The “Infamous” Valuation Question
Yesterday, we hosted another SpeedPitching Luncheon in Utah. It was an incredibly successful event with nearly 40 early-stage investors in attendance. I’ll write more about the event in a bit, but for now, I’d like to continue the discussion posed by Devin Thorpe about “Do You Dodge the Valuation Question?”
Devin: I think that you pose a great question. There were a few investors that came up to me and requested that we coach them on how to respond to the valuation question. The reality is that we DO coach them on the valuation question… we just coach them to push off the discussion until the next meeting!
I agree with you that it’s not fair for the entrepreneur to nail down a valuation after a 7 minute discussion. Too often the investors make large assumptions about the company, the market, and the management team without knowing all of the facts. I know that the investors can’t stand the fact that the entrepreneurs dodge the question — they want to know the valuation up front.
The reason that they would like to know the question up front is because they want to know if the investment is in their ball park. If it’s not in their ballpark, they won’t want the follow-up meeting no matter how strong the deal is.
So the REAL question is… is there a way to accurately respond to the valuation question (to please the investor) without pinning yourself on a certain valuation? Maybe you could give a ball park answer so that they know that your deal is affordable, but then include a caveat that you would like to discuss in detail at a future meeting?
After yesterday’s luncheon, it has become apparent that we should suggest a different approach to our entrepreneurs so that our investors don’t get so frustrated. I’d love to hear your suggestions.
Brock,
I left yesterday thinking that the answer is to answer the question directly if it is put to you. I now understand the desire of the investor to know the price before wasting time. It’s like a car. Would you test drive a car without at least knowing the sticker price? I think this means entrepreneurs need to be willing to give the “sticker price” of their deal–and it needs to be reasonable–in the ball park. That said, I still think investors who insist on getting the pricing (and some add terms) out of the way up front, do themselves and the venture community a bit of a disservice. No entrepreneur worth her salt would price her offering so low as to appealing on price alone before really having a chance to sell an investor on the substance of the deal. This means to me that investors who insist on negotiating price and terms up front may create a problem of adverse selection–only the weaker entrepreneurs may be willing to play by their rules.
ddt
(Left this over on Devin’s post too.)
I’ve heard that same question. Having seen all the same pitches yesterday I’d suggest this answer as an entrepreneur: “We’ll discuss valuation with seriously interested partners”.
That question’s often used as a crutch. Investors love these “hoop tests” (as in, can I get the entrepreneur to jump through mine.)
Entrepreneurs need to be just as picky since they can spend a lot of time talking to someone who will never end up funding them. I can’t see that the answer above would turn off any seriously interested potential investor.