How To Answer What's Your Valuation?
The "What’s your valuation?" question is a common component of investor Q/A. You need to be aware of and ready for this tough question from investors. Seasoned founders have a particular way of framing their answer to this question. In this Dreamit Dose, Managing Director Adam Dakin reveals the right approach on how to answer the valuation question when pitching VCs. That’s your Dreamit Dose in about 5 minutes!
Anchoring Investors On A Number
Here’s a typical answer to the valuation question.
“We are looking for a 10-12M pre money valuation based on significant progress since our last round.”
That seems good enough, right? Wrong. Giving a number, any number, is a mistake. Giving a range actually just compounds the mistake. The investor just anchored on the lower number. The very top of your range is now set at $10M. You never want to be the first one to offer a number. If you throw out a number that’s too high, investors may check out right there and pressure you to justify the valuation. You want to avoid that line of questioning upfront because VCs determine valuations for a living. In a sense, it’s like bringing a knife to a gunfight. When pressed, many founders get defensive which is not a good look for someone asking for investor backing. If you answer the right way, you won’t be in a defensive position.
Signaling Your Fundraising Acumen
Giving a valuation number also reveals a degree of unsophistication. Why? Valuation is not set by you, your team, your investors, or your board. New investors don’t really care about the last round’s valuation or all the milestones that you feel justify a step up. If you don’t know this, you sound like a rookie. Valuation is part art, part science. It’s important to understand VC Math 101.
“The VC believes your company has a reasonable chance of achieving a certain exit valuation. We then back out the maximum post-money valuation to deliver a venture-level return. It’s really that simple.”
Most early-stage VC’s are aiming for a 5-10x return. So if a VC thinks that your company has a real shot at being acquired for $100M, the maximum post-money valuation to deliver a 5x return is $20M.
There’s No Such Thing As An Unfair Deal
VCs often hear founders say they got screwed by “vulture capitalists” who invested at low valuations and acted opportunistically. This drives investors crazy.
“I have co-founded several companies and served on many boards. I have been through my share of down rounds and ugly financings. So I am not unsympathetic. But if you believe in supply and demand, there is no such thing as an unfair deal.”
If you create a competitive process, your valuation goes up. On the other hand, if you have only one investor who can keep the lights on, it’s going to be, “Thank you sir - may I have another?” If you think a deal is unfair, walk away and find a better one — you do not have to take the money.
Who Set The Valuation?
Another blaring record scratch are step up bridge round valuations set by existing investors.
“We recently closed a bridge at a $20M valuation, up from a $14M post in the last round.”
If this valuation is not set by new investors, it is meaningless. In fact, it may be worse than meaningless. New investors have no idea if the valuation is actually fair and likely do not have the motivation or stamina to debate valuation with your existing investors, especially if they are not experienced, institutional investors.
The Right Answer To “What’s Your Valuation?”
Ready for the one-sentence answer to this common VC question?
“The market will determine our valuation.”
That’s it. It’s that simple. If you feel compelled to expound, you could add something like,
“We have a lot of investor enthusiasm and discussions are going well. We are focused on pulling together a great syndicate which we think includes your fund. Are we the kind of company you would consider investing in? If so, what are the next steps in your process?”
Investors are clever. VCS have many ways of making you confess. They’ll ask follow up questions like, “Are your investors expecting a step up?” or “Can you at least give us some guidance regarding your valuation?” Hold your ground. Do not give a number. This is not your typical I go high and you go low negotiation. Finding the right investors who can add real value is more important than just the valuation.
By Elliot Levy, Healthtech Associate at Dreamit Ventures
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