June 7, 2007

The “Infamous” Valuation Question

Yesterday, we hosted another SpeedPitching Luncheon in Utah.  It was an incredibly successful event with nearly 40 early-stage investors in attendance.  I’ll write more about the event in a bit, but for now, I’d like to continue the discussion posed by Devin Thorpe about “Do You Dodge the Valuation Question?

Devin:  I think that you pose a great question.  There were a few investors that came up to me and requested that we coach them on how to respond to the valuation question.  The reality is that we DO coach them on the valuation question… we just coach them to push off the discussion until the next meeting!

I agree with you that it’s not fair for the entrepreneur to nail down a valuation after a 7 minute discussion.  Too often the investors make large assumptions about the company, the market, and the management team without knowing all of the facts.  I know that the investors can’t stand the fact that the entrepreneurs dodge the question — they want to know the valuation up front.

The reason that they would like to know the question up front is because they want to know if the investment is in their ball park.  If it’s not in their ballpark, they won’t want the follow-up meeting no matter how strong the deal is.

So the REAL question is… is there a way to accurately respond to the valuation question (to please the investor) without pinning yourself on a certain valuation?  Maybe you could give a ball park answer so that they know that your deal is affordable, but then include a caveat that you would like to discuss in detail at a future meeting?

After yesterday’s luncheon, it has become apparent that we should suggest a different approach to our entrepreneurs so that our investors don’t get so frustrated.  I’d love to hear your suggestions.