Venture Capital
Valuations
How to Handle the
Valuation Issue
Submitting a plan to a venture capitalist or other
investor with a pre-determined valuation for the startup is invariably
an instant kiss of death. No one will even want to talk to you
unless of course they have very good reason to believe that you
seriously under valued your company. But as we all will admit, if
we are honest, this never happens with founders.
So the best advice that I can give you is not to enter any discussions
by announcing what your startup is worth and what percentage of equity
you are prepared to exchange for capital. Instead have an idea in
your mind as to the absolute lowest valuation you would be willing to
do a deal at and then keep quiet about that number and let the venture
capitalist be the first to throw out a number.
Just like in eBay auctions, interest by multiple parties almost always
pushes a valuation upwards. For this reason its beneficial to be
negotiating with two or more investor groups. Announcing the fact to
each group that there is another one bidding against them is usualy a
mistake. It makes you sound like a high pressure used car salesman
type. So don't volunteer the information. If asked, be coy, "There
could be other interest but it's really too early to say." Then just
shut up and smile.
If one group of angel investors suspects that another group might
"steal the deal" from them, they may suddenly become more generous on
their valuation. However, it's common for venture capitalists to
respond with a wounded rabbit expression and inform you that if you
don't trust them enough to reveal the other venture capital firm, they
can't do business with you.
So what's the right course of action with venture capitalists? I don't
know. It helps to be a good poker player in these situations.
Read more on negotiations here.
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