Before booking that appointment where you pitch to investors, you should have sorted out everything about your valuation. There is absolutely no way you would pitch the idea to an investor and then ask for more time to go back for proper valuation. There is a previous post that talked about having a power pitch and how to go about that, but this post will focus on how you defend your valuation before investors.
Normally, when valuation is done, you should get a range figure of what your company is worth. But, like is normal in negotiations, the founder will choose to go with the figure at the top of the range, while the investor might be gunning for the figure at the bottom of the range. The goal should be how both parties can reach a mutually satisfying deal.
The debate is usually not about the funds to be raised, since it is assumed that the founder should have done his/her math and estimated the right sum needed to take the business to the next stage of growth. What both parties will have to settle for usually is what percentage of equity should be exchanged for the sum. If you have watched even one episode of the Dragon’s Den, you probably have a fair idea about how this works.
When you say your business is worth $100,000 or $1,000,000 what do you need to justify this claim to your investor?
Let me just state first that, as a startup founder, it is not wrong to go with the top figure in the valuation range. It shows potential investors that you have confidence in your business, what it is worth, and what it could become. This, however, does not mean that they would accept your figure just like that.
The previous post already gives out pointers to what a founder should be doing to get a proper valuation. This is not meant to be a repetition of that post. Rather, this post will show you how to justify the value that you have arrived at. After all, what would be the point of an excellent valuation done, if you cannot tell your investors why your business is worth that much and even more.
Make a good case for your business. If you have crunched your numbers right, then you can explain with ease how the revenue model works and how the growth potential for the business will be actualized. No investor wants a plan that stops in the paper or a juicy investment that never materializes.
If you currently have holes in your operations, or gaps in your management team, talk about it. You may think that by withholding such information, your company would be considered more valuable. In truth, it may not work out that way for you. Instead, talk about the gaps yourself and highlight how the lack of funds has limited you from building the team or the system that you want. Then go ahead to state how the funds will be used to secure the people needed to join the team, and close any gap.
Talk about the potential exit value for and from your company. For the most part, investors want to be part of your growth but only to a certain point and not forever. You should be able to clear any doubt or perceived obstacle for exit plans in the future. Also, explain the potential exit valuation, and give pointers as to how much returns investors could look forward to getting when they choose to exit the business, and how much returns they will get if they stay.
Ensure that you have done your homework. If there are similar businesses like yours that have recently raised funds and conceded more equity for less money, then try to find out what differences exist between both businesses. Who knows, it may fall on you to explain why you think your business is worth more than a similar business at a similar stage of growth.
Whatever it comes to, keep in mind that fundraising is not only about the money you bring in, but about the value. If you have to accept a lesser valuation from an investor(s) whom you think brings more to the table than just money, don’t be afraid to. If the investor has the network, experience, and wherewithal to take the business to the next stage, be ready to bend a little to accommodate that investor.
Like I said in an earlier post, getting partners or investors is just like getting married. You are generally better off with an investor who has more than money to bring to the startup.