Maximizing Early Stage Valuation

Rob Go wrote an instructive post yesterday titled How VC’s Value Early Stage Companies.  It’s a great, quick read for first-time entrepreneurs.  Too many times I have listened to an entrepreneur justify a particular valuation based on a financial model, with first revenues 1-2 years away and a lot of evident technical risk.  It’s OK to model it… you probably should do a quick check of the DCF in case there’s an associate charged with doing the same… just don’t bring it up in your pitch.

I have found that the process for getting a decent valuation on a business is similar to that of getting a decent price when selling a house:

  • Set a reasonable, or even attractive price– don’t look too concerned about valuation
  • List defects/shortcomings of the home up front– no exaggerations, explain the risks
  • Make sure the house is tidy– a sharp, 12-slide pitch
  • Have a well-attended, well-advertised open house– 2 week roadshow East/West Coasts
  • Let potential buyers know when other offers are coming in– let them know when others are moving – again, no exaggerating!

The goal of the exercise is to get 2+ buyers submitting term sheets.  Once you do, let me suggest one more thing:

Don’t get focused on maximizing valuation.

More on that in another post.


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