Thursday, December 29, 2016

Lessons Learned Seeking Funding - Be realistic about the value of your company.

  Overvaluing your startup can be a deal killer.  Here's why.  At some point, most startups need to determine a value for their endeavor in order to raise money.  There is real potential -- even an incentive -- for company owners to inflate this value.  The logic goes something like this:

We need $500,000 from an investor.  If our company is worth $1 million then the investor will wind up owning 50% of the company, so let's jack up the value to $5 million so the investor only gets 10%.  

Investors will be on the lookout for it, they will spot it, they will test it, and if the owners can't prove up the valuation to the investor's satisfaction then the deal will probably be off and any potential relationship will be over.  The company would then have two problems:  1] they still need to raise money, and 2] they now have to explain to the next investor prospect why the previous prospect balked.

This is the wrong approach.  Don't use it.

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