In an earlier post on fundraising do’s and don’ts, I wrote that startups should optimize for success rather than valuation. Specifically, I wrote that sometimes it’s worth “taking a few additional points of dilution [by accepting a lower valuation] to get the right partner in your company”.
Marc Lore, the founder of Jet.com which was acquired by Wal-Mart for about $3 billion in cash and $300 million in Wal-Mart shares, gives several other reasons why taking a slight discount on your company’s valuation is likely to increase your company’s likelihood of success.
In addition to letting you work with the right partner for your company, the benefits of taking a slight discount on your company’s valuation are that it:
1. Increases investor demand for the round, thereby creating scarcity which sometimes even results in a higher final valuation for the round.
2. Makes it more likely that the round’s investors have a nice paper return by the time of the next round, thereby making them more likely to be happy investors who refer the company to other investors.
3. Lowers the likelihood of a potentially morale hindering future down round.
4. Increases the pool of potential buyers of the company by not boxing out smaller buyers who would otherwise not put in the time to evaluate the company due to believing that they wouldn’t be able to meet its valuation expectations.