Your startup valuation is essentially what investors think your company is worth, which has a huge impact on your company when you raise money. The higher your valuation, the less equity you have to give up for a particular dollar-amount of investment.
Here are five tips for maximizing your company’s valuation in the eyes of investors.
1. Choose your team wisely
Investors aren’t just backing your product—they’re also backing a team. What is your team’s track record? Do they have a history of launching successful startups with exits? If so, it will be much easier for your company to get money, and VCs will value your company more highly.
In addition, VCs are looking for teams that have significant experience in your industry’s domain. If that experience is in a leadership position, all the better. Although many VCs intend to be involved in steering your company, they are also looking to back entrepreneurs that they trust and who will make the right decisions. So be sure to get a top-notch team in place before you approach VCs.
2. Demonstrate traction
While the best way to demonstrate traction is to show escalating revenues, not every startup is that far along in the process when they need to seek VC money. So if you haven’t built a revenue model, find other ways to demonstrate and articulate traction.
Is your website seeing a rise in traffic? This can mean a growing interest in your product.
Are you seeing an increase in your freemium adoptions? This can be an indication of potential future sales.
Your sales pipeline may be light as you build out your product, but do your paying customers have exceptionally low churn? This shows VCs that you’ve got a product that customers love; now you just need the money to get your sales and marketing to scale to reach a much larger market.
3. Create and hit milestones
You never want to end up with a down round. So whenever you’re raising money, you want try to get a higher valuation than the last round. The way to ensure that is to create and hit key milestones.
Once you’ve identified the important milestones that matter to you and investors, work backwards to build a timeline and budget. For both time and money, it’s critical to build in a 25% fudge factor. Fundraising always takes more time and money than you expect.
“When you put milestones out there, you really need to meet them,” says Lighter Capital Chief Investment Officer Molly Otter. “If you don’t hit the milestones you said you’d hit, it’s going to be much harder to raise money later.”
4. Be a good negotiator
When you approach investors, remember that the entire process is a negotiation.
“The more effectively you negotiate, the better your valuation will be,” explains CEO of Early Growth Financials David Ehrenberg.
What does an effective negotiation with a VC look like? Ehrenberg offers three tips:
Listen to as many valuations as possible before making a commitment.
Don’t suggest a valuation; rather, let the VCs come up with a number first.
Play potential investors off of each other.
By waiting to commit until you’ve got all the information, you can maximize your company’s valuation when you do sign on the dotted line.
5. Get your timing right
So much of your company’s value is based on how investors see your market and industry right now. Is your market hot? Are investors flocking to you industry? If so, the time to seek that investment money is right now. Hot markets come in waves, and a huge component of startup valuation is based on current investor sentiment. What’s popular today is going to be passé in six months, so it pays to be ready to chase those investment dollars whenever the time is right.
“If you see your market space getting hot and you want to raise VC money, you need to strike while the iron is hot,” explains Otter. “Take advantage of it, because the valuation you see right now may not be there in six months.”