Valuation is a Four Letter Word – 3 Ways to Avoid a Potential Deal Killer

Just like four letter words that got your mouth washed out with soap, “Valuation” should be treated with equal regard. In Angel Investor and VC parlance, “Valuation” is a term that refers to the capital value of your company. The short hand investors use goes something like this: IniTech is raising 3 at 5 Pre, meaning:  IniTech is attempting to raise a $3 Million dollar round of funding at a pre-money valuation of $5 Million dollars, which will make the post money valuation $8 Million. Got that? Check out my upcoming post on this very topic for more information. Moving on…

Have you ever gone to a car lot looking to buy a car, and the first thing the salesman does is tell you the price? Me either. He starts by describing the 300 horsepower engine, the killer torque ratio, leather interior, 5 year warranty, etc. Does he ever get to price? Nope, he waits for you to ask. Why? Because the last thing he wants to do is interrupt the romance with sticker shock.

I have seen dozens of otherwise great pitches go completely sideways when the Founders inserted the valuation they were offering into the slide deck. Valuation is one of those things, like politics, that everyone has an opinion about. There are multiple schools of thought concerning how to arrive at a fair valuation, and truthfully, there is no one right way. It’s a negotiation between founder and investor, and based (sometimes loosely) on facts around the case, such as the value of the intellectual property, has the company realized any revenue yet, time to market, etc.

So how do you handle this topic? Like the car salesman of course! Your job and focus is to describe the exciting future your company is going to have and how the journey you are taking is one the investor wants to be on with you. They are looking for romance! In other words, focus on the horsepower, torque, and interior (Oh, did I mention the heated seats?). Valuation, which is the price you are offering shares of your company, is something you discuss AFTER the investor shows his buying sign.

Here are 3 strategies for Handling the Valuation Question During Your Pitch:
1. Explore:   Explain in one sentence that you are happy to explore the topic with the investor after the presentation to hear their thoughts on valuation. This approach is particularly powerful, since you will get some insights into the investor’s preferred method of valuation.

2. Defer: If you are currently in discussions with several investors, you can use this to your advantage. Explain that you are in the process of identifying a lead investor, and that the final valuation is part of that discussion, and that you are happy to bring them up to date if they like.

3. Reveal: If you have spent the time determining what you believe is a fair market value for your company at its present time, offer to share your valuation and the method used to arrive at that number as a follow up to the meeting. Be sure that you have a well thought out justification for valuation, backed by facts and comparable to other companies who are in a similar situation as yours.

Lesson: The purpose of your presentation is to inspire investors to join you and your company on an exciting and profitable journey, by placing their capital in your trust.  And so like other four letter words, the mention of valuation should not be part of your pitch. When you do have the conversation, just remember that you don’t want to derail the romance and kill the deal with sticker shock.