What’s Next For IR? A New Kind Of Funding Needs A New Kind of IR

Part 1

NIRI, the National Investor Relations Institute, celebrates its 50th anniversary this year. IR as a profession has a long heritage. But in a new report, “The Disruption Opportunity”, NIRI may be signaling that the next fifty years will look very different, and the profession must adapt or die. 

The report deals with what NIRI calls a “burning platform moment”: change is coming, and coming at increasing speed, driven by technology, capital market changes and activism. Unless the profession adapts, IR risks becoming a tactical, commoditized function of limited relevance to the C-Suite. 

Based on a survey of its 3,300 members, along with a “think tank” of focused experts, led by Lynn Tyson, executive vice president, investor relations at Ford Motor Company, the results sound a little self-serving. “Industry association announces it needs to be valued more highly” is hardly a surprising headline. After all, turkeys don’t vote for Thanksgiving. 

But leaving this aside, there is some good food for thought in the detail of the report to raise some deeper questions, to throw a light on the current state of investor relations and – importantly – to provide an insight into the future. 

One of the threats NIRI perceives comes from the shrinking size of listed companies. At the end of 2017, there were 3,600 issuers listed on all the US markets, a number which has more than halved since 1997. There are many reasons for this, chief among them the rise of new sources of capital from private funding, the heightened cost and complexity of regulation, and alternative attractions for investors – debt, derivatives and hedge funds, for example. 

Two thirds of NIRI’s membership believe this trend will continue, forming an existential threat to the profession. But this fear of shrinking public equity markets masks the growth of private markets, especially in the headline-grabbing US tech sector, as well as the cyclicality of available exit routes. 

All business requires capital. Whether it is a start-up needing funding before it is self-sustainable, or an established multinational wanting to expand or to acquire another business, no firm can grow successfully on cash flow alone. Capital is the foundation on which all commercial activity rests. 

There are many sources of that capital, but what is common is that if an exchange of value is to succeed, the providers of capital must be partners with the recipient in order to achieve mutually satisfactory outcomes. 

The equity markets have been a highly efficient capital distribution system for centuries. So efficient, in fact, that NIRI is horrified that they are shrinking. 

But a decline in the number of companies listed on the public equity markets should not mean a decline in the importance and role of strategic Investor Relations. What it means is a shift in the nature of the investors, often driven by the companies that require the investment themselves. 

Some facts from the US tech sector serve to illustrate this: 

• In the 1990’s hitting $20 million of revenue was seen as a suitable point to go public. By 2014 that figure had risen to $100 million.
• In 1999, the median time from fundraising to IPO was four years. By 2019, that has stretched to 10.1 years, according to CB Insights.
• In 2000, 17 of the 20 largest tech fundraisings were completed by an IPO. In 2018 just six tech IPOs made the top 20.

One conclusion to be drawn is that the IPO route has become less attractive, and companies have found other, better or cheaper sources of capital. Private markets have started to replace public ones. 

An EY report highlights that IPO proceeds in the US were only $3 billion in 1Q 2019, a decline of 57% year-on-year. Meanwhile, US startups have raised $30 billion in 1Q 2019 according to Crunchbase. But 2019 could, after the IPOs of Lyft, Pinterest, and Uber, still turn out to be an IPO bonanza. A UBS report points out that after years of anticipation, over 100 “unicorns” could make their debut as public companies this year. 

The transition from private to public company is tough, and many companies take the view that the requirements of a public listing are too onerous to fulfill, and so distracting for management that they comprise a risk to the successful execution of strategy. In these cases, private capital is far more attractive, and the statistics show this opinion is growing. Profound shifts in business and industry have also contributed: Companies used to go public because they had to build factories and distribution networks. These days, it is brainpower that counts, not fixed assets, so companies stay private for much longer. 

Enlightened strategic companies take the view that the providers of capital are their part-owners, not merely the provider of a commodity. Strategic investor relations involves engagement, dialogue and mutual learning between the provider and recipient of capital. It plays an important role in the ongoing development of corporate strategy. And the individuals within a company who are responsible for engagement with the providers of capital should reside at the heart of any company’s strategic worldview. 

Instead, we find too often that the IR team in any company is treated – and behaves – like the provider of a commodity: yes, they do a good job making the results look good and organizing our attendance at investor days, but it is not where the CEO goes for advice; and they could be replaced by an algorithm pretty soon anyway. 

This commodity status of IR is self-fulfilling: while the IR team often perceive their role as providing information materials, managing earnings cycles and arranging meetings, they will become ever-more marginalized and their employer will be missing a trick. In order to break the cycle, a subtle shift in outlook is required: to recognise the strategic value of IR, and its potential worth to the firm. Plenty of companies have made this shift, but most have not. And they are neglecting the value that can be brought by their owners – the providers of capital – as a result.

Redemption lies in a fundamental shift in the expectations managed and the insights provided by the investor relations function, which we will cover in Part 2 of our series about "What's Next For The Investor Relations Profession".