A very common question which investors ask in their first meeting with an entrepreneur who’s raising money is what valuation the entrepreneur is looking for.
Answering this question head-on is very risky. If the valuation you’re asking for is deemed too high, the investor may think that you’re being unrealistic and therefore not move forward with follow-up discussions. If the valuation is deemed too low, the investor may conclude that there’s something wrong with the company. This may also lead them to not take a follow-up meeting.
An entrepreneur articulating an expected valuation for their startup is problematic because valuing companies, and especially startups, is an art, not a science. A valuation that you see as fair may easily be deemed to be too high or too low by an investor with a different perspective. Articulating an expected valuation opens the door to these disagreements at a time when you should instead be focusing on getting the investor to better understand your business and evaluating whether you’d want to partner with them.
As a result of this problem, I recommend that our entrepreneurs not articulate an expected valuation when fundraising. Instead, I recommend that they share how much money they’re looking to raise, describe what they’re going to use the money for, communicate the details of any prior funding rounds that the company may have had (milestones achieved, metrics, and funding terms), and state that they’re going to let the market set the terms of the current round. This gives investors who are interested in investing in the company all the information they need to come up with an offer.
Most of the time, this information is enough for interested investors to make an offer. However, sometimes investors continue to push the entrepreneur to articulate an expected valuation.
In this case, I recommend communicating how much equity you’re looking to share in the current funding round. Since you’ve already shared how much you’re looking to raise, combining this information with how much equity you’re looking to share implicitly signals the valuation you expect for your company.
However, by focusing the conversation on the funding you need to succeed and the amount of equity you’re looking to share to remain motivated as a founder, you show that you’re optimizing for the success of your business. You’re not optimizing for valuation.
And since investors want to partner with founders who optimize for success, this approach makes them much more likely to want to invest in your company.
Also published on Medium.