A private company that has long-term investors who add value is going to have an advantage over a competitor with less knowledgeable investors who pester them about hitting short-term numbers. I doubt anyone is going to disagree with that. I’ve met plenty of small entrepreneurs who list their investors as either a huge advantage or one of their biggest sources of frustration (sometimes, both). A public company may have far more investors, but it’s the same dynamic.
I believe investor relations can be a legitimate advantage for a public company. Unfortunately, very few CEOs put in the effort. Most public companies file a 10-K that was written by a team of lawyers, don’t write an annual letter, don’t post anything helpful on their investor relations site, and their conference calls are the bare minimum quarterly updates followed by vague answers to analyst questions.
Two companies that put a lot of effort into investor relations are Netflix and Trupanion. Both companies write shareholder letters, have informative investor relations websites, and are open and forthright on their conference calls. Reed Hastings, Netflix’s founder/CEO, and Darryl Rawlings, Trupanion’s founder/CEO, both have been very consistent in their long-term vision for their respective companies and have spent a lot of time explaining that to Wall Street.
Darryl even travels to Omaha and gives a presentation after the Berkshire meeting every year. He wants long-term investors and he smartly figures Omaha during Berkshire weekend is the best place to find them. Putting this much effort into getting a good shareholder base can have several benefits.
First, companies like Netflix and Trupanion turn a largely variable cost of investor relations into a fixed cost (here I am mostly referring to time cost, not monetary). Most public company management teams spend a significant amount of time answering similar investor questions.
On the other hand, Netflix and Trupanion answer these introductory-type questions through their shareholder letters and investor relations websites. They may spend more time upfront creating shareholder letters and helpful IR sites, but once finished, those are fixed costs and available to every investor in the world. Alternatively, most public companies experience this as a variable cost—answering the exact same question by hundreds of investors every year.
As an example, no investors should be asking Trupanion management about how they calculate unit economics because Darryl explains it in-depth in every letter he writes. Meanwhile, other management teams probably get asked relatively basic unit economics questions on investor calls constantly. What a waste of time answering the same questions over and over when management can answer them once and for all through public sources.
Second, public companies that successfully attract a long-term shareholder base should be at less risk of activist takeover. A shareholder base that understands the long-term vision for a company and isn’t as focused on short-term variance will be harder for an activist to convert. This creates a small flywheel effect where a good shareholder base discourages the wrong type of investors and that encourages management to continue focusing on the long-term, which attracts better shareholders.
One example of a company that I wish would put more effort into investor relations is Issuer Direct. To be clear, I have a lot of respect for Brian Balbirnie, the founder/CEO. He exhibits basically all the traits investors seek out in CEOs: honest, smart, passionate-bordering-on-obsession, pays himself reasonably, high insider ownership, and very focused on the long-term.
But the fact is Issuer Direct’s business is kind of confusing. There are a lot of moving pieces and it took me several phone calls with Brian before I really understood how all those pieces fit together. And it pains me to think about how many times he’s had those same phone calls with many other investors.
He could probably save himself a significant number of hours every year by spending time upfront writing a thorough annual letter and putting an FAQ page on their website (i.e. trading in variable hours he spends throughout the year for fixed hours spent upfront). The best FAQ pages are ones that answer the most common investor questions. And they should be working documents, not set-it-and-forget-it. Trupanion updates their FAQ page a couple times a year as common investor questions evolve.