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.