2 Answers to the Valuation Question

One of the questions investors like to ask is “What’s your target valuation for this round?” Sometimes they’re calibrating to see if the valuation is in their typical range, sometimes they’re fishing for information, and sometimes they’re seeing if there’s a logical answer. As an entrepreneur, there are two correct answers:

  1. We’re going to let the market decide.
    This should be the most common answer (it isn’t) as it shows that the entrepreneur is both flexible and looking to create an auction process to find the best combination of terms and valuation.
  2. We’re thinking of the range $X to $Y.
    Now, it’s best to keep it open ended but some investors press for a number. Don’t give a single number. Instead, give a range and sound flexible since it depends on a variety of factors. Never forget the old investor saying: you decide the valuation and I’ll decide the terms (it always holds true).

When an investor asks about valuation, provide one of these two answers and keep it simple. Valuations are much more subjective than they might seem.

What else? What are some more thoughts on the two answers to the valuation question?

One thought on “2 Answers to the Valuation Question

  1. I think entrepreneurs should conduct their own research on market valuations for startups. The data, while imperfect, is out there. Charlie Paparelli recently published a blog where he thought a “great deal” pre-money valuation was $1.6 to $2.4 million if you work through the math. If you ask angel investors with whom you are not negotiating, many will gladly tell you about valuations they have seen. Many angel groups publish their preferred valuation ranges on their web sites. Professional advisors such as accountants, attorneys and appraisers who see a lot of valuations can provide insight. With that research in-hand, the entrepreneur can respond from a more empowered position with something like, “our research indicates and our advisors have told us that the range of pre-money valuations for startups in our space and at our stage of development in the local area seems to be ‘x’ to ‘y’, we we feel that we ought to be in that range as well (or upper part, or lower part).

    The caveat that you touch on is that knowing the market valuation only matters if you have any leverage, such as the ability to develop the company with or without capital. If you need the money badly, and only have one realistic source, your approach to valuation should change to, “If I accept this capital at these terms, is there enough financial incentive for me to continue with the venture?”, because you are no longer negotiating – only requesting and hoping.

    Of course, as you hint in your post, the valuation could be obviated by the terms, and so articulating a valuation should have an inherent understanding of “typical” terms in the market.

    — mike

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