Here's why Path didn't leak a fake valuation (and you shouldn't either)

By Sarah Lacy , written on August 15, 2013

From The News Desk

As a thought exercise, there is nothing wrong with Francisco Dao's post this morning about valuations. But when I read it, as an entrepreneur and an editor, my heart sank. Because I happen to know the exact opposite played out in the case of Path, the company Francisco cited as a jumping off point.

I know this because a few weeks ago I had lunch and an off the record conversation with Path's CEO Dave Morin about the media storm around his funding round. When I read the post this morning, I texted him immediately and asked if I could share what we talked about and he said yes. I think it was an important conversation not only for Path, but for other entrepreneurs who struggle to know just how to handle the blogosphere.

Morin says he has no idea where the $1 billion valuation figure came from. He wasn't called and asked for comment. And if he had been, he says he would have said it wasn't true. It didn't help him fetch a higher price: It hurt him. He says it made his fundraising materially harder, because investors who were interested in a meeting balked that the company would be seeking that price. Knowing they wouldn't pay it, they were disinclined to even take a meeting.

It wasn't fatal. But it meant Morin had to explain over and over again that Path had never considered it was worth $1 billion. Beyond that it would have been a stupid idea to leak a valuation he didn't think he'd get, because suddenly a $500 million valuation looks like failure instead of success. Beyond that, there are huge dangers for a company that's not yet making much money to raise anything at $1 billion. It sets up the danger of down rounds and cram downs.

And for a startup CEO incredibly busy running a company, that kind of distraction -- on top of the existing distraction of raising cash -- is at best incredibly frustrating. At worst, it can actually be damaging to the company.

I spend a lot of time explaining to entrepreneurs that it's not our job to make life (or a fundraising) easier for them. But when a story isn't true, we shouldn't actively try to make it harder either.

Francisco had no way of knowing what happened in my meeting, and his speculation was well-founded: For years startups and investors have been actively trying to manipulate the press to cram through certain deals and terms. Plenty of people have tried exactly what he describes. And both the experience of Path and the type of thing Francisco describes are big reasons we don't do a lot of these "These guys may be raising money" stories anymore.

For one thing they are not that interesting. You can look at most companies, how many employees they have, and how long ago they fundraised and guess if they are in the market. But repeatedly I get "tips" that simply don't stand up when you ask one or two more sources whether they are true and whether the valuation prices are accurate.

There is a big problem in startup reporting that Morin put his finger on in our conversation: Journalists talk to VCs more than they talk to entrepreneurs. He's right, and I am totally guilty of this too.

This didn't use to be the case. In the wake of the dot com crash, VCs generally eschewed the press which is why they made such good sources if you could win their trust. But we all know that game has changed immeasurably. Because deal flow has become so ellusive, VCs are now essentially marketing their services every time they open their mouths, as Bill Gurley talked about at our last PandoMonthly. Most of the major firms have hired a marketing partner or high ranking communications person in house and all feel pressure to build a brand. It's almost like politicians running for office the way each of them positions themselves as more entrepreneur friendly than the next guy.

I don't blame them -- it's simply become the game in the consumer Web space. As Naval Ravikant said in our PandoMonthly, VCs essentially rely on branding cash -- the ultimate commodity. What kind of cash you have has become a very real asset in recruiting talent and telegraphing that you have staying power in the Valley.

But the downside is that VCs are having the bulk of the conversations with time-pressed journalists covering the space. They are all about building relationships with journalists, and they have the time to and can most easily cater to the time pressures of blogging.

Meantime, many entrepreneurs are scared shitless of responding to any inquiry about a potential funding round or acquisition. Most haven't dealt with the press before and don't have pre-existing trusted relationships. They've seen talking to the press backfire time and time again with competitors. Their companies are too important to them, and they are busy. They'd rather just err on the side of being quiet lest they make the situation worse.

So the problem is the narrative of these off-the-record conversations are informed by people at the board level, not people actually running the companies. If you've never run a startup that doesn't seem so bad. But once you've run one, you realize that even the most engaged boards are really disconnected with the day-to-day realities of a startup and how quickly they can change. Simply put, they aren't the ideal source, but when they speak and entrepreneurs don't, they're the only ones we have. No one is really at fault in this equation, but it's a big reason inaccurate information keeps getting reported. And inaccurate info helps no one.

VCs are good sources in a lot of ways. They have a broader take on the startup landscape and are less emotionally attached to a company in question than the entrepreneur is. But somehow, if we're all in this to cover entrepreneurs, we have to do a better job of opening those communication lines.

The conversation was a revelation to me as an editor. We're guilty of this too, mostly in cases where an entrepreneur has actively tried to thwart our reporting or hide the truth. And frankly, the return of gossip bloggers who simply make up facts to try to provoke a reaction make the landscape worse for everyone. Sadly, they make all reporters look bad.

I explained the problem from the journalists' side, and asked Morin what he proposed for a publication and entrepreneurs who want to start having a fairer dialog. Not a favorable one, but a fair one. Something that helps readers more than the denial, the reporter speculation, and the rewritten press release.

He said for his part he was no longer going to obfuscate anything. If a reporter gets a scoop, and it's accurate and he or she calls him up, he'll say congratulations and tell them to run with it. No more playing games.

I appreciate that approach. So here's what I promised Morin and what I promise any entrepreneur we cover: If you have an off the record conversation with us, we will never breach that trust. There's a lot of debate about this one, but we won't even breach it if we discover later that you lied or tried to manipulate us. (Which happens a disturbing amount.) We just won't trust you again.

We will call you before we run a story about you -- even if you have lied to us in the past or we are concerned you will leak the story elsewhere. The window of time we give you to respond will vary based on how much trust there is in the relationship, but we will always call no matter what from now on. The best relationships are ones where we talk to you between funding or product announcements, so we understand the company's strengths and challenges clearly.

If for any reason we fail on that -- via a staff writer, guest post or (as was the case here) regular outside contributor -- I personally will reach out to the founder and write a post correcting the error. If you ever feel we've been unfair to you, I encourage you to reach out to me directly and let's talk about it. My email is Sarah at In many cases, I'll even encourage you to write a rebuttal.

This isn't about being favorable to entrepreneurs, it's about giving all sides a fair hearing. Even in the contentious cases of our reporting on Beachmint and Uber, we've repeatedly asked the companies to speak to us. They've declined repeatedly, but we'll keep asking. We probably won't write what you'd like, but you shouldn't be afraid to give us your side of the story. Morin's approach is the right one.

Our readership is best served by getting the truth about a company. Sometimes that truth isn't convenient for entrepreneurs at that time, but we believe in the long term it's best for everyone. Hopefully more entrepreneurs will respond in the way Morin has.