Press Releases About Financing Are Lightning Rods For Startups

29 JANUARY 2018

Press releases that announce startup financing are a future lightning rod for founders, they just don’t know it at the time.

It’s easy to understand the reasons behind these announcements. Raising capital is a long and agonising road for entrepreneurs.

When you close a funding round issuing a press release to celebrate the milestone may seem like a natural conclusion before you get back to work.

And there can be pressure to follow through with this idea. It can come from team members, investors (although rarely in my experience) or from a member of the startup press who learned of the round from a third party.

The reality, however, is that founders are often too elated and exhausted having found a way to finance their company to think through the medium-term implications of the information they’re about to make public.

I have felt that elation-exhaustion mashup many times and not once have I issued a press release about a financing. Here’s why and I hope these six lightning rods serve as a caution to founding teams.

1. The moment news of the financing is published, the company’s valuation is public

Press releases are like calling cards and as time passes, they become historical markers. As soon as they are published, whether you like it or not, the market quickly forms their view on expected future growth.

And the omission of a specific valuation in the press release won’t matter. Interested parties will connect the dots between presentations, blog posts, tweets and other online collateral. When you combine this information with the amount raised, stage of the business and estimates of traction from competitors and it’s straightforward to estimate the valuation.

But here’s the kicker, it’s not the current valuation that’s of interest.

Today’s valuation sets the benchmark for the next round of funding.

This means that if significant traction isn’t achieved between the current financing and the next, new investors or acquirers may be in for a bargain as the company tries to raise financing at a similar valuation or a more dilutive down-round.

2. Earnings now need to correlate to the valuation

The valuation of a new venture is often based on the ‘stages method’, a strangely accurate approach used by angel and venture capital investors.

The stages method helps ascribe a value to a company that doesn’t yet have meaningful cash flow.

At some point, this method gives way to more conventional valuations based on current and projected revenue growth rates.

Although there might be good reasons why revenue isn’t growing at a rate consistent with the valuation, the reality is that raising further finance will be difficult.

3. Pivots will require greater explanation

Pivots happen all the time but any pivot the company makes between financings will require further explanation if high-level details of the strategy are included in the press release.

4. Competitors also get the memo

Whether you care about competitors or not, they see your press releases too.

Companies also mulling market entry now become more aware of your progress. In any case, it’s a double-edged sword.

5.  At best customers won’t care. At worst, they will.

I encourage founders not to lose sight of the fact that a financing, while a massive achievement, is the result of convincing a relatively small group of people that you’re worth investing in.

Customers and users probably won’t understand or care about the significance of this event. And that’s good. However, a press release may inspire a different line of questioning about the underlying sustainability of the business.

6. The public relations payoff rarely meets expectations

Instead of getting back to work and putting new capital to good use, small teams can invest time agonising over the press release’s phrasing and distribution.

Once it’s published, it’s a gamble whether a news outlet will pick it up or not. This gamble may create the right type of attention and you get swamped with new users and customers.

You might have seen this happen. I haven’t.

Closing thought

I’m not saying that all mentions of financing events should be excluded from a startup’s external communications. They are an important aspect of creating confidence and should be used as part of a predictable value creation story where significant uplifts in customer growth and revenue happen soon after a financing closes.

The bottom line is communicating value creation (instead of valuations) is the best investment in public relations for new ventures.

It might mean that public momentum-related announcements are few and far between but substance matters.

In any case, I think it’s a mistake to think that press releases about financings are marketing for startups. They are the PR equivalent of vanity metrics. And rarely do good things comes from vanity alone.