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Should your startup release financial data?

May 28, 2008

Two different companies I profiled last night shared their revenue numbers with me in virtual interviews, but were both shocked that I printed the numbers in their profiles.  Each company asked that I remove the numbers and I complied with their requests.  This got me thinking: when should you keep your revenues secret and when should you release them?

Do release them:

  • if you are raising professional (vc or private equity) capital
  • if you are experiencing rapid growth without any outside capital

Do not release them:

  • if you have raised professional money and are experiencing rapid growth
  • if your revenue numbers are NOT growing

If you are hoping to raise money from venture capital firms you might as well release your revenue numbers (current and projected).  Once your deal is shopped EVERYONE who cares will find out anyway.  Once you have raised your first round of professional money it may make sense to keep your numbers secret, at least until your existing investors decide that another venture capital firm needs to lead the series b round (i.e. because they are tired of the deal or they are out of dry powder).  Why? Perhaps you are able to grow VERY fast and instead of alerting your competitors to your hockey stick, you may want to keep a lower profile.

On the other hand, if you manage to achieve ‘hockey stick’ growth on your own with little or no outside investment, revealing that fact could help you take your business to the next level.  Savvy investors who ‘discover’ your business (i.e. the fact that without outside capital you are kicking butt) can easily figure out how to put more capital to work within your business to take advantage of the ‘hockey stick’ you have built.  Does this make sense?  Having an investor come to you is SOOO much better than trying to get an investor to see you.

If you keep your revenues secret (prior to accepting professional investments) people may assume they are lower than they actually are or even worse that you don’t have a real company.  Perhaps YOU think they are too low.  Get over it, you are a startup ~ the size of your revenues aren’t as important as their trend.  Don’t be embarrassed that your startup has little or no revenue, especially in technology related startups ~ don’t apologize.

Finally, NEVER lie about your revenues.  I repeat, NEVER lie to ANYONE about your revenues.  The problem about lies is that you will need to keep them straight and it is impossible to keep them straight over time.  For example, we meet at a network event and you suggest in 2003 “we are doing $1MM in revenues and are growing by 20% per year.”  Two years later we run into each other at another event and you tell me, “We are about to raise money from Austin Ventures.”  I ask, “have the growth numbers held up?”  You tell the truth and say, “Actually, they are better than we expected, we have growth 300% over the last two years!”  I do the math in my head and ask, “Wow, you guys are doing $3MM in revenue?”  You are actually doing $1,000,000, but your growth has really been 300%.  You have taken your great story and completely screwed it up by lying two years earlier.  I am good friends with one of the guys at Austin Ventures and mention to him, “I can’t believe company x is doing $3,000,000 in revenue! 300% revenue growth in two years is amazing!”  You get where this is going?  At best you have caused your integrity to be called into question and at worst you may have cost yourself the deal.  NEVER LIE ABOUT REVENUES, EVER!

Note to companies I profile: if you don’t specifically ask me NOT to print something you can expect it to be posted in your profile.

Written by Alexander Muse · Filed Under Blog, Startups 

Comments

6 Responses to “Should your startup release financial data?”

  1. Curvezilla Says:
    May 28th, 2008 at 2:03 pm

    As I look out my corner office window from the 72nd floor of the Bank of America building I can’t fathom why someone would lie about their business. I mean I would never fudge the numbers and tell you my consultancy made $200MM last year when we only made $198MM. The audacity of some people.

    *super fast commercial speaking voice* This comment was all meant tongue in cheek and is by no way true by any stretch of the imagination. ;-)

  2. sean scogin Says:
    May 28th, 2008 at 3:49 pm

    fantastic post! I can understand the feeling of wanting to tell people that you’re doing well, but integrity in business is so much more important. Btw, now a devoted reader, found you via twitter (for your records)

  3. Scott Whigham Says:
    May 28th, 2008 at 4:18 pm

    Interesting take and while we all would prefer investors coming to us, there are other things to take into account when deciding whether to publish your numbers. Imagine a chart with three points, all curving upward:
    * Revenue
    * # of Employees
    * Quality of product

    On this chart, your revenue and Quality of Product are high but your # of Employees is low. This means your ability to react to competition would be lower, right? Having few employees means high margins and low costs but it isn’t the greatest thing. So should this company publish their numbers? I say, “No”.

    Publishing successful numbers invites potential competition from better-funded companies. It’s the idea of, “If they can do $x with just five people, we could do $x*100 with a team of 50!”

    If I publish successful numbers, one of my competitors can use those published numbers to raise money (”Look, Mr. VC - this small, self-funded company is doing $x with only one employee! You should fund us and we can wipe him out!”).

    You say, “Once your deal is shopped EVERYONE who cares will find out anyway.” but I disagree: only those in the right circles who care will find out. My competition is possibly some 17yo kid in Singapore who isn’t in those circles. Microsoft isn’t in that circle.

    I just think that posting numbers *prematurely* invites competition that can potentially be devastating. For that reason, until all three of your lines on your chart are on the same curve, I think that you shouldn’t do it. After you’ve gotten all of your ducks in a row (revenue growth, # of employees, and quality product), go for it!

  4. Alexander Muse Says:
    May 28th, 2008 at 6:17 pm

    Scott - perhaps there is some risk of a competitor raising money based on your numbers, but I would suspect a savvy investor would take the ‘competitor’s’ business plan and give you a call. Why fund a copycat when you can approach the small guy, likely at a better price, and fund him. Of course, you may be right, but I would be willing to take the risk…

  5. Scott Whigham Says:
    May 29th, 2008 at 5:08 am

    While I agree with your example in the last comment, it begs the question: “Are all investors ’savvy investors’?” No. If the aforementioned 17 yo kid with the great idea (to compete with me by copying me) has a rich uncle, is that rich uncle going to pick up the phone and call me? No chance. Rich Uncle Alex is going to my posted numbers as proof that his 17yo nephew has a legitimate shot at making the big-time (and therefore will fund his nephew increasing my competition).

    I think that, in the software/web world, it might only take your competition raising as little as $50,000 to potentially cause real problems for you. In the biomedical field or manufacturing world it might take $500,000 + to make an impact but not in my field; angel investments can make a big difference. In the web world, a “hacker dude” can pair up with a “business dude” and they can have a business plan+demo in just two weeks. Rich Uncle Alex won’t be able to write the check fast enough when they show him their, “If we can just capture 1% of this billion-dollar market…” presentation.

    I understand where you’re coming from but I still have to disagree that it is wise for all types of companies that meet your criteria to post their numbers. I love transparency but there is a limit for me.

  6. Truman Neuman Says:
    May 29th, 2008 at 9:47 am

    The Truth Works; Always has.
    Time and Tide waits for neither man nor the exposure of his deceptions’. Thanks for another great advisory snippet, exactly.

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