Negotiating Startup Valuation With Venture Capitalist

Startup valuation

There is a common confusion between the two financial terms, namely angel investors, and venture capitalists. Both even though provides and expects the very same thing, there is still a significant difference between both of them. While angel investors are those wealthy investors who generally invest their personal money in any kind of company they see fit. Venture capitalists generally fund startups and they invest money of other investors and entities. Personal money is included but it is a rare case scenario. Also, angel investors are generally not included in the decision-making of the company. However, venture capitalists are always attentive to what’s happening in the company and they have a major part in taking any decision. Though both of them look forward to the success of the entities they have invested in. Now, Valuation is an important factor not only for the owner but for the investor also. Determining the value of a company in its initial stages can be a bit tricky. Described below are the factors which affect a startup valuation and how can it be negotiated.

Startup valuation can be very difficult on the basis of the company’s profit. Being a startup, you cannot hope to make a profit instantly; therefore valuation on the basis of it will be unjustified. Startup valuation can be done on discounted cash flow method or the venture capital method. It can also be done by comparing the startup in the market. Investors invest in a startup after looking and analyzing many things. It can be the vision and goals of the company or the management of the company. It can be the dedication or the promising attitude of the venture.It is very common that market’s valuation of your startup is less than from what you have calculated. How can you negotiate that value then?

Now there can be two cases;

Your company actually values more, however, the market value of your company is low. It happens when you have liquid assets but they are not that valuable to be included in the valuation. Or it may be because of weak presentation and working of your startup. That generally leads to low funds or at least lower than what you have expected. It may happen that value of your startup is not more than what has been told by the market. Contradicting them won’t be fruitful since they will be your investors and they have the right to tell you things. It doesn’t mean that you get intimated by them. You need to learn to improve or work in a more organized way.
Your company values more but the market is trying to make it low. In that case scenario, you need to have a proper financial forecast. Other than an awesome business plan and a more awesome management team you need to have a financial analysis of your company. It will help you to have a proper valuation of your startup. It will also help you to persuade the market. Negotiation with the investors will become easy.

In order to negotiate, you need to be persistent and should not appear desperate. You should know how to command things but in a way that your investors feel that they have the upper hand. You need to show them the good side of your company, the promising future of your startup. Build up a professional relationship full of trust. They will easily be attracted if you have a plan. Like a real plan.

Startups even though are at a high risk, they still have the highest scope to excel and establish themselves firmly. Try and be smart. Learn to bend things your way. Be an entrepreneur.

This article has been contributed by Simmi Setia, Content Writer at LegalRaasta, an online portal for GST Software, GST Return Filing, GST Registration, Section 8 Company Registration, Nidhi Company Registration, IEC Registration, Fssai License, File ITR Online.