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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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