It’s been awhile since my last post as wedding planning and my start at First Republic Bank have accounted for, oh, about 90% of my time over the last 3 months. The former is going pretty well in case you’re wondering, although who knew there were so may options for, like, everything….
At any rate, Valuation in the start-up world has always been a heavily discussed and negotiated topic. As an entrepreneur, the higher the valuation, the more of your company you can keep; As an investor, the lower the valuation, the more of a company you can acquire for a given investment amount. Over the past few weeks, I’ve had many discussions involving valuations at the seed level. Paul Graham even recently warned his companies to stay away from Google Ventures because of Valuation considerations . Of course, keep in mind that YC grads typically garner the highest average valuations of any incubator in the valley (don’t have info on Techstars, so will leave it as the valley for now).
Inspiring me to write this post is a dialogue I had with a bootstrapped company founder last week who was looking to secure a $750K- $1MM seed round.
It went a little something like this:
Me: “How is the fundraising going? Do you have any good leads?
Him: “Yes, fundraising is going very well. Have two realistic options in that I think can raise from either a few angels I know or can take the money from a prominent Micro-VC firm”
Me: “Which direction are you leaning and what’s the main decision variable?
Him: “Valuation of course. The Micro VC is offering me the investment at $4MM Pre-Money and the I think I can get the angels to buy off on a $7MM Pre-Money, maybe more! Also, a company that is similar to mine just received $500K at a $6MM valuation, and my company is definitely better and worth more [of course it is]”
In all seriousness, the level of sophistication and pragmatism of most early stage entrepreneurs is quite refreshing these days, with a focus on building valuable partnerships and an eye on the longer term goal. That said, I still hear (and have had) several conversations that mirror the dialogue above.
At the end, valuation at the early stage is the ultimate double edged sword. Too low and you give up far too much of the company, sacrificing valuable economics, potentially severely reducing management incentives in the future, while creating a potential for management/investor dissension. Too high and you create an unreasonable bar for yourself for the next fundraise thereby disenfranchising current investors who may not want to back you again (for this or your next company) because they get washed out in the next round or feel they paid too much.
I’ll keep it simple. Interim valuations are what they imply, simply temporary valuations that if reasonable, work out well for everybody in the end. Instead of being laser focused on increasing valuation (note that I’m not advocating you don’t negotiate for a fair one), focus on one thing:
Raise capital in a way that will allow your business the highest probability to succeed in the long-term.
The Start up world is excruciatingly tough. As a banker working with over 700 startups over the last 13 years, the odds are stacked against you. Give yourself the highest probability of success. You do this by finding the right partners and creating the proper infrastructure (financial, resource, and personnel).
The company I mentioned above? I’m hoping he takes money from the Micr0 VC as they are experts in his field…albeit, I think he should get a $3.5MM pre-money :).