Correlating PR with the Valuation of a Startup

Many variables go into determining the price point of acquiring a startup venture.

Does a startup’s public profile play a role in determining valuation?

One would think greater awareness generates more buyers which can bring an auction-like dynamic to the proceedings and drive up the price. On the intangible side, the buzz that comes from a growing public profile can create the perception of a momentum, again increasing the perceived value.

This has been on my mind since reading The New York Times story, “Disruptions: The Logic (or Lack of It) in Appraising Start-Ups.” The throw-away line in the last paragraph caught my attention:

Of course, all of this math starts to fall apart when a start-up receives an exorbitant amount of press and exposure on social networks.

The NYT Times journalist Nick Bilton writes that media coverage can even cause an irrational escalation of the final figure paid for a startup. If we define escalation as 20 percent (to be conservative), and the startup’s “rational” valuation is put at $10 million, this means communications (media coverage) puts another $2 million in the investors’ pockets.

Not too shabby.

Yet, startups typically allocate budgets for PR that fit into the you’ll-grow-with-us category, ever mindful of showing prudence to the Board.

Does this mean “an exorbitant amount of press and exposure on social networks” gets generated on the cheap?

I don’t think so.

Instead, PR consultancies take on startups with modest budgets only to see the scope of the assignment grow without an increase in budget. Our nature “to please” exacerbates the situation.

When you consider the exorbitant fees – I like understated language – collected by investment bankers and attorneys during an M&A, the investment of time by PR agencies in startups seems misplaced. Of course, this assumes a data-driven case can be made that correlates the results from PR with an increase in valuation. (I leave the deep study of this topic to some enterprising communications professional in pursuit of a Ph.D.)

As a starting point, I took a high-level look at the media coverage of the Goodreads/Amazon and Instagram/Facebook acquisitions called out in The New York Times article (figured Summly was too small; tough to filter Mailbox coverage).

Using Factiva, I built a media index incorporating 15 mainstream publications and online properties (covering startups). This way, I could do an apples-to-apples comparison of the coverage over the six months leading into the acquisition and the previous six months of coverage. Again, the idea is to get a “feel” for momentum.

Correlating PR with the Valuation of a Startup image Goodreads CoverageCorrelating PR with the Valuation of a Startup

Correlating PR with the Valuation of a Startup image Instagram CoverageCorrelating PR with the Valuation of a Startup

You can see the coverage of Goodreads spiked through the roof before Amazon swooped in. Even a more mature startup like Instagram doubled its public profile before the Facebook acquisition.

In short, the data suggests that PR plays a role in the perceived value of a startup.

While the “how much” question can’t be answered, it does seem ludicrous for PR consultancies to give away a product that increases the valuation of a startup.

Perhaps, PR consultancies should be framing agreements in which their “extra” time is captured as an investment with a reward forthcoming if a liquidity event occurs.

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