Forget About the Valuation
I got into a conversation with an entrepreneur last week, a guy we’d been in touch with off and on over the last year or so. He had an interesting idea for a business and had put together a reasonably experienced core team. A couple of VCs I know were intrigued. I asked him how the company was doing. The answer was that they were abandoning it because they “couldn’t raise any money.” Knowing his views on this, I suspected the truth was that he “couldn’t raise any money at the valuation he wanted.”
We often hear entrepreneurs’ concerns about properly valuing their company as they begin to engage in discussions with potential investors. In my experience these concerns can border on the irrational, even the suicidal, often because they believe their startup deserves a very unrealistically high valuation (on questionable merit), or because they want to set a high valuation in the belief that it’s the only way to end up at an acceptable level of ownership after the VCs have invested (as if VCs are stupid). Both are wrong and shortsighted. Do you want a 100% of a tiny pie, or do you want a small piece of a big one? After all, it’s pretty darn tough to scale and be successful without the needed financing. In this era of unicorns (companies with valuations of at least a billion dollars), scoring a big valuation is taking on celebrity status. If he got a big number, why can’t I?
Valuation takes care of itself for two reasons: 1) if you execute on a great idea and deliver, the the company is successful and the valuation is not all that important, and 2) if you don’t execute, it doesn’t matter; the valuation of a failure is zero. A big valuation is no guarantee or predictor of success; it just means you were able to convince enough investors that you might be very successful. A few will; most won’t. I’m reminded of Bill Gurley’s now-famous prediction that 2015 would see more than one dead unicorn.
My conversation with my entrepreneur friend also reminded me of a great post a few weeks ago from Heidi Roizen: “How to Build a Unicorn From Scratch – and Walk Away with Nothing.” It’s definitely worth a read.
Valuation isn’t among the first things you talk about with an investor; it’s among one of the last things. Get the money. Execute. Become successful. Otherwise, forget about it.
by Jeff Kuhn