When you are in fundraising discussions with venture capitalists, there is one question that will almost always come up during your initial meeting: “What do you think your company’s valuation is?”
Have you ever wondered why they ask this question? The reason is simple – they are looking for a way to say “no” to funding you.
Venture capitalists hear pitches from a lot of companies. They say “no” over 90% of the time, so every time they look at a company, their brain is naturally looking for the “reason to say no” so they can move on and focus on the other 10%. When the valuation question comes up during your first meeting, be careful that you don’t give them an easy reason to say no.
I’ve heard it from investors many times – “they’ve got interesting technology and a good team, but their expectations around valuation are unrealistic.” Once you get labeled with unrealistic expectations around valuation, you’re not going to get a second meeting.
And don’t be surprised if it gets harder to get meetings with other investors also. Investors tend to run in the same social circles, and they talk about deals alot. They share information, and if you get branded with the “unrealistic valuation” stamp, you’re going to have a very difficult time raising money.
Here is a unique approach to the valuation question that I’ve used many times with great results.
When they ask you what the valuation is, tell them “we are focused on getting the right partner in this round that can help us get to our goal of a $500M valuation. We are meeting with the best investors in this sector, and for the right partner, we’re not going to let price be an issue. We’re going to let the market determine the valuation for this round.”
By answering this way, you have signaled 3 very important things:
- You view investment as a partnership with a goal of reaching a very large valuation. Your mindset is focused on the best ways to make a really big pie instead of arm wrestling over how to divide up the current size of the pie.
- You are confident that there will be multiple term sheets from high quality firms for this deal.
- You understand that valuing an early stage company is a negotiation, not a calculation, so you are taking a collaborative approach and not a combative approach.
Tomorrow we will be posting a simple method fo using the valuation question to your advantage. In the meantime, we encourage you to check out our latest webinar here.