The $64,000 Answer to "What's Your Valuation?"
This post isn't about how early-stage companies are valued by investors, nor is it about how entrepreneurs value their babies. No, this post is about answering the inevitable fundraising question: "What's your company's valuation?" or "How much of the company are you prepared to sell for this round?"; particularly when asked in the first in-person presentation.
Here's my advice and, yes, I expect to hear it come back at me the next time I ask for a valuation. Resist the urge to say a number. Resist with all your strength. I know it's hard because I've seen entrepreneurs blurt out a number even within 5 minutes of receiving this advice. Don't say a dollar figure and don't say a percentage. I repeat, don't say a dollar figure and don't say a percentage.
The $64,000 Answer
Instead, share the following (after you've convinced yourself you believe them):
1) We are looking for great partners beyond the dollars and valuation;
2) We understand that valuation is a market concept so valuation is a result of creating an interested market of investors for our company;
3) If we both decide we could be good partners and excited about each other, I'm confident we will find a valuation that works for everyone;
4) Then be quiet and listen (clamping down on your urge to follow-on with a number).
From there you'll probably get one of the following responses:
a) That's great to hear, because we're all about partnering; or
b) That's a load of crap, tell me the valuation you're really thinking.
Even if you get response b), I'd suggest reiterating your primary goal is finding the right partners to build your world-changing company. If you can't leave investors happy with that answer, then, and only then, reference other specific company comparables (not "my friend got X") and how your research uncovered a range of attractive X to acceptable Y values (reiterating that it's about partnership first).
Why do I say this?
Because the reality of fundraising is much more fluid and dynamic than saying a number that could immediately kill investor interest. I have seen meetings turn from hot to frozen when a pre-revenue entrepreneur boldly claims he expects a $20M valuation -- only because he hadn't been through the process long enough to realize anything beyond single digits was a deal killer for any quality fund.
If you give yourself and your investors time to learn each other a couple things happen. First, you get a better feel for who you're partnering with, and great partners could lower valuation requirements that could have killed you earlier. Second, investors spend more cycles learning you and researching your business. You'd prefer valuation conversations to happen after investors have grown their excitement and vested their time/energy into you. That is the better time to discuss numbers that could work for all parties.
Exception Cases
Have I seen it turn out OK by saying a number? Yes. Could this approach waste time? Yes, if you don't vet the partner expectations along the way. My advice isn't focused on the exception cases, I'm recommending a path that has the highest likelihood of getting you good VC partners and a termsheet. Because valuation is a relationship and market concept, your biggest levers for affecting valuation are interpersonal and termsheets. Getting VCs to like you first or getting multiple termsheets will reap better results than demanding $20M valuation in the first meeting. If you can resist the temptation to blurt a number, you will be way ahead in building the strongest funding partnership for your company.
Whaddya think readers -- any pearls of wisdom from experiencing this process firsthand?
Here's my advice and, yes, I expect to hear it come back at me the next time I ask for a valuation. Resist the urge to say a number. Resist with all your strength. I know it's hard because I've seen entrepreneurs blurt out a number even within 5 minutes of receiving this advice. Don't say a dollar figure and don't say a percentage. I repeat, don't say a dollar figure and don't say a percentage.
The $64,000 Answer
Instead, share the following (after you've convinced yourself you believe them):
1) We are looking for great partners beyond the dollars and valuation;
2) We understand that valuation is a market concept so valuation is a result of creating an interested market of investors for our company;
3) If we both decide we could be good partners and excited about each other, I'm confident we will find a valuation that works for everyone;
4) Then be quiet and listen (clamping down on your urge to follow-on with a number).
From there you'll probably get one of the following responses:
a) That's great to hear, because we're all about partnering; or
b) That's a load of crap, tell me the valuation you're really thinking.
Even if you get response b), I'd suggest reiterating your primary goal is finding the right partners to build your world-changing company. If you can't leave investors happy with that answer, then, and only then, reference other specific company comparables (not "my friend got X") and how your research uncovered a range of attractive X to acceptable Y values (reiterating that it's about partnership first).
Why do I say this?
Because the reality of fundraising is much more fluid and dynamic than saying a number that could immediately kill investor interest. I have seen meetings turn from hot to frozen when a pre-revenue entrepreneur boldly claims he expects a $20M valuation -- only because he hadn't been through the process long enough to realize anything beyond single digits was a deal killer for any quality fund.
If you give yourself and your investors time to learn each other a couple things happen. First, you get a better feel for who you're partnering with, and great partners could lower valuation requirements that could have killed you earlier. Second, investors spend more cycles learning you and researching your business. You'd prefer valuation conversations to happen after investors have grown their excitement and vested their time/energy into you. That is the better time to discuss numbers that could work for all parties.
Exception Cases
Have I seen it turn out OK by saying a number? Yes. Could this approach waste time? Yes, if you don't vet the partner expectations along the way. My advice isn't focused on the exception cases, I'm recommending a path that has the highest likelihood of getting you good VC partners and a termsheet. Because valuation is a relationship and market concept, your biggest levers for affecting valuation are interpersonal and termsheets. Getting VCs to like you first or getting multiple termsheets will reap better results than demanding $20M valuation in the first meeting. If you can resist the temptation to blurt a number, you will be way ahead in building the strongest funding partnership for your company.
Whaddya think readers -- any pearls of wisdom from experiencing this process firsthand?
Posted by VC Dan | 11/08/2006
Let's get to know each other, Join FVB, my venture capital blog community!
If you liked this post, please subscribe! You'll be glad you did!
Comments (2)
This is very good advice Dan. In our Bplan we include a dcf model for three scenarios - should I get rid of that?
It seems the first person to mention money loses. I like when I interview someone who doesn't blurt out a # like that's the only thing that matters - so maybe you nasty vcs are the same way :-)
Mark: yes -- unless you are a mid/late-stage company I'd ditch DCF entirely. Touting the results of a DCF is almost a negative, unless its presented as just one of various models that includes direct, recent comparables. Why, because the risk is so high in early-stage deals that DCF hurdle rates have to be absurdly high to match actual risk/reward. When models include extreme assumptions (like a crazy high hurdle rate) the whole model becomes suspect.
Yes, it does help to put yourself in the investor's shoes. An entrepreneur who seems more focused on a number than on partnering is a red flag. Of course, you could say the same thing about investors who insist on hearing a number ;-)
Post a Comment
<< Home