Why valuing your startup and pricing your funding round are not the same thing
I need to eat humble pie. I advised how (not) to value your startup when raising money, and a chap called Dan Gray set me straight. I can’t put it much better than Dan’s own words, so here they are:
VCs are not experts at valuation. Recent history shows that the majority are very bad at it. What they do is 𝘥𝘦𝘢𝘭 𝘱𝘳𝘪𝘤𝘪𝘯𝘨, primarily on a market basis, which does not require understanding the specifics of the company in question. Founders should be informed and prepared with a target for terms, and shouldn’t be afraid to share that target with investors. As well as being practical and sensible, it’s also a sign of someone who understands the venture process and how they are positioned. Of course, founders should also understand that VCs do bring that market perspective – and are comparing this against other deals – so the end result will usually be a compromise between the two. The final price that is agreed for a fundraising transaction should include valuation as a key factor (along with market and fund math). Founders are best positioned to look at valuation because they know the company well, and VCs are best positioned for the rest. Dancing around the issue with huge ranges and dilution targets just makes it sound like you’re being coy, or don’t really have a plan.
In other words, as usual, do the work. …OR… don’t use a valuation at all. Wait… what?! I’ll share our new approach to raising early-stage capital in the next few days. Watch this space… Good luck with the raise.
