DO's and DON'Ts of startup valuations
The do’s and don’ts of startup valuation
As Switzerland's leading venture intelligence boutique in startup valuations we have seen all kinds of valuation expectations and derivation from founders. As the field of startup valuation is more an art than science, we thought it is a good idea to give you the do’s and don'ts of startup valuation to be well prepared for negotiations with other parties and to not make the same mistakes other founders have already done.
Convince an investor about your company before negotiating the valuation
It is always easier to discuss a valuation once an investor is also convinced that your company is a great investment opportunity as the price is also driven by perception. Additionally, if you are an investor that sees multiple pitchdecks a day, - which is the norm for professional VC investors - you always find reasons to not invest in a case. The valuation is an easy reason to reject an application. Therefore, try to convince investors about your case with qualitative arguments before ending up discussing the valuation. Thus, it is needless to say that the valuation shouldn’t be put on your pitchdeck.
Be well prepared
Do your homework before jumping into valuation talks. Have an idea of what your startup is worth, how much you expect and find some comparable peer companies and examine how their valuations have developed overtime. Also keep in mind what potential ROI (return on investment) multiple investors want to achieve. Yet, investors' targeted ROI are very subjective and depend on the type of investors you have in front of you (a VC fund will have a different ROI needed than a private business angel most likely). But as a rule of thumb, a VC fund seed investor aims for a ROI of 20-30x and a 10-20x return for a Series A. If your valuation should already be CHF 10mio at a seed stage, you need to show that an exit of >CHF200mio can be realistic for example.
In terms of documents, you don’t need to show a specific valuation calculation in most cases, but a convincing pitchdeck and a strong financial plan that displays your unit economics and an attractive but not too aggressive growth story.
Identify a lead investor to negotiate
Don’t fall into the trap of negotiating your terms (including valuation but basically everything in the term sheet) with each investor individually. The role of the lead investor is key as this party evaluates the terms and then backs it up if you find an agreement. Once there is an agreement, the other investors must follow the lead investor and you don’t need to argue on the valuation anymore ideally. Hence, treat all other investors equally.
Don’t be greedy
We have come across many aggressive valuation expectations over the last couple of years. Although there is a lot of money in the market, it is not recommendable to be too greedy as professional investors won’t pay any price a founder proposes. You are either going to be successful and the amount of shares you as founder own in the end will be sufficient to end up with a success story or you fail. We therefore always suggest being realistic with the valuation in order to be attractive enough for good investors and to be able to close a financing round.
Although this point might be a no-brainer, it is still worth noting that investors are usually more experienced than founders and can rely on larger databases when it comes to valuation. So, cheating doesn’t make sense and normally doesn’t end well.
Finally, the topic of valuation is sometimes (almost) too present in funding rounds and should be much more seen in the overall context of your fundraising strategy that defines your financing needs: how much? when? from whom? in what form?