Market Clearing Valuation for Entrepreneur’s Raising Money

Earlier this month I was talking with an entrepreneur that needed to raise money. His startup was running out of money, and with almost no revenue, it was a matter of either raising more money or laying everyone off. As he went out to the market and pitched investors, there was some demand and a couple investors offered up term sheets. Only, the valuations came in much lower than desired.

While the entrepreneur had one valuation in mind, the market clearing price was something entirely different. Unfortunately, as an entrepreneur in that position, there aren’t any other options. Of course, more investors can be pitched in an attempt to get a higher valuation, but there’s limited time before things fall apart.

Entrepreneurs would do well to recognize that valuations offered by investors represent the market clearing price for the startup, and if time and money runs out, there aren’t any other options. Meeting with a large number of investors (100+) well in advance of needing the cash (e.g. > six months) is one of the best approaches (unfortunately this is a full-time job to create a competitive process).

What else? What are some other thoughts on the market clearing valuation for entrepreneur’s raising money?