☕️ An investment valuation step function simplifies the negotiation process
Use this mind frame to land investors easier
Raising capital is a difficult task, and its only getting harder. As more cash moves to later stage companies, “true” startups are left holding the bag wondering where to turn.
Determining a proper valuation is an important part of any investment negotiation, and understanding the proper mechanics of the process can give you an advantage over other firms. Unfortunately, its often a phase of the process that leads to far more “nos” than “yeses.”
Its pretty clear that at any successful startup, as time increases valuation does accordingly. Most founders are under the impression that their day to day activities incrementally increase the worth of their business.
While a smooth, continuous curve of valuation growth makes for a great story, its far from reality. In the real world, valuation is tied directly to an investment closing. That means changes are instantaneous moments in time, not continuous functions.
Understanding the reality of the valuation curve give you a leg up when determining how to pitch your company.
When a valuation change occurs, its based around a set of facts of how the business currently is. Anything that occurs AFTER those moment in time, directly affects the future valuation. However, while it “affects” the valuation there is no direct or immediate impact on the number the company experiences.
It isn’t until a new round is closed that we determine the worth of those accomplishments. Therefore, at the stroke of a pen 100% of the gains achieved since the last investment are realized.
When negotiating one doesn’t need to justify any work prior to the last valuation. The prior round serves as a platform from which we build upon. A new investor is actually pulling forward ALL of the benefits and successes achieved after that last investment moment in time without risk.
From a negotiating standpoint, that means we only need to argue what these additional achievements are worth (and any up side) rather than having to justify the entire value of the business. Taking this approach DRASTICALLY simplifies the negotiation process and weeds out investors who want to renegotiate the diligence a prior investor has done.