Recently, I sat down with a client and the talk turned to valuation.
While my client had raised money at a $7 million valuation before the market crashed last year, she was now talking to investors who wanted to put in money at a $2.5 million valuation–a pretty big haircut for her and her original investors.
Her question: Should she take the money and dilute her equity (and risk alienating the investors who had backed her from the beginning), or should she tell the new investors to take a hike?
It’s a question I’m getting more and more now that the economy has begun to recover and investors have started coming back to the table.
In the past, I probably would have advised a client like this to hang tough and keep looking. After all, that’s what I did back at my internet marketing company, NetCreations, when the Russian debt crisis hit in 1998 and we started getting calls from VCs looking to get in at a rock-bottom valuation. The following year, after growing our sales from $3.4 million to $20.7 million, we went public at a $300 million market cap.
But that was then and this now. And in today’s market, where startup capital is scarce and the economy is still struggling to get back on its feet, early-stage investors are hard to find. That’s why, instead of telling clients to hold their breath until they turn blue, I’m advising them to find a way to take the money that’s a win for both sides.
Case in point: I told the client who raised her initial money at the $7 million valuation to consider the size of the investment before making her decision. After all, it’s one thing to give a sweetheart deal to an investor who writes a check for $500,000–it’s another to give the same deal to somebody who’s only willing to put $50,000 in the pot.
I’ve also been advising my early-stage clients to try generating revenue–even a small amount of revenue–to show prospective investors that they’ve got a real business, not just a business plan and a dream. In fact, one of my clients has been so successful making sales that she told me that she may not need to raise any more capital, after all.
Personally, I admire clients like that. Because I know from my own experience in building companies that, if most entrepreneurs spent as much time pitching customers as they do pitching investors, they’d make a lot more money, give up a lot less equity and have a far more valuable company to sell at the end of the day.
This entry was posted on Monday, September 14th, 2009 at 8:31 am and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.Leave a Reply
