You’re Not Any Prettier at a Cheaper Valuation
The best investors leave valuation until the end
It’s not about the valuation.
Shocking? Shouldn’t be. The best startups are expensive — as well they should be and will always be.
At Promus Ventures, we make decisions in light of our thesis and discipline and will continue to invest in subsequent rounds when we believe the expected IRR of infused capital will match the returns demanded by our LPs.
The best investors leave valuation until the end. Startup teams can pick out shortsighted investors with how early these investors ask about pricing.
Many years ago when I started as a VC, I cared a lot about valuation and wanted to know immediately where the round was being priced. I naively thought this would properly let me view all subsequent diligence in context.
What I learned was that I had it all backward. There is a myriad of things that have to be in place before we pull the investment trigger (people, product, and potential). Valuation is only one variable in the equation.
Logically this just makes sense. Why have a discussion around price if an investor doesn’t believe the founders have the moxy or passion to grow the team and company? Valuation is irrelevant if the product doesn’t solve a major consumer or enterprise pain that exists today. And the list goes on…
Additionally, I think valuation out of context can taint one’s perspective on the founders. I have now for many years preferred to keep an open view early in discussions with founders as sometimes a high (or low) valuation can distort the way in which one views the team. Too high? Well, they must be greedy. Too low? Yikes, the market must not like them, something’s wrong.
For example, we have a founding team that is currently raising an extension round to their seed in which we earlier participated. Their product is still early and the team small, but their massive passion and drive for the product has stayed at a high level since we invested nine months ago. Every time I meet or talk with them, I am impressed by how they intently listen to customer feedback and care deeply about getting the product right.
Trust between founders/investors (and investors/investors) is built over time. So when it came time for this team to raise additional capital, the decision wasn’t difficult. Even before the pricing has been finalized, we told them we’d like to increase our last commitment by three to fourfold. I am confident that we (the founders and two other VC groups involved) will agree on an appropriate market price, not waste time in the process, and let the founders get on with building their company.
I don’t care if you are an angel investor and plan on investing in only one round or you run a billion-dollar fund that invests across multiple rounds: valuation should be left to the end. Price can do silly things to the mind — leave it out of the conversation until both sides feel like there is a fit and want to move forward together.
