Wednesday, March 31st 2021 (about 1 month ago)
Last week, we began a discussion on how to talk valuation with VCs. Even experienced founders fail to forge deals with VCs because they simply don’t know how to negotiate valuation.
Founders often share unrealistic expectations with VCs and fail to see the bigger picture behind a long-term investor partnership. Founders must understand the mutually beneficial offerings they bring to the negotiation table before settling on a deal. In the same way that VCs need to perform due diligence on your company before signing the check, founders need to understand investor expectations and what value they will provide in the long-run before naming a final price.
Check out these three “Do’s and Don’t” before negotiating your valuation with VCs.
Don’t – Start off by naming a price
VCs may tip off the negotiation process by asking founders to name their valuation price. We recommend you do not name a price, but instead provide background information to let the market drive the price and gauge where the VC stands.
How can naming a price ruin the negotiation process? If you name a price too low, the VC may immediately write-off your company because you seem too small and won’t fit their ideal investment portfolio. If you name a price too high, the VC may think you’re trying to rip them off if the valuation does not match their impression of the company’s worth.
From any angle, we do not know enough about the VC’s perspective to explicitly state a potentially polarizing valuation number. Let the VC draw their sword first.
Do – Ask the VC how they feel about the marketing pricing
If you already completed a round of investment, share the valuation of your last round and how much you raised. Share data on your revenue growth since the last round to prove that you put the money to work and your valuation has increased. Indicate that you will let the market set the price and ask the VC, “Where do you think market pricing stands for this round?”
Unless you already have a definitive price set on an existing round or a note, be careful about sharing a price until the VC has made an offer (NFX).
Don’t – Balk at a lowball offer
Particularly for early startups, the valuation price is not the only factor founders need to consider before entering a partnership with a VC. When a VC invests in your company, you enter a significant partnership based on trust and mutual growth. Founders need to consider the level of guidance any given VC will provide in that partnership. An excellent match may return more dividends to founders in the long-run than a disinterested VC willing to take a higher valuation.
Even more, within the small VC world, taking personal offense during any negotiation can ruin your reputation within the VC community. You may not only ruin your chances of investing with that VC in the future, but word may spread with other investors and derail potential future relationships.
Do – Thank VC’s for every offer and continue to shop around
Not only can you preserve your relationship with the VC that lowballed you, but you may be able to return to that VC once you acquire more favorable interest and renegotiate (NFX). Never react emotionally to an offer, but do communicate with transparency throughout the process. If you feel an offer is low, state that. Be prepared to justify your expectations with data that proves your worth.
Don’t – Forget about your preexisting investors during negotiations with new ones
If you have already raised one or multiple rounds, you want to avoid a down-round or even a flat-round at all costs. In discussions with potential new VCs, sharing pertinent information on your previous rounds will help them understand the ballpark for negotiation.
Do – Engage your current investors and prepare to share with new VCs
Before raising a new round, discuss with your current investors their expectations for minimum valuation. Determine if they will continue to invest in the new round and at what price.
Your new VC will also want to understand this information because the size of your current investors’ checks could affect their return on investment (Both Sides of the Table). This information also communicates the nature of your partnership with investors.