How to Negotiate Valuation with Investors
Agreeing with investors on your company’s valuation is one of the crucial points in fundraising. The valuation you agree to will stick around for the whole startup’s life.
If you’re a first-time entrepreneur, odds are that investors have much more information on market valuations than you do. This creates an asymmetry information issue against you. In this case, your weapon to get the better deal is by strengthening your base knowledge on valuation.
That is, the way to negotiate valuation is by knowing what a realistic valuation would be, and by being able to defend it. In this article, we will show you tips for getting there.
Build a Financial Model
Having a rigorous financial model will make you familiar with the company’s financial mechanisms. You want to truly understand the drivers of the startup’s profitability, the way to get there, and the magnitude of profits.
Each financial model has assumptions that drive the projections. These assumptions, when realistic, will showcase to the investors how your company is worth the value you claim.
Not sure how to start building a financial model? Check out our article on what you need to prepare for a financial model.
Use Multiple Valuation Methods
Conducting valuation by yourself before meeting investors will make you the expert on your startup. Investors do know more about valuations in the market, but they don’t know yet the specific valuation for your startup. Only you, with all the internal information you have, can get a sense of your startup’s specific valuation.
This will aid you in further supporting your claim. This way, you can show them the true value based on assumptions and facts.
Note that each valuation method covers a specific aspect of the subject company. Some will focus on the startup’s financial projections. Others will focus on the startup’s market valuations. By using more than one valuation method, you get a well-rounded view of the startup’s valuation and its valued core strengths.
Join VeFund
Instead of taking the valuation journey solo, we built an automated valuation tool that can guide you all the way.
VeFund’s valuation calculator uses a mix of valuation methods based on your startup’s stage of development. And through our access to market multiples and valuations, we provide you with the necessary numbers you need to know for your company.
This way, you can go through fundraising with more confidence, knowing your valuation and the numbers behind it. Check out our automated valuation calculator from here.
