Exposed: Why we know tech startup valuations

December 15, 2014, 2:54 PM UTC
Brian Lee and Jessica Alba at the offices of The Honest Company in Santa Monica, Calif.
Brian Lee, an entrepreneur, and actress Jessica Alba at the offices of The Honest Company, Alba's start-up that sells eco-friendly baby supplies, in Santa Monica, Calif., Oct. 9, 2012. Lee has been joining with the famous to get the name recognition any new site needs to get moving, but the subscription model in online shopping may be wavering. (J. Emilio Flores/The New York Times)
Photograph by J Emilio Flores —The New York Times/REDUX

Every time, it went the same way. I would ask a CEO to tell me his company’s valuation on its new round of venture capital or growth equity financing, and he’d decline. Same thing if I asked the company’s PR rep, or lead investor. Occasionally a rival venture capitalist who had lost the deal would spill out of spite, but it was rare. In general, valuations were considered precious trade secret.

That was ten years ago. And five years ago. And even three years ago. Today, however, such reticence is the exception to a new rule in which valuations are used to legitimize and promote venture-backed companies. Just think of all those unicorns, and that we all know of their existence.

Part of the shift is media-driven — a byproduct of increased coverage and reporters figuring out how to scour SEC and Delaware filings systems. For example, last week I asked Honest Co. co-founders Brian Lee and Jessica Alba if they had leaked their company’s near $1 billion valuation. They said they hadn’t, and that the resulting focus on their “value” was more negative than positive.

Most of it, however, is intentional. I spent time speaking with several veteran PR pros about the matter, and heard the following points repeatedly:

1. If the company is in a highly-competitive space, disclosing a strong valuation can help with both employee recruitment and customer acquisition. “It’s viewed as proof of validation and that the company is less risky,” one PR pro explained. “It means the paycheck won’t bounce, and the product will be delivered.”

2. Don’t let the CEO spill the beans. The big risk to disclosing a high valuation is what happens if the company then raises at a flat or down-round next time. Basically, all of that employee/customer validation is reversed. The key, therefore, is giving the CEO some wiggle-room to… ummm… well, basically to lie to everyone. The flexibility to say those original reports were wrong, as evidenced by the fact that neither the CEO nor company ever confirmed them. So how do you leak “properly?” Via PR on background, without attribution. Or, put in more recognizable terms, via “sources familiar with the situation” or “sources close to the company.”

3. Some CEOs simply cannot help themselves. “There is a lot of ‘mine is bigger than yours’ at Silicon Valley cocktail parties,” another PR pro said. “It’s one thing if a CEO discloses valuation for strategic reasons, but a lot of times it’s just bragging.” This is particularly true if a company has not yet shipped product, thus increasing the future reputational risk and forcing the company to make unnatural financing decisions inthe future (like doing a debt deal for the purpose of maintaining valuation).

4. For companies that do want to keep their valuations private, one huge fear is that inaccurate information will leak. For example, a startup raises at a $150 million mark but it is reported as $400 million. Each PR person I spoke with admitted that, in such cases, they will try to steer the inquiring reporter toward the correct number. Here’s how one put it: “I don’t want to be on record as saying reporters should bluff, but of course they should.”

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