How do you align startup valuation with venture capital expectations? Share your strategies for bridging this gap.
Usually you don't. If the VC in question isn't leading, then usually their only choice is in or out. If they are leading, then you can investigate their assumptions and see if there's any room for negotiation, but your real leverage comes from having a better offer. Estimate how long it will take you to get such an offer and whether it's worth it; sometimes it is, sometimes it isn't.
Valuations are snapshots of perceived value--not market value. I've never met a founder who believed the valuation I shared at seed was high enough. That's how founders are built. They live in the future when it's a globally transformational company. I love that! However, "today," there are benchmarks and reasons to explore a range of valuations. As an investor, I share with prospective founders whom I want to back, why I believe a certain valuation makes sense now. Also, I explain how I expect the valuation to change over time in various scenarios, including at the critical next round, when and if the company is profitable, and if we were to (sadly) miss our projections. This tends to bridge the gap and help us pursue the big picture.
It is very important to understand. Why do you want to invest in a company and why they should have you as an investor? If you're able to make substantive case on both sides of a transaction, then you can put mechanisms in place that enable the team to claw back some of the equity if they perform substantially well. So if my evaluation as a VC is let's say $20m and their pre money valuation is $30m, then I have quite a long way to negotiate. Instead of doing dad which is never going to end up well, then I usually propose a mechanism where if the management team is able to deliver specific milestones (e.g. revenue) then they can get options or shares in the company to lift their ownership, reverting dilution.
Valuation should be based on market size, growth potential, revenue, team strength, and competitive advantage. VCs use these factors to set realistic values. If founders ask for more than market practices, it can signal overconfidence and scare off investors. A well-known case is WeWork, which sought a $47 billion valuation despite heavy losses. VCs pushed back, and the company's valuation dropped to $8 billion after its failed IPO. The key is to understand the VC’s perspective. Let VC highlight where the startup’s numbers might be inflated. It’s important to remain open to feedback and adjust your expectations. However, aiming for a higher valuation isn’t bad if you can back it up with solid growth plans and impressive market traction.
Just because you can fund to a particular valuation doesn't mean you should, even in an upward-trending market. We see plenty of flat or down rounds in the life sciences this year as investors continue to be cautious following the "irrational exuberance" of 2021-2022.