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What are your valuation expectations? – Big question huh?
Here’s what they mean…
This is a very similar question to the previous one “what are your deal expectations?” but focused directly on your valuation. The question – “What are your valuation expectations?” is basically a direct way of asking these questions; Are you expecting a crazy premium valuation, or are you going to be in line with the market?
Fundamentally investors are wondering if your valuation is way out from what they can afford, or not. If you are talking to a seed stage investor and you are asking for a $20m pre, it’s quite likely that they won’t be able to afford to get to a targeted ownership percentage in your company. Throwing in a million just may not be worth the effort. At which point, it’s easier to just end the conversation now and save everyone some time. Before answering this question (“What are your valuation expectations?”), it is quite important for you to understand the net worth of your investor.
Especially at the earlier stages, a million difference in your valuation can make a really big difference to their exit value.
Determining your valuation is difficult because there is no right answer. You have to be both realistic on the upside without scaring investors off, but on the other hand, you do not want to undervalue your company, leaving money on the table, as well as the VC thinking something is wrong.
I’ve written a blog here on how to approach the question of What’s your startup valuation? when you are asked more directly.
The best way to handle this question, like others, is to do all you can to have several VCs interested in you ;). If they know there is demand in the market then the investors are the ones who are price takers. You can afford to be a little more arrogant in responding to this question if you know you have a lot of options. If on the other hand, you don’t have a lot of options, you need to be quite careful.
Typically you just want to say you have reasonable expectations and the market will set where that is.
What you need to say
“This is not a private equity deal. You can’t do a DCF on a startup. All you can do is compare traction with other companies having raised in the market, to understand what the market rate is, and pricing happens from investor offers.
Who we raise from matters to us so we would prefer to have the right investor rather slightly better valuation, of course, both would be lovely! We think our valuation will be in-line with other deals that have been done in the previous two months, which I’m sure you’re aware of.”
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Also published on Medium.