Venture capitalists often pose a seemingly simple yet challenging question to founders: “What are your expectations surrounding valuation?” This question can make founders feel like they’re walking a tightrope. Pitch too high, and you might scare off potential investors; too low, and you might undervalue your startup, raising doubts about the business.
Navigating this situation often feels like the Goldilocks scenario—finding that “just right” number can be daunting. Many investors, familiar with this game, may see your initial number as a starting point to negotiate down. This is where the real challenge begins for founders, who might only enter these negotiations once every few years, unlike seasoned VCs who deal with them regularly.
Here’s a Friendly Tip: Don’t Just Throw Out A Number.
A smart approach is to let the market dictate the valuation of your round. This strategy suggests you’re open to offers, confident, and far from desperate. However, it’s crucial to give some indication of your expectations to facilitate discussions towards closing a deal. This helps ensure that both you and potential investors are on the same page, preventing any painful surprises when advancing toward a term sheet.
Gather Your Valuation Data Points Early
Start by engaging investors early—even before your next funding round. Use these preliminary discussions to gather insights on how they might value your company in the future. This doesn’t mean asking for a hard number, but understanding their valuation rationale can be incredibly valuable.
Show You Know What You’re Doing
When the inevitable valuation question comes up, use the information you’ve gathered from these early talks. Explain that while you’re letting the market price this round, other investors have suggested potential valuations based on well-understood metrics and recent market transactions. This demonstrates not only your preparedness and understanding of the market but also that you’re a savvy negotiator aware of your business’s worth.
But Don’t Stop There
After presenting your valuation approach, flip the script. Ask the investor how they might value a company like yours. This not only shows your interest in their perspective but also provides you with more information to refine your strategy in future discussions.
Remember, being flexible and well-informed are key to navigating venture capital negotiations. By being proactive and gathering as much information as possible, you’re not just preparing for a successful fundraising round—you’re also building relationships with potential investors who may be crucial for your business’s growth.