Transparent Funding Announcements

We are in a cycle again where how much you raise is the story. It’s what the press likes to write about (e.g. Company X raised Y from A, B, and C). Now that everyone is overly focused on unicorns, the headline number on the valuation (e.g. Company X raised Y at a valuation of Z from A, B, and C) has crept into the story on big rounds.

While this makes for press release fodder and ego gratification, it’s of very little use to entrepreneurs. There’s no real story there. No understanding of the human dynamics behind the financing. No understand of what actually went down. No underlying metrics that drive the financing. No real perspective on how people thought about things and the choices they made. Just happy talk focusing on the dollar raised. Zero educational value around anything.

Recently, the gang at SalesLoft told the detailed story of their $10m financing. Kyle and his team went through Techstars Boulder in 2012 before moving back to Atlanta and being leaders in energizing the Atlanta startup community. Kyle followed the tradition of extreme openness about the financing process that I think Rand Fishkin started with his post three years ago titled Moz’s $18 Million Venture Financing: Our Story, Metrics and Future.

If you’ve never read Rand’s post on our financing, it goes through an extraordinary amount of detail about Moz’s business, the financing process, the terms, and the timeline. Rand did NOT run this by me before posting it – I saw it at the same time as the rest of the world. He did ask if it was ok with me that he’d be this transparent. I reminded him that I signed up for TAGFEE when I invested, it was his company, and he could write whatever he wanted.

After he posted it, he sent around the link to a few prominent people in the tech media. None of them covered the financing in any way. A few days later, I sent out a few emails asking folks I knew at these sites why they hadn’t written anything, since they so quickly write Company X raised Y from A, B, and C. I didn’t get responses from everyone I wrote, but the ones I got back said something like “Rand wrote too much – there was no story here once he put that post up.”

I found that fascinating. When I pondered it, I realized how divergent the media was becoming from what entrepreneurs were thirsty for in terms of substance.

Late last year, Danielle Morrill followed in Rand’s footsteps with an epic post about our $6.5m financing of Mattermark. In it, she talked a lot about the process, just like Rand did, along with disclosing all kinds of information about the business, the valuation, and what she experienced. I also wrote a post about the financing using Mattermark as An Example of How We Decide to Invest.

Interestingly, the media wrote more this time. I don’t know if it’s because Danielle is in the bay area (while Rand is in Seattle), or the story has broadened. But when I go back and read the media stories, they are still overly focused on the amount of the financing, rather than the story behind it.

Another company that did an awesome transparent funding announcement was Buffer (and app and company I love, but am only a tiny investor in via an AngelList syndicate) when they announced We’re Raising $3.5m in Funding: Here is the Valuation, Term Sheet and Why We’re Doing It. Data, data everywhere. And lots and lots of story.

Now, I’m not suggesting that every entrepreneur should write transparent funding announcements. That’s up to the entrepreneur. But I think it’s super valuable to read the ones that are out there. The amount of useful information to entrepreneurs who are building their companies, both for process, dynamics, and comparables, is enormous. And, while these funding stories are positive, the path to them is often a complete mess, such as Rand’s Misadventures in VC Funding: The $24 Million Moz Almost Raised or Danielle virtually stomping her feet in frustration when she wrote Mattermark Has Raised $2M in Our Second Seed Round.

In my book, this is a lot more useful to read than Company X raised Y at a valuation of Z from A, B, and C. Thanks to the entrepreneurs who are brave enough to put this out there.

  • Funny. Yesterday I was lecturing at the University of Illinois and we talked a lot about fundraising. One of the things I told them to do was to ignore the hype machine and not worry about building a company that could raise $100M at a $1B valuation. I told them to concentrate on building a great business-and only use VC if they had to do it. REVENUE is the best form of venture capital in a lot of cases. Also told them that sometimes it’s a lot better (and less brain damage) to build a company that sells for $20M and hold 50% of the equity than build a billion dollar company and hold very little equity at the end. The most important thing is to have the courage to startup, and keep believing in yourself once you go.

    • Well put!

      • This post is extremely helpful to a company I know of that is going through a fundraising round right now. Especially the link to Mattermark. I think it’s going to be a great company and I am writing another check. But, making sure the optics are right is messy.

    • Great advice, but I can say from first hand experience that it’s very hard to drown out the hype machine. If you read (and believe) the press, then you’ll have some fairly basic misperceptions:

      – if you get into (Stanford / MIT / Berkeley / etc) then you’ve won
      – if you get into YC or TechStars, then you’ve won
      – if you raise $X from a top tier VC, then you’ve won
      – if you sell your company, then you’ve won

      Don’t get me wrong – these are all (generally) GREAT events. But you haven’t won. You’ve taken one great step in the right direction of winning. But it isn’t presented that way.

      I’ve done this enough times to agree that not only is REVENUE the best type of VC, but PROFITABLE revenue is really the best binary metric out there. But nobody writes/talks about it so it’s hard to socialize. It’s all about short term wins, because that’s what is psychologically and emotionally compelling to the masses. Unfortunately, for many entrepreneurs, it can be mostly discouraging. So, thanks to Buffer, Mattermark, Moz and others that write the truth behind some “wins” that entrepreneurs need to hear.

      • Yes, I agree. Bottom line profits rule depending on the company. I should have been more clear. At least at seed stage, growing revenue is always nice!! Wonder if we should be writing about profits and the calculation that goes into them. The accounting isn’t always clear because most people don’t think accrual, they think cash.

        • As an entrepreneur, +1 that that would be helpful

      • Matt Kruza

        Scott, I definitely agree that the media hype machine can be insufferable. However, its hard to think of any unicorns who were profitable before big rounds. I am sure there are a few, but thinking of the 20 most successful tech companies etc. of the last say 5 years were any net income positive or even ebitda positive before say raising $20 million or whatever arbitrary point you want to use? One typical case a lot of people mention is basecamp (37 signals) but I don’t think they are even close to a unicorn (the term is ridiculous, but is normal hype for $1 billion company). I think Jeff’s earlier point about owning 50% of a $20 million company may be more rewarding than a fraction of a billion dollar one. I guess that may be the real differentiation, do you want more control smaller pie or less of a bigger one. I probably opt for the former and hope I can still create a really big pie, but I think its important for entreprneuers to make that critical choice explicitly

        • Matt – being a unicorn is nice, but it’s not necessarily success – it’s convincing an investor that you are worth 50-100x more than your revenues (which of course leads to all the articles about whether or not we’re in another bubble).

          The bottom line is entrepreneurship is hard. A lot of people work their tails off and don’t succeed, and yet all we read about are these magical companies that seem to come from nowhere and become unicorns. It sets an unrealistic bar and it glorifies fleeting events that are not necessarily sustainable successes (e.g. see the Secret announcement from today).

          The other discussion we are in wild agreement on. I was told very early in my career that I’d be much better off thinking about owning a decent chunk of a watermelon vs. all of a raisin. I’ve never forgotten that description….

        • While there are lots of companies that aren’t cash flow positive before they’ve raised a huge amount of money, there are definitely some that are. We have been involved in several multi-billion dollar companies that became NI+ / CF+ on under $20m of invested capital. And we are investors in several others that are well on the way to that path with < $20m raised.

          It's very easy to fall into the trap that the build a valuable company with a lot of scale you must raise a lot of money. But many of the most valuable ones – for both the founders and the investors – are the ones that haven't raised very much money.

          • Matt Kruza

            Are there any that are no longer private that are multi-billion that you can disclose? If not I completely understand, just very curious to see a few and study their history. As, no doubt, I aim / would love to achieve a similar outcome. Would love to do so with absolutely no traditional VC money, but if needed will consider as any responsible founder would do. Just personally having a hard time thinking even of any billion dollar IPO’s in last few years that were profitable even by then. The one I could think of, was Tableau (ticker DATA). Checked it out and IPO’s with something like $5 million in NI on $130 million in revenue. They only raised $15 million in two rounds from NEA so they are definitely an example of how to do it very efficiently without a massive round (also with there $1,000 per head + model there are some big implications there too).

          • Tableau is a great example. Zynga is another one. We’ve been out of the stock for a long time and I have no information on the company, so I’m comfortable talking some about the history.

            The first round for Zynga was a $5m financing that we co-led with USV. The company had previously raised $200k from the founder/CEO (Mark Pincus). When we invested, the company was cash flow positive, even though it had only been around for a few months. It ended up never touching the money we invested. 60 days later Mark raised another $5m from Avalon Ventures (with participation from us and USV). Less than a year later he raised $29m led by KPCB with IVP. The company was generating a lot of cash at this point and never touched any of it. There were a few more private rounds which built a very strong balance sheet and provided capital for some liquidity – both for founders and employees. Then the company went public. While it has struggled as a public company, it still has a market cap > $2b.

            If you look at the current financials, it looks like they are losing a ton of money on the Net Income line. But if you look at the cash flow, you’ll notice that they aren’t. Much of the loss is accounting for RSUs, at least when I was paying attention to the quarterly financials, which while it has impact on NI, has no impact on cash flow.

            We have other examples like this in our portfolio. including the fastest growing SaaS company we’ve ever invested in that very few people (beyond their customers) know about. It’s a silent killer of epic proportions ( http://www.feld.com/archives/2011/12/the-silent-killers.html) and we love it that way.

          • I’d never realized that Zynga had gone through 3 rounds without touching a penny of it, Brad. That’s interesting and it would be fascinating to see their rationale behind seeking further investment that they apparently didn’t need.
            Great piece, by the way. Rand’s writeup was excellent, and knowing the way he thinks, his level of transparency was no surprise. I have recommended it be read by a couple of people seeking outside investment, as it really put all the thought processes on the table.

          • Matt Kruza

            Awesome. Thanks for the examples! And definitely love the silent killer examples. I get the catch 22 that you can’t / wouldn’t be best to share those when current, but I do think sharing those more when they “win” or become more public would offer more of that perspective that I think you are saying people misunderstand about the current scene.

  • Rob Leathern

    We fixate on numbers that are attached to dollar signs- it makes for easy headlines and an easy story. Lazy sometimes in both the reader and writer’s side, sure, but human nature. I recall debating with our CFO the effect of announcing fundraising numbers has on employees: and I think there is where thought should go in to make sure whether it is a few numbers or a story or both, there are not unintended consequences from sharing them (in general I think more is better as long as it doesn’t become a sideshow/distraction).

  • Hadn’t read Rand’s longer thing on financing, it’s helpful. May sound odd, but when I read VCs or founders talking about a round, I’m usually most curious about little details like how it felt / what sort of questions came up / what the flow of conversation was like. All of the negotiation that goes into it seems individualized, and while it’s good to have models you still have to make it your own…which means the actual #s have to be balanced against the relationship building / negotiation process.

    • That’s one of the things that made me smile when I read Rand’s post for the first time (when he posted it to the web.) Sure – the numbers are revealing, but I loved the way he talked about how our relationship, and the subsequent negotiation, unfolded.

  • peteradamsrockiesventureclub

    I couldn’t agree more with this post. Some of the data that is shared with the current “news release” format can be more damaging than helpful for readers who don’t understand the back story. The result is something like Bible interpretation where the numbers are used to reinforce whatever argument someone wants to take, one way or the other, without any actual bearing on reality.

    Ideally venture news would actually tell a story that could serve as a learning point for those who read it. The back story is usually much more helpful than the summary numbers – though having both together is best!

    • The magic point you make is that “the numbers are used to reinforce whatever argument someone wants to take, one way or the other, without any actual bearing on reality.”

      This obfuscation by numbers that aren’t the important ones are everywhere in our industry. It’s been true since I started making investments in 1994 in tech companies and it’ll likely be true long after I’m gone.

      It reinforces the warning of “make sure you know what you are reading and why you are reading it.”

  • We’re in the fundraising process currently, I’d very much like to write a transparent post so that other companies from Eastern Europe and beyond understand expanding and fundraising in the USA. What risks do you see with this approach?

    • The biggest risk is writing about it prior to the transaction closing. In addition to generating potential noise (vs. signal) as you are working through what the actual deal is, there are likely legal and regulatory issues around disclosure prior to the investment.

      Once the investment is done, then it’s up to you and your investors as to the level of disclosure you are comfortable sharing. If your investor is comfortable, then I see very little downside and a huge amount of upside. If your investor isn’t comfortable, that’s probably an important thing to take into consideration since they are now your business partner.

      And – if they aren’t comfortable and it’s something you very much want to do, you may have a serious values conflict, which can be a major issue over the course of your relationship. If this is true, I’d strongly encourage that you talk through it and really understand each other so you are as aligned as you can be, or at least acknowledge where you differ, and how you are going to engage in the context of this.

  • Derek Pignatelli

    The disconnect seems to be the difference between what is serviceable for the media and what’s helpful to entrepreneurs. Even with the information at their fingertips if they can’t (or don’t want to take the time to) understand it or if they don’t believe the extra information will add utility to a large portion of their readership then the effort just isn’t worth it.

    Sports media doesn’t tend to give details beyond term and amount of player contracts either. And while that’s not useful to agents or other players in the actual business of sport, that’s not the audience they’re writing for (same for weekend film grosses or TV ratings. There’s little mainstream focus on even something as basic as revenue/ratings relative to cost).

    Long story short, until a large portion of the readership is savvy enough to understand the details of a financing round, I don’t think you can fault the reporters taking the most efficient path to a positive outcome by giving the audience the red meat they want.

    • Matt Kruza

      Derek you stole the words out of my mouth! Great point. There are WAY more casual readers / tech followers vs. the inside baseball terms of financing events. Probably most of the commenters on brad’s blog are like him and prefer detail (I know I sure do), but there just isn’t enough broad based support in general.

      • Derek Pignatelli

        Thanks Matt. I’m putting your agreement with me on my list of internet wins for the day. Important note: I use the word “list” generously.

        • All true. But the people I care most about in this ecosystem are the entrepreneurs and the more knowledge / information they have about how this really works, versus the fly by headlines that have no substance, is important to keep working on.

          Also, one of the difference in sports is that it’s very easy to dig deep into team and player statistics. It’s pretty clear who is winning or losing and who is doing well. And it’s supported by data.

  • I think part of the problem is that media companies can’t tell which companies are doing well and which ones aren’t. Funding announcements are the only signal they get that something good is happening. If there was a better signal, i’m sure they’d jump on it, but for now that’s all they’ve got.

    Of course, they could do some research and go out and actually talk to people in the industry, but that’d require real work and leaving their desk.

    • They could certainly use Mattermark to get a ton more signal around which companies are doing well. Shameless plug, but you set me up perfectly!

      • What @daniellemorrill:disqus said. If you are in the media and you stumble upon this comment and want a free trial and white glove onboarding treatment, just send me an email.

        • RBC

          Brad, you bring up another gem in your comment. I was wondering if you have seen any companies doing amazing onboarding – and if they have been able to quantify the impact?

          • Mattermark does a great job of this. FullContact is trying out a concierge service, especially for VIPs of people with large address books. These two are probably the standouts in terms of this that I’m deeply involved in.

  • josh

    I love these types of posts too, hopefully your “thanks” encourages more entrepreneurs here. As far as press I think in 2014 there were 10+ vc deals for every day of the year, so the topline “Notice of transaction” is about all I’d expect on average.

    • Yeah – I get my “daily funding news” from Dan Primack’s Term Sheet and the reverse chron sort of new fundings in Mattermark.

  • Hey Brad,
    We’re big fans of yours at SalesLoft, so seeing you mention our little SaaS startup all the way over here in Atlanta is truly amazing!

    As employees at SalesLoft, what’s great to us isn’t so much that our CEO, Kyle Porter, decided to write and release a “Transparent Funding Announcement,” but in actuality that’s how he runs the company to begin with – it didn’t go against his grain!

    From the weekly company updates he emails to our whole team (https://twitter.com/jasonlk/status/592832125923160064), to putting out guides on how he’s built the company for the public to use and see themselves (Sal.es/WhatWhyHow), this transparency is normal to us and will, hopefully, be the norm for most businesses in the future.

    Let’s pray that that happens 🙂

    Best,
    David.

    • I love Kyle’s approach and have always been a huge fan of his starting from all our interactions at Techstars.

  • Well said & agreed. Your ending is key though: it’s not for everybody.

    I think the timing and maturity level of the company is a factor in disclosing or not disclosing. If the company is still very early and haven’t established its footing in the marketplace, disclosing may reveal weakness that may be perceived as harmful then. Those same weaknesses may not harm them later.

    If Company X raised $Y to solve Z, I’d rather have the media focus on how it’s solving Z instead of how it raised $Y.

    • I’m not sure it’s a function of stage of the company. Mattermark is still very early in its life.

      I think it’s much more linked to the philosophy of the founders.

      And yes – I’d much rather the stories focus on how the company is solving Z. But that’s not our currently reality.

  • I wonder who reads the X raised a gazillion dollars stories. As a consumer I would much prefer to hear the startup story. I love the new project from BAREMETRICS to make this openness part of day to day business.

  • yazinsai

    These don’t just make great news stories, but they are incredibly helpful to first time founders (certainly to me). You get an announcement out, but also learn something in the process — how cool is that!

  • Tech writers are funny. They’re all willing to write about the same thing with little to say, for example Instagram’s new music discovery thingie, if they think they can beat others to the buzzer with a headline. It’s about clicks and views. It’s not about serving entrepreneurs or readers or anyone but owners and investors. And despite the success of long-form efforts, the money’s still in the quick and easy.

  • When reporters are expected to post 1+ stories/day, they don’t end up doing much research, fact checking, or what we might consider actual reporting. That means we readers miss out on the real inside stories behind every milestone that every startup struggles to overcome. This is true in almost every category, not just financing coverage.

    As mentioned below, tools like Mattermark and FullContact are fantastic for identifying and comparing trending companies. But the stories that Kyle, Rand, and Danielle are sharing are especially powerful because they are so personal. They pull back the the curtain and bare their entrepreneurial minds and hearts to the world, complete with fears, flaws, and insecurities (and financial details!). That’s why I’ve recommended those very posts time and again to entrepreneurs.

    A (very) few publications are doing a little better. Stephen Levy’s Backchannel on Medium has done a great job of turning over rocks to highlight the real human stories inside tech (and reporters have weeks to research each story). But they focus on giants and moguls, early stage companies need a similar champion of in-depth narrative journalism. In the meantime, let’s hope that entrepreneurs keep taking up the mantle to share for themselves…

  • Your recent posts have been great. You’re on a major roll, Thanks

  • It certainly takes a strong commitment to transparency to put out announcements like that.

    It’s probably daunting at first, but I assume it is very liberating afterwards; and one wouldn’t want to go back to opacity once they’ve had a taste of the opposite.

    Being on the receiving end of it is plain awesomeness. It shows you what it’s really like to build a company and raise money in a way that very little else can accomplish, in my experience of having been following the Tech industry in the last five years as an outsider looking in and ‘drilling down’ to understand it.

  • Tech scholars are interesting. They’re all ready to expound on the same thing with little to say, for instance Instagram’s new music revelation thingie, in the event that they think they can beat others to the ringer with a feature. It’s about snaps and perspectives. It’s not about serving business visionaries or perusers or anybody but rather proprietors and financial specialists. What’s more, notwithstanding the achievement of long-shape endeavors, the cash’s still in the fast and simple.

  • thank.Huz
    very good post