How Do You Tell Investors What Your Company Is Worth?
Years ago, when I was an Entrepreneur in Residence at a San Francisco based venture capital fund, Dave, the partner I worked with, and I met with the CEO of a semiconductor company looking for Series B funding. I knew the CEO and I knew the space really well which was why I was in the meeting.
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The company had accomplished a lot since they had raised their Series A funding. I was impressed, and I could tell Dave was impressed as well.
Near the end of the meeting, Dave asked Mark, the CEO, what he thought the company should be valued at for the next round. Mark calmly looked at Dave and said, We’ll let the market decide what the value of the company should be.”
You’re doing the right thing when you let the market decide what your company is worth.
Dave smiled and said to Mark, “You’ve been coached well.”
With that one simple comment about letting the market decide, Mark had put the onus on the investors to make him an offer. And that’s as it should be because investors are the market for you company.
You are only likely to hurt yourself if you try and name your price.
Dave was hoping Mark would throw out a price because it could only hurt Mark not help him. Think about it. There were three prices Mark could give Dave:
A. A price above what Dave and his partners were willing to pay, or…
B. A price below what Dave and his partners were willing to pay, or…
C. A price that Dave and his partners were willing to pay.
Remember that investors have done many more deals than you ever have. And professional investors like Venture Capitalists are usually very disciplined.
So if you make the mistake of pricing yourself way over the market price, then you may scare off potential investors. Obviously if you throw out a low price, that hurts you too.
You only have leverage to increase the price if there’s competition for your deal.
But let’s say you have multiple investors that are ready to give you competing term sheets. I get that you’re worried about leaving money on the table by letting investors go first, but you’re still better off letting investors make the first offer.
Now, if you’re lucky enough to be in this position, you can negotiate from a position of strength. Then you can negotiate better terms.
That’s what happened in Mark’s case. Mark had multiple offers to choose from including ours. And no, we didn’t get the deal…
For more, read: What Are Four Decisions You Need To Make Before Raising Money?