The Importance Of Understanding Your Shareholder Base For Successful Investor Relations

In our recent podcast episode with Rodney Nelson, VP of Investor Relations at Twilio, we explored how effective investor relations require a deep understanding of your shareholder base and how it evolves over time. Rodney shares valuable perspectives on why IROs should prioritize understanding their investor base, the importance of conducting thorough investor analysis, and how a public company's shareholder base evolves over time.

How a company's investor base changes during the transition to becoming a public company

When companies go public, they often experience significant changes in their investor base. Rodney highlights that each company has a unique path to public markets, which influences how their investor base evolves. He notes that some companies bootstrap into their IPO while others rely on venture capital or being acquired by a large corporation.

Despite these different paths, Rodney notes a common pattern: the first investors who come into newly public companies are typically growth investors looking for businesses growing at 40% or more with innovative approaches to their markets. However, as businesses mature and growth rates naturally decline, the investor base begins to transform.

According to Rodney, this evolution happens because different types of investors have different priorities. Growth investors primarily care about top-line expansion. As growth slows, they may lose interest, while GARP (Growth at a Reasonable Price) or value investors—who focus more on profitability and cash flow—become more interested in the company. 

The importance of engaging with new types of investors

One of the critical challenges for IROs is adjusting their approach when engaging with new types of investors. Rodney emphasizes that the nature of these initial conversations varies depending on the company's stage and market understanding.

For high-growth companies, conversations with investors often focus on total addressable market and scalability. As growth slows, investors start asking different questions: "Where is the margin expansion going to come from and where can margins ultimately get so that I can underwrite this business not just on an EV to sales basis, but on an EV to profitability or an EV to free cash flow basis?"

Rodney stresses the importance of educating investors about business changes and aligning their expectations with company projections: 

"You need to be educating investors about what's happening in the business, what expectations they should have and then as the IRO making sure that the expectations of your investors are aligning and matching up with what you're expecting the business to do over the next 12, 24, 36, 48 months."

Why IR teams should focus on the profile of their investor base

Understanding your investor base is crucial because, as Rodney puts it, "your business is getting recapitalized in the public markets every day." Investors constantly buy and sell shares, effectively repricing the company daily. Managing this transition poorly can lead to significant stock price dislocations because when expectations don't align with execution, investors question their position and move on to other stocks. 

Proactive IROs can mitigate this by signaling changes early and ensuring clear communication flows in both directions.

 "It's about making sure that the two-way line of communication from us to the street and from the street to us is well understood by all parties involved so that you don't have these massive dislocations in expectations versus performance."

The process for evaluating and understanding your investors

Developing a thorough understanding of your investor base requires maintaining good relationships with investors and knowing their mandates. For example, crossover funds that invested in late-stage private rounds likely expect continued high growth. If internal data suggests growth will slow, these relationships may be at risk.

Rodney advises identifying which current relationships might be jeopardized by business changes and which potential investors might become interested as the company's profile evolves: 

"If the first time you're having a conversation with a GARP investor is when growth has already decelerated massively and you're pivoting the story to growth plus profitability, it's too late, you've forgotten an opportunity to win capital in the capital markets."

Building relationships with potential future investors takes time—sometimes 12-18 months before they take even a small position. By establishing these connections early, you can ensure a smoother transition when business metrics change. 

Making time for investors who aren't a current fit

Even when your company is experiencing high growth, it's important to nurture relationships with investors who may not be an immediate fit but could be valuable in the future. As an IRO, it’s your job to see around corners and position your company for long term growth. Rodney suggests that IROs can plant the seeds for future relationships and bring in management once your business trajectory is in line with that investor’s mandate.

"You don't necessarily want to burn valuable management time with somebody who you know may not be in your stock for a year," 

Presenting analysis and risk identification to the board

Once you've identified potential risks and opportunities in your shareholder base, communicating this effectively to your board and management team is crucial. Rodney suggests several approaches:

1. Build trust so your market feedback is taken at face value
2. Let investors speak directly to management so they can hear investor expectations firsthand
3. Conduct perception studies to provide data-backed insights
4. Consistently match investor feedback with actual business performance

"If you're consistently bringing data and aligning that or matching that up with what your business is actually doing from a performance perspective, usually your management teams in my experience will take those things at face value." 

Learn more about conducting perception studies with Irwin Pulse.

Why analyzing your shareholder base should be a priority

When asked where analyzing the shareholder base should rank in terms of priorities for IR professionals, Rodney is unequivocal: 

"It has to be one of the first things you do. You've got to understand where there's opportunity and where there's risk in the cap table."

While IROs can't control the stock price directly, they can influence the narrative and manage expectations in accordance with how the business is going to perform. Rodney likens this work to his experience playing baseball: 

"I view this as my playing field and the scoreboard is the stock price. I know I can't control it every day... But can I be a difference maker at the margin in helping to keep both our existing and prospective investors informed and operating with an accurate and objective set of facts about our business? Absolutely."

He emphasizes that analyzing your shareholder base isn't just an academic exercise—it should drive action. While sell-side conferences can provide good exposure, after attending one or two per quarter, returns diminish. IROs need to get creative with in-office visits and non-deal roadshows where they have more control over who they meet.

For mid-cap companies, this might mean looking beyond major financial centers to secondary markets like Chicago, Milwaukee, and Minneapolis. Without proper analysis of your investor base, you'll find yourself constantly in reactive mode rather than doing the proactive work needed to manage expectations and volatility.

Final Thoughts

Understanding your shareholder base is not just a strategic advantage—it's essential for effective investor relations. As Rodney aptly puts it, "it’s the critical proactive work that you're going to need to ensure that you're managing expectations and future volatility."

By thoroughly analyzing your current investors and identifying potential future shareholders, you can navigate transitions in your business more smoothly, minimize volatility, and build lasting relationships with the right investors for each stage of your company's development.