How to respond when a VC asks about your startup’s valuation • TechCrunch

First rule: do not throw out the number

There is one The trick question that investors almost always ask, and which is sure to make founders uncomfortable: “What are your valuation expectations?”

For most founders, this is the usual Goldilocks scenario. Throwing out a number that is too high may drive investors away, while a number that is too low may raise the question, “Why so low? What is the problem with this business? And put shareholder value on the table.

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And if that’s true, the knee-jerk response of most investors is something like, “Let’s see how much I can work with this founder to get a better price.”

Founders are at a distinct disadvantage in the valuation game. By design, venture capitalists play this game much better than most founders—a VC might close several deals in a quarter, but a founder might only approach the markets once every two years.

So, instead of throwing out certain numbers that will inevitably be challenged, here’s a solution:

Do not throw out a number

The more you seek to understand what your investors are thinking about the deal, the better off you’ll be.

The founder’s most reliable (and valuable) answer to the infamous valuation question begins with, “We’re going to let the market price it out.”

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When delivered correctly, it means you’re accepting offers, you’re not disappointed, and you’re confident you’re closing a deal on acceptable terms.

But if that’s all you’re saying, you’re in trouble because it can also be interpreted as “we don’t have a clue” or “we take what we’re given.” After all, if you really want to close a deal, you need to provide a basic indication of your expectations.

“When talking to VCs, founders should provide some indication of their valuation expectations in the conversation,” explains Jay Levy, co-founder and managing partner of Zelkova Ventures. “It’s important to know that everyone is on the same page, because it would be painful and unfortunate for everyone to progress towards the term sheet, only to find that the expectations are incorrect.”

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Collect your valuation data

To prove a market-based valuation approach, you need to start early. Start pitching to investors for your next round to collect valuation data points and have low-profile conversations to build on the premise that “it’s probably too early for you, but in 12-15 months, you’ll probably be a good fit.” In these chats, always ask them how they might approach the value of your company at the right time (i.e. in the next round, next 12-15 months).

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