Early Fundraising: A Reasonable Valuation and Long-Term Partners

Aim for a reasonable valuation, not an excessive one. An excessively high valuation can often put you on a path to failure. --- | Do not get too hung up on valuation In the early days of a startup, do not worry too much about valuation. Getting the money matters most. A common sight is founders agonizing over a small difference in early-stage valuation, only to delay their fundraising or end up with an investor who is not the best fit. Robin: “Raising money at an early stage is about finding partners you can work with over the long term, not finding a sucker to take the investment off your hands. There is a very real chance you will not find the next sucker.” There is actually little reason to get too caught up in valuation in an early round. For one thing, neither the company’s operating data nor its financial metrics are very mature. Negotiations tend to revolve around a going rate: companies at roughly the same stage, with comparable teams, tend to command similar prices. The differences are not that great. For another, consider two outcomes: you do not get this funding and the company fails to survive; or you do get it, but a stake you had expected to be 50% ends up at only 20% by the time the company lists. Clearly, not getting the money would have the greater effect on your life. So the point remains: securing the money as quickly as possible matters most, especially when capital markets are changing very rapidly. Paul Graham even takes this argument a step further. He says it is best not to take money from the investment firm offering you the highest valuation. There are two important reasons: First, the best investors are confident you will choose them. They also know they bring substantial value to founders and are worth their price, so they are less likely to throw out arbitrary bids. Second, and more importantly, more capital means greater expectations. Suppose you can raise $3 million for a 15% stake in this round, implying a post-money valuation of $20 million. Then someone suddenly says, “I will give you $5 million for just 12.5%.” That works out to a post-money valuation of $40 million. Nothing about your business has changed at that moment. The price has simply risen because investors bid it up. What does that mean? It means you have set yourself a very high bar for the next round. If this round’s valuation is $20 million, you could raise the next round at $40 million, $30 million, or even $25 million, leaving the company considerable room to maneuver. But if you have already pushed yourself to $40 million this round, over the next year or so you will have to build the company into one worth $60 million or even $80 million. Imagine the pressure. If a funding winter also makes it harder to raise money, that earlier high valuation could become an enormous constraint. Ultimately, we are making the same point: building a startup is already difficult and takes a very long time. What matters most is getting the job done; do not let small details get in the way of the bigger goal. That is our fourth point about fundraising: do not get too hung up on valuation in an early round, and do not accept an excessively high offer. Of course, founders are not always the ones at fault. Paul Graham has also written that you should be very careful with “valuation-sensitive” investors. They often consume a great deal of your time negotiating the price down or dwelling on minor terms. Note that this does not mean such investors are entirely undesirable: some investors who like to bargain are extremely capable. You can, however, improve your process by meeting them in the middle or later stages of a raise. Ideally, you will already have some offers by then, so you can say, “This is broadly the price everyone has agreed on. You can take it or pass.” That can save a great deal of time. Otherwise, if you approach one of these investors first and receive a very low offer, subsequent investors may be influenced by that price too.