First Round Valuation Pain: How To Take a Deep Breath, Suck It Up, and Get the Deal Done Now
We get hasty at times. We have an idea, we know what it’s worth, and we don’t want to accept anything less. Here’s a tip; set a lower valuation for your first round of funding so you can get the deal done as soon as possible. People tend to jump on board when you have a good idea at a good price. With the fresh new funds, you’ll be able to build a bigger company sooner and then you can go for your next round of funding at a higher valuation - something close to what you dreamed of the first time around but did not have the revenue to support. Maybe you give up another 10% or 20%, however, you’ll get the money you need now to be able to grow. Use the funding wisely and focus on increasing revenue.
You could keep demanding a higher valuation and ultimately you might get the money. You will be delayed. It will be more difficult. Is it worth it? No! Sure, you will have more equity because instead of 10% you may only have to give up 5%. The wait will kill you in many ways, personally through extended aggravation, and your company will be starved for cash. This is not a good place to be. Bite the bullet and get the deal done!
After raising funds at a lower valuation, you may have 90% or 85% of the company. That's okay. You'll have the funds you need to grow to a bigger company sooner and then you do the next round at a higher valuation based on the increased revenue you generated with the first round of funding. Then, you'll give up another 10% or 20% and again, you'll have the funds you need to grow revenue.
Always raise funds, never stop. Keep the investor information emails going and continue to emphasize how you grew or will be growing revenue. At the end of this arduous process, you might only have 30% to 40% of whatever you started with but it will be worth $100, $200, $300 million or more versus having a whole lot more equity in something that might just fizzle out completely.
Notice the focus on getting a deal done, using the funds wisely to increase revenue, and then using that growth as the basis for doing the next round at a higher valuation. That’s why they have pre-seed, seed, A, B, C, D and forever more round labels… You never know, you may become cash flow positive and not need further rounds. Just get there as soon as possible and stop aggravating over your percentage. It will come back to you. A smaller percentage of a large pie is worth more than any larger percentage of a smaller or non-existent pie. What do you feel like biting into? Large pie for me any day please.
If you’re interested in a spreadsheet model to use in calculating your personal worth after several rounds, reach out. I’m happy to share one you can use in strategizing the best road to success in a quantitative way.