Valuation is one of the most emotionally charged, divisive aspects of the financing process. When clients present, I frequently counsel them to leave valuation out of their presentation. If they are asked a question about valuation, I counsel them to say:
I sincerely appreciate your interest in our company and am thrilled that you are excited about it so much that your only question is valuation. As for valuation, first and foremost, I'm looking for investors to add value beyond money, that's why I'm here today (and that better be true by the way).
Our valuation is $xx and we are flexible and I would be happy to discuss this in more detail during due diligence.
The important thing is that you don't lock horns over valuation during a presentation. If you do, it's a no win situation. And, if you do, I've found more often than not that your valuation is too high.
The fact is vaulation is a made up number. But here's a number that's not: 100% of nothing is nothing.
What I mean is when you are talking about % points of valuation being a deal killer, you are missing the forest through the trees. The tricky thing I understand is that often in the financing process, the entrepreneur is getting exposure that generates exictement in the company....
...which usually inflates, illogically, the valuation of the company in the CEO's head....
...which usually creates, unfortunately, division and dispute between a start-up and potential investors.....
...which often results, predictably, in a CEO holding 100% of the equity in a company that's worth nothing because he or she couldn't get it financed.
My advice to you on valuation is to consider what the investor brings. And think about what you really want. I understand that it's tough to consider giving up control or more of your baby, but you want your baby to become an adult right?
Often, when I get down to it, the CEO is interested in starting another company, it's in their blood. So, I say, if the match is right, don't sweat valuation too much. The fact is if the deal stinks for anybody, the deal stinks for everybody. I've found that over time the market, beleive it or not, is fairly efficient in correcting for that.
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