Founder: “They just offered us a new round of funding.”
Me: “That’s great. Wait, what’s the problem?”
Founder: “The valuation. It’s only a $100k increase over our last round.”
Me: “At least it isn’t a down round. Have you shared with them all the milestones you have accomplished since then?”
Founder: “No. Can we counter?”
Me: “Yep.”
I was right. It was a good thing that the valuation was pushing towards a “down round,” where the new valuation is lower than the previous one. In some economic environment and for certain reasons that happens.
In the case of this startup, they had just grinding away for ten months, checked off a lot of milestones, and their “reward” from this investor was only a $100k increase in valuation.
It wasn’t optimal.
Later-stage valuations are built upon quantifiable metrics. Things like revenue, new users, etc. When you are in the early stages of a startup, valuations are as much art as they are science. That is why a lot of times convertible notes/SaFE are preferred. Because they push the valuation to a later date when there is more of those quantifiable metrics. The next closest thing to metrics is other milestones. Things like your first prototype. A customer willing to be a beta tester for you. Even landing a lead investor can be seen as a significant milestone to other investors.
So, what happened?
I coached the founders to thank the investor for their offer and to tell them that the valuation felt low. Their response looked something like this.
“Thanks for your interest in seeding us with a second round of funding. Since the first round we have accomplished a lot of milestones. <insert list of accomplishments>. Based on those milestones being accomplished we believe the new valuation is not acknowledging all those results.”
Forty-eight hours later the investors had increased the valuation by 43%.
Plenty of founders forget that a valuation is a negotiation. Especially in the early stages when there isn’t as much data to do a true valuation against. Most of the investors I am connected to, including myself, are open to negotiating terms of a funding round. The key, as a founder, is being able to support your claims.
By the way, congrats to Elo and Kofi at Cr3dentials.xyz. I love working with you.
If you are considering raising capital from investors, check out my free guide, "Potential Questions to Ask Investors."
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