Barry Coffman, professional investor with Launchpad Venture Group, visited Venture Lane this week to share his thoughts on how to properly value a startup and why having the most realistic valuation will serve you best in the long run. For those that missed the session, we’ve listed a few of the key takeaways below:
1) The earliest capital you receive will be the least efficient capital. Think of your angel invested capital as “educational capital.” Makes sense – you’re still working out the product market fit!
2) Barry recommends that you view raising rounds of financing as getting to the next big plateau. Can you justify getting to the next big plateau with the amount of money you’re asking for and the post-money valuation?
3) With early-stage angel investing, angels investors are looking for winning teams. Think of it this way: they would rather invest in a “B” idea with an “A” team over an “A” idea with a “B” team.
4) If your valuation starts too high, you aren’t giving yourself enough leeway and you lose optionality. Both the investors and the startup lose if the value is too high and the startup isn’t able to multiply the investment down the road.
5) The investors and the startup team are in this together – think of it as a long-term partnership as opposed to an adversarial relationship. Getting to the most realistic valuation serves both parties.
TL; DR: Employing a reality-based framework when it comes to valuation is vital. Lofty valuations can limit exit opportunities, increase the likelihood of future down rounds, and leave founders with less bargaining power over board composition, liquidation preferences, and veto rights.