When to Bring Up Valuation

If you want to scare off VCs, start your pitch with “we are looking to raise $X at a pre-money valuation of $Y”.   Stating how much you want to raise is fine and recommended.  In fact, even better to state how much you want to raise and how long that amount will last.

However, stating a desired pre-money valuation early in the process is not a good idea.  Here is why.  There are typically just a handful of pivotal terms in a VC deal and they fall into 2 categories:  control terms (like special voting rights for the Preferred Stock and board seats) and economic rights (like liquidation preferences, anti-dilution protection, whether the preferred shares are participating or not, and………pre-money valuation).

In my view, starting off a VC relationship by diving into perhaps the most critical economic term is kind of like, well, moving too fast on a first date.  The good discussion will happen, but give the relationship a while to mature first.  Seriously, pre-money valuation is a function of many things (team strength, size of market, IP, hotness of sector, etc.) that will not all be readily apparent at the beginning.

So, my suggestion is to not bring up pre-money valuation unless (i) asked by the VC or (ii) the relationship has matured to a point where you can sense that a term sheet is likely.  If a VC asks for your input early on in the process about pre-money valuation, be skeptical and careful in your response.  If you give an actual number and it is too high, you have just given that VC a reason to say no (as in “why do I want to deal with an entrepreneur whose expectations are out of whack with my reality”).  Instead, I suggest something like this:  “We expect a valuation commensurate with our state of product readiness and company maturity.  We look forward to discussing that in more detail when your interest level merits”.

Answers to the question that I think are likely unproductive (again, I am talking about early discussions when you are building the relationship), include:   “$6.5mm is expected to buy 25% of the company”.   That is saying exactly what the expected pre-money valuation is.   Or, “Our post-money of our Series A was $10mm”.   No question that a pre-money for the Series B might be above $10mm, but it all depends on a bunch of factors that need time to flesh out.

Bottom line:  valuation discussions too early in the VC relationship game are a huge distraction and will likely backfire on you.   The exception is when you have a ton of interest (the VCs are just crawling over you).  That demand will accelerate the relationship building and the valuation discussion.

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