Money Matters
The Purpose of this Section
This section covers the concepts concerning funding and running a VC-backed start-up.
Why is This Section Important?
Privately held companies are generally concerned about attracting attention not only from their prospects and customers, but to another very influential group – the venture capitalists that fund them. You’ll learn what’s important to the executives running these VC-backed startups in the following chapter.
To develop a relationship and mutual respect with a C-level executive, you need to understand their business and key concerns. The CEO first thinks about the solvency of the company – do they have the funding to support their growth goals? Do the financial analysts understand the corporate strategy, and are they making a “buy” recommendation?
It is important to understand if your client is VC-funded, private, or a public entity. If you have a Venture Capital (VC) funded company – who funded the company? What is the reputation and network of that VC? Can those VCs help in publicity and marketing areas? If the company is a VC funded company, what round of funding has the company secured? A, B, C, D? It is also important to know how those funding stages translate to corporate success.
Not unlike the housing valuation market, funding a start up is based on a formula. In the housing market, there is a standard price per square foot assigned based on the location of the home. In the start-up realm, there is a formula assigned based on the market traction (e.g. how many customers, how much revenue), the differentiation of the product, and the projections for market revenues. An entrepreneur is given credit for the idea, the sweat equity they have put into the company, their own experience, and the money they may have invested to get the company going. The level of credit also depends on the strength of the idea and the entrepreneur’s progress compared to the competition. The valuation of the company the VCs settle on before the funding (which adds to the total value of the company) is called pre-valuation. The pre-valuation combined with the funding amount is called post-valuation.
Each funding round the company seeks is evaluated on the pre-valuation, and then the VCs consider what has been done with the dollars received from the funding. Did the entrepreneur stretch each dollar invested to make the company worth much more than the actual dollars invested (for example, did the company take an $8M dollar Series B investment and land a $20M dollar contract with GE and expand the company’s presence from one to four locations). Or, was the investment squandered (no substantial new sales, loss in market position, etc.). VCs sometimes “cram down” previous investors if it appears previous investments were not properly used. For example, this means that after a series B investment, the company has a post valuation of $20M; but when a new set of investors consider a series C, they find the company in a state of disarray – badly lagging in marketing, sales, or product development. They may give the company credit for only $15M. This means that every investor up to that point has their shares reassessed and all take a 25% reduction in the value of their investment. This gives the new investors an “edge” as their money is worth more. Often a new funding round, particularly if the company is not getting the up-tick in investment, can cause problems for the entrepreneurial team looking to secure funding. The entrepreneurs sometimes have to bridge the gap and bring the VCs along. Sometimes, however, it is the VCs that have to convince the entrepreneurs to take a valuation. Entrepreneurs sometimes have unrealistic expectations about their company’s worth.
Know that a VC funded company is a company that is concerned with their burn rate. This burn rate is the monthly spend they are making to propel the company. There are formulas for companies in funding stages to determine burn rates. The burn rate may change based on the industry the company is in. Technology intensive companies may need more product funding – and that will impact the burn rate.
In a public company, the CEO is concerned with ensuring her quarterly earnings and progress will be judged appropriately by the market. She wants maximum credit for technology developments and so PR is very important in that process. She also wants to influence technology analysts that may be evaluating acquisitions or partnerships for their long term effect on the competitiveness of her company. These moves and announcements are critical in swaying the “judgment” of the investment analysts that are making recommendations to buyers on the stock market.
Private companies are more complicated to understand. Sometimes the financials are held very close to the vest (for example in the case of a family-owned business) and sometimes the private company is a spin out of a public company. It’s important to ask lots of questions in order to support the CEO’s financial goals.
The most fundamental thing a PR and marketing executive can do is understand the total picture of the company. Often PR and marketing types think about initiatives for the sake of the initiative. It’s important to ensure that the initiative has a business outcome. For example, did a marketing event deliver a certain number of qualified leads that helps the company reach sales projections. It doesn’t matter if the event was “cool” if it doesn’t deliver a return on the investment. It’s important to understand what type of return the executive team expects before engaging in that initiative.
This section covers the concepts concerning funding and running a VC-backed start-up.
Why is This Section Important?
Privately held companies are generally concerned about attracting attention not only from their prospects and customers, but to another very influential group – the venture capitalists that fund them. You’ll learn what’s important to the executives running these VC-backed startups in the following chapter.
To develop a relationship and mutual respect with a C-level executive, you need to understand their business and key concerns. The CEO first thinks about the solvency of the company – do they have the funding to support their growth goals? Do the financial analysts understand the corporate strategy, and are they making a “buy” recommendation?
It is important to understand if your client is VC-funded, private, or a public entity. If you have a Venture Capital (VC) funded company – who funded the company? What is the reputation and network of that VC? Can those VCs help in publicity and marketing areas? If the company is a VC funded company, what round of funding has the company secured? A, B, C, D? It is also important to know how those funding stages translate to corporate success.
- Series A can be the first serious round of VC funding, or it can also be a “seed” round. This round is typically one to five million dollars (at most) and is provided to the entrepreneurial team to see if they can get their prototype or idea working.
- Series B is generally received as a company is recognized for its market traction. By this time, the first product is ready to go to real customers, and it is time to let the market know the client exists and secure the first customers that are not friends or family of the executive team. The typical funding level in a series B can vary widely, depending on the type of company being funded. Series B round funding typically ranges from $8 to $15 million dollars.
- Series C is the stage that things get seriously rolling at a company and the funding is often used to expand the company presence, the corporate marketing footprint, or to expand product offerings or innovation. Series C funding rounds vary widely – depending on what type of company is being funded (hardware companies often require more funding than software companies, for example). Series C funding rounds typically range from $15 to $50 million dollars.
Not unlike the housing valuation market, funding a start up is based on a formula. In the housing market, there is a standard price per square foot assigned based on the location of the home. In the start-up realm, there is a formula assigned based on the market traction (e.g. how many customers, how much revenue), the differentiation of the product, and the projections for market revenues. An entrepreneur is given credit for the idea, the sweat equity they have put into the company, their own experience, and the money they may have invested to get the company going. The level of credit also depends on the strength of the idea and the entrepreneur’s progress compared to the competition. The valuation of the company the VCs settle on before the funding (which adds to the total value of the company) is called pre-valuation. The pre-valuation combined with the funding amount is called post-valuation.
Each funding round the company seeks is evaluated on the pre-valuation, and then the VCs consider what has been done with the dollars received from the funding. Did the entrepreneur stretch each dollar invested to make the company worth much more than the actual dollars invested (for example, did the company take an $8M dollar Series B investment and land a $20M dollar contract with GE and expand the company’s presence from one to four locations). Or, was the investment squandered (no substantial new sales, loss in market position, etc.). VCs sometimes “cram down” previous investors if it appears previous investments were not properly used. For example, this means that after a series B investment, the company has a post valuation of $20M; but when a new set of investors consider a series C, they find the company in a state of disarray – badly lagging in marketing, sales, or product development. They may give the company credit for only $15M. This means that every investor up to that point has their shares reassessed and all take a 25% reduction in the value of their investment. This gives the new investors an “edge” as their money is worth more. Often a new funding round, particularly if the company is not getting the up-tick in investment, can cause problems for the entrepreneurial team looking to secure funding. The entrepreneurs sometimes have to bridge the gap and bring the VCs along. Sometimes, however, it is the VCs that have to convince the entrepreneurs to take a valuation. Entrepreneurs sometimes have unrealistic expectations about their company’s worth.
Know that a VC funded company is a company that is concerned with their burn rate. This burn rate is the monthly spend they are making to propel the company. There are formulas for companies in funding stages to determine burn rates. The burn rate may change based on the industry the company is in. Technology intensive companies may need more product funding – and that will impact the burn rate.
In a public company, the CEO is concerned with ensuring her quarterly earnings and progress will be judged appropriately by the market. She wants maximum credit for technology developments and so PR is very important in that process. She also wants to influence technology analysts that may be evaluating acquisitions or partnerships for their long term effect on the competitiveness of her company. These moves and announcements are critical in swaying the “judgment” of the investment analysts that are making recommendations to buyers on the stock market.
Private companies are more complicated to understand. Sometimes the financials are held very close to the vest (for example in the case of a family-owned business) and sometimes the private company is a spin out of a public company. It’s important to ask lots of questions in order to support the CEO’s financial goals.
The most fundamental thing a PR and marketing executive can do is understand the total picture of the company. Often PR and marketing types think about initiatives for the sake of the initiative. It’s important to ensure that the initiative has a business outcome. For example, did a marketing event deliver a certain number of qualified leads that helps the company reach sales projections. It doesn’t matter if the event was “cool” if it doesn’t deliver a return on the investment. It’s important to understand what type of return the executive team expects before engaging in that initiative.