There is a Trick question that investors almost always ask, and is guaranteed to make founders uncomfortable: “What are your valuation expectations?”
For most founders, it's the perennial Goldilocks scenario. Throwing in too high a number could turn investors off, while too low a number could trigger the question, “Why so low? What's wrong with this business?"
And if that's right, the knee-jerk response of most investors goes something like this: "Let's see how much I can short this founder to get a better price."
Founders are at a clear disadvantage in the valuation game. From experience, investors play this game much better than most founders: a VC can do multiple deals in a quarter, but a founder can approach markets only once every two years.
So instead of having to throw out specific numbers that will inevitably be challenged. Several prior considerations must be taken.
Don't throw a number
The more you try to understand the thoughts of the investors on making deals, better to reach that agreement.
The founder's safest (and most valuable) response to the infamous valuation question begins with, "We're going to let the market price this round."
When delivered correctly, it implies that you are accepting offers, you are not desperate, and you are confident that you will close a deal on acceptable terms.
But if that's all you say, you're in trouble because it can also be interpreted as "We have no idea" or "We'll take what we're given." After all, you need to give a baseline indication of expectations if you really want to close a deal.
Jay Levy, co-founder and managing partner of Zelkova Ventures, explains: “When talking to venture capitalists, founders should give some indication of their valuation expectations in the conversation. It is important to know that everyone is on the same page, because it would be painful and unfortunate for everyone to move towards a term sheet only to realize that expectations are not aligned."
Gather valuation data
To substantiate the market-based approach to valuation, you have to start early. It's appropriate to start by pre-presenting investors with valuation data points and having low-risk conversations to build the assumption that "it's probably too soon for you, but in 12-15 months, it should most likely be a big deal." change ". When asking how to approach the valuation of the company when the time is right, that is, in the next round, the time frame is the indicated one of 12 to 15 months.
You shouldn't ask for a specific number: anyone can give a number or range, but that doesn't make it significant. The valuation approach and justification is much more valuable to investors because the final figure whether it is $20 million or $200 million is a result of the approach and justification.
When proposing a figure, you have to listen to the elements of the approach; that "math equation" (eg 5x-10x next year's revenue, 10x-20x EBITDA and so on). Justifications for why one approach makes sense are also being heard. This may sound something like: "Recent transactions in the space indicate that this is roughly where the market is."
Armed with a couple of investor valuation fundamentals for the next round, it's time to introduce this round's investors.
Show that you know what you are doing
When they ask the valuation question, here is the resounding answer:
We are letting the market price be this round. Ultimately, we're pretty confident that we'll end up putting together a deal that makes sense with the right investor. However, some of the others we've talked to have said they could approach valuation somewhere in the range of (time to cite the proposals assembled) in our next round, with some of the drivers being (cite the valuation bases that have been assembled).
Quoting next round investor valuation guidelines to the investors you are approaching for this round can be incredibly powerful. It will say everything you want to say, without saying it:
- You are well informed about valuations in the business space.
- It is known in which metrics it is most important to work to increase the value of the company after investing.
- It is already known who to turn to to obtain the capital of the next round.
- You have definitely been talking to other investors, and they are professionals.
Adelle Archer, CEO and co-founder of Eterneva, backed by Tiger Management, has successfully used this strategy in the past. She explains: “When you recognize that certain investors can bring added value beyond money, signal that it's important to you and embrace flexibility in terms. That can be a very attractive quality.”
But being open to term sheets isn't everything, he notes. “Trust alone will not be enough to get you through the valuation discussion. You want to have a rough idea of the valuation range in which you might end up. Any information you get from other investors on how they arrive at a valuation will help you tremendously,” he added.
Founders who take this approach project more than just confidence: they show that they have not only done their homework, but also are mature enough to understand the value of flexibility in negotiating a fair valuation in an investment context significant.
Don't stop at that moment
Investors appreciate a well articulated and confident answer to the valuation question, but it should be done better. You have to ask the investor “Out of interest, how would you approach the valuation of a company like ours?” It's key to listen carefully, research the details, and then add that response to the conversation for the next meeting.
To take this strategy even further, questions to ask every VC you talk to include:
- do you have a range target proprietary?
- Are there any concerns you may have about our valuation that you would like to discuss at this time?
- Is there a company with which you would like to co-invest?
Each additional valuation focus data point collected allows for a better and more informed conversation with the next VC. When you indicate flexibility and actively troubleshoot as you go, you may find that you have done yourself a great service to the eventual success of the augmentation by addressing potential issues early and proactively. Beyond that, having a gentle reference to another potential co-investor never hurts.
The more you try to understand your investors' thoughts on making deals, the better you will be at getting to that deal. Instead of letting valuation become the biggest source of anxiety, build a true FOMO agreement.fear of missing out, "fear of letting go" or "fear of missing out") through well-informed trust.
