When news of an investment round or exit arrives, the first thing we look at before translating it into an article to be published here in the Startupbusiness columns is the value of the deal. How much was invested or at what economic value the exit was closed. It is, that of value, fundamental information when it comes to reporting financial news, otherwise it would lose much of its newsworthiness.
In most cases this value is included in the disclosure. Usually the value, and the names of the investors or buyers are included in the first lines of a press release and in these cases that becomes news that can be given quickly by simply taking the basic information disseminated. In other cases the news is further elaborated perhaps by delving into certain aspects, for example the strategic reasons for an exit, or by talking to entrepreneurs and investors.
This is not always the case, however, and not infrequently such news is disseminated despite the omission of figures or assessments.
In these cases, it becomes more difficult to publish the news because, as mentioned above, news of a mainly financial nature without figures appears somewhat dull in the eyes of the reader who expects to find answers and information in the articles he reads.
Moreover, the news of an exit or investment round without figures can easily suggest that it has a very small underlying value. Even if the news was perhaps given with great emphasis, it still risks losing much of its impact.
Let’s remember that every deal and every exit that is fully disclosed benefits not only those who want to inquire but the entire startup investment ecosystem because completed funding rounds, but especially successful exits, represent the most glaring of demonstrations of how investing in and supporting startups is a potentially very lucrative activity. This has a positive impact on attracting new attention and financial resources to the asset class in an even more powerful way than the still fundamental tax incentives and supporting regulations.
Having said that, however, we decided to delve deeper and try to understand what the reasons might be for making round or exit announcements by deciding not to disclose figures or valuations. We have identified thirteen:
1 – Legal reasons: the agreements provide for confidentiality on the contents of the deal and therefore confidentiality, in these cases one has the will to give the news but, of course, one cannot betray the trust of the parties who signed these agreements.
2 – Privacy reasons: when the exit has generated a very good return for the shareholders they do not necessarily want to publicly disclose how much they have earned. In particular, this applies to individual business angels.
3 – Paper-on-paper exits: when valuations are derived from the power relations between those who sell and those who buy and since there is no exchange of money and therefore no liquidity, valuations and multiples are applied that do not always adhere to the true value of the companies. In this case one cannot speak of a true exit unless the buying company is listed (in which case the shares are ‘liquid’).
4 – Complex deal structure: inflated valuation for an instalment purchase, the buyer is willing to accept a higher valuation if payment is deferred, i.e. after the acquired company makes its contribution to the acquiring one (earn out).
5 – Exit ‘forced’: strategic pressure forces one to sell even accepting a low price, e.g. very strong competitor or very weak company.
6 – ‘Contrast’ exit: where one group of members gains and one loses. Contrasts are avoided by further publicity. This occurs, for example, in the case of liquidation preference agreements.
7 – Exit ‘policy’: the value may also be negative (seller pays) if there are reasons why the owner prefers to sell the asset in order not to liquidate and not to dismiss directly.
8 – “Reputational” Exit: some of the professional investor partners prefer not to let the exit value be known in order to avoid affecting their track record, it occurs when the value of the exit is low (affecting the track record translates into a bad reputation for investors who would then find it harder to raise new funds from LPs) and is also linked to the fact that the reasons for the deal are not exclusively economic but also strategic and for example a price that is too high for something that appears to have a low valuation could affect the decision-making ability of the buyer in the eyes of those who do not have the strategic vision of the operation. This is also the case for the founders who, if they sell at too low a price, then in the future they risk making a greater effort should they find themselves in need of further collections, as happens with serial entrepreneurs.
9 – Exit ‘public relations strategy’: rather than focusing the deal on the actual price and value of the target company, the emphasis is on the strategic reasons for the deal.
10 – Regulatory compliance: you do not say the value because it is not an obligation anyway and therefore you prefer not to communicate it.
11 – Competitive motive: not wanting to give strategic information to potential competitors, this may also preclude the disclosure of the transaction itself.
12 – Negotiating leverage: if I say the value of the exit then it is possible to trace it back to the valuation, which would make a later deal more complex (the value acts as an ‘anchor’).
13 – Asset and acqui-hiring: this occurs when the exit is made not so much for the intrinsic value of the target company’s business as for the interest in certain assets of the target company, such as people’s skills or presence in strategic markets, or contracts with important customers, so the value of the transaction would be unrelated to the value of the company as a whole.
These are some of the possible reasons why the value of an exit, or a round, is not communicated. These are not always fully justifiable reasons, although they are all more than understandable.
The fact remains that at a journalistic level it will always be difficult to report news of this kind without valuations, although exceptions may be made in particular cases, where, for example, the value of the news is important regardless of the figures for strategic reasons (e.g. expansion into new markets), or because it creates exponential value even non-financial (e.g. creation of new jobs), or because it strengthens the ecosystem (think for example of an Italian company buying an international company). The important thing is to at least avoid giving misleading information by mixing equity rounds with debt rounds, improperly inflating the underlying valuations. (photo by zero take on Unsplash)
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