RSS at Feed BurnerNegative aspects to a high valuation
Paul Graham has a great piece called The Hacker’s Guide to Investors. He makes a lot of great points, but a very interesting point is this:
“A high valuation can be a bad thing. If you take funding at a premoney valuation of $10 million, you won’t be selling the company for 20. You’ll have to sell for over 50 for the VCs to get even a 5x return, which is low to them. More likely they’ll want you to hold out for 100. But needing to get a high price decreases the chance of getting bought at all; many companies can buy you for $10 million, but only a handful for 100. And since a startup is like a pass/fail course for the founders, what you want to optimize is your chance of a good outcome, not the percentage of the company you keep.“
In addition, a valuation that may be too high may make it difficult if you need additional funding. Mainly because the initial investors want to see that their investment has increased, so they will expect the next round to be higher. However, if you increase the valuation too much, it makes the investment less attractive to the potential investors in the next round.
on May 4th, 2007 at 9:54 pm
This is entirely true. I couldn’t agree more. As an entrepreneur, I’ve run into this complex valuation struggle while raising money for English180. If you are still Pre- Series A, my suggestion would be to raise money through a convertible note structure to avoid a setting a valuation of the company at a pre-revenue stage.