The Valuation Trap
Never answer the classic VC question "so, what valuation are you looking for?" with a specific number.
Got that? Never!
Sure you've got it? I find myself going over this issue a couple of times a week with entrepreneurs starting their first company as well as seasoned serial-entrepreneurs who have been around the block many times! I get a lot of inspiration for writing relevant blog posts from covering these kinds of issues – this is the hot button of the week.
Whatever number you give in answer to this question, you wind up negotiating with yourself (a fool's errand in anybody's book of strategy):
- If you give too high a number, the prospective new investor might start thinking "boy, these guys are being totally unrealistic…" or worse. Many VCs don't relish being the bearer of bad news and so tend to nod politely and then go chase other deals where they don't have to be the bad guy who brings you back to earth.
- If you give too low a number, do you think the prospective investor is going to say "oh, that's way too low, we were thinking of a much higher number…" ?
So, never give a specific number!
The question itself is a fair one and has one of two answers:
- If you have raised money before, the answer runs along these lines… "Our last round was at $X million post money. We think you will agree that we've made substantial progress in building the company since then and that will translate into the valuation that the market will set."
- If this is the first money you have raised from institutional investors… "We're realistic about the valuation that the market will set and look forward to hearing your opinion of a fair valuation."
VC's ask this question to test the waters and see how realistic you are about the fund raising process – think of this as a pass/fail question, remember the answers above and you'll do fine.