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The Problem of Startup Valuation Going Too High or Too Low!

Credits: ThugStart.com

Startup valuation in a nutshell

  • The hotness of the industry.
  • The capabilities of the startup team.
  • The product or service and its competitive advantage.
  • Comparables — Your startup is valued in comparison with a similar startup.
  • Conformity — Your startup valuation is drawn by examining investor preferences.
  • Averaging — Your startup is valued by looking at the average or the most realistic valuation; i.e. you take the worst and the best-case scenario and look at the average.

What happens when your valuation is not enough?

  • You end up with the wrong kind of investor. Finding the right investor is important — you’re looking for a VC who understands your passion and vision. If they do, they should understand the exact value of your startup and not value it too low. When the valuation is low, the investor might not really get your business.
  • Your investor relations turn sour. Now, this kind of investor apathy (they know they got a huge bargain) might end up causing many problems. The investor might not have as much interest in helping you out because they need to work harder with startups with bigger valuation, i.e. with more on the line. You know your valuation is too low and the investor is not interested and so you start resenting them. When investor relations turn sour, things can start going downhill.
  • You’ll have trouble raising money in the future. Low valuation results in lots of dilution, especially at the seed stage. If you have a low valuation and a hefty investment, you naturally end up losing a lot more equity. The more equity you need to give away at the early stage, the less of it, you have to give away in the future rounds. A hefty dilution will be a red flag for future investors.

What happens when your startup valuation is too much?

  • You end up with the wrong kind of investor. Similar to a low valuation, an extremely high valuation doesn’t necessarily mean the investor gets your startup concept. You might simply be attracting an investor with a lot of money to spare, but not one that’s super excited about the firm. Bad VCs are out there and you need to be wary of them.
  • You give up long-term strategy. A high valuation might lead to short-term gain, but it can do damage to your startup in the long-term. You might send the wrong signals to investors: you’re not thinking about the company success, but personal gain. A high valuation increases expectations for the next rounds and makes it rather hard to keep increasing the valuation — you leave no margin for error; something startups should always do.
  • You’ll distance investors. High startup valuations are also rather efficient in distancing investors. The investor might start viewing the high valuation with resentment if things don’t go according to plan. Furthermore, since your next round will require a lot of traction, you might find it harder to attract interested investors.

How to get the valuation just right?

Suggested Reads

1. Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms

2. Startup Evolution Curve From Idea to Profitable and Scalable Business: Startup Marketing Manual

3. The Startup Funding Book

4. The Funding Is Out There!: Access the Cash You Need to Impact Your Business

5. The Entrepreneur’s Growth Startup Handbook: 7 Secrets to Venture Funding and Successful Growth

6. Funding & Financial Execution for Early-Stage Companies

7. The Crowdfunding Handbook: Raise Money for Your Small Business or Start-Up with Equity Funding Portals

8. Startup Fundraising: How successful founders raise capital for their startups: Building an Investible Company, Pitching to Investors, Negotiating the … Else Tech Founders Must Do

9. How to Break Into Venture Capital and Think Like an Investor Whether You’re a Student, Entrepreneur or Working Professional

10. Funded: The Entrepreneur’s Guide to Raising Your First Round

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Abhishek Shah

Nomad | Early Stage Investor | Wannabe Anthropologist | Technology Evangelist | Curious, Inquisitive & Experimental Entrepreneur