Rule one: Don’t throw out a quantity
There is one trick query that buyers virtually all the time ask, and it’s assured to make founders uneasy: “What are your expectations surrounding valuation?”
For most founders, it’s the perennial Goldilocks state of affairs. Throwing out a quantity that’s too excessive would possibly push buyers away, whereas an quantity that’s too low would possibly set off the query, “Why so low? What’s wrong with this business?” and go away shareholder worth on the desk.
And if it’s excellent, most investor’s knee-jerk response goes one thing like this: “Let’s see how much I can work this founder down to a better price.”
Founders are at a definite drawback within the valuation recreation. By design, buyers play this recreation much better than most founders ever will — a VC would possibly do a number of offers in 1 / 4, however a founder would possibly method markets solely as soon as each couple of years.
So, as a substitute of getting to throw out particular numbers that can inevitably be challenged, right here’s an answer:
Don’t throw out a quantity
The extra you search to grasp your buyers’ ideas on deal-making, the higher you’ll be at attending to that deal.
The most assured (and worthwhile) founder response to the notorious valuation query begins with: “We’re letting the market price this round.”
When delivered accurately, it implies you’re taking presents, you aren’t determined and also you’re assured you’ll shut a deal at acceptable phrases.
But if that’s all you say, you’re in hassle as a result of it will also be interpreted as “We don’t have a clue” or “We’ll take what we’re given.” After all, it is advisable to give a baseline indication of your expectations if you happen to really need to shut a deal.
Jay Levy, co-founder and managing associate of Zelkova Ventures, explains, “When speaking with VCs, founders should give some indication of their valuation expectations coming into the conversation. It’s important to know that everyone is on the same page, because it would be painful and unfortunate for everyone to advance toward a term sheet only to realize that expectations are misaligned.”
Gather your valuation knowledge factors
To substantiate your market-based valuation method, you must start early. Start by pre-pitching the buyers in your subsequent spherical to assemble valuation knowledge factors and have low-stakes conversations to construct within the presumption that “we’re probably too early for you, but in 12-15 months, we’ll most likely be a great fit.” In these chats, all the time ask how they may method valuing your organization when the time could be proper (i.e., in your subsequent spherical, 12-15 months from now).