How to respond when a VC asks about your startup’s valuation • TechCrunch
Rule 1: do not give numbers
There exists a Trick question investors almost always ask, and it’s guaranteed to make founders uncomfortable: “What are your valuation expectations?”
For most founders, this is the eternal Goldilocks scenario. Throwing in a number that’s too high could drive investors away, while too low an amount could trigger the question, “Why so low?” What’s wrong with this company? and leave shareholder value on the table.
And if that’s right, most investors’ instinctive response goes something like this: “Let’s see how far I can undercut this founder at a better price.”
Founders are at a distinct disadvantage in the valuation game. By design, investors play this game much better than most founders ever will – a VC can close multiple deals in a quarter, but a founder can only approach the markets once every both years.
So, instead of having to throw out specific numbers that will inevitably be disputed, here’s a solution:
Don’t throw away a number
The more you seek to understand your investors’ thoughts on closing a deal, the better you will be at closing that deal.
The founder’s most confident (and valuable) answer to the infamous valuation question begins with, “We’re leaving the market price this round.”
When delivered correctly, it implies that you are accepting offers, that you are not desperate, and that you are sure to close a deal on acceptable terms.
But if that’s all you say, you’re in trouble because it can also be interpreted as “We have no idea” or “We’ll take what we’re given”. After all, you need to give a basic indication of your expectations if you really want to close a deal.
Jay Levy, co-founder and managing partner of Zelkova Ventures, explains, “When speaking with VCs, founders need to give an indication of their valuation expectations in the conversation. It’s important to know that everyone is on the same page, because it would be painful and unfortunate for everyone to move forward on a term sheet only to find that expectations aren’t aligned.
Gather your assessment data points
To justify your market-based valuation approach, you need to start early. Starts with pre-introduce investors for your next round to collect assessment data points and have low-stakes conversations to assume that “we’re probably too early for you, but in 12-15 months we’ll most likely be a good fit.” In these discussions, always ask how they might approach valuing your business when the time is right (i.e. in your next round, 12-15 months from now).
