Should you name valuation and terms when raising capital?
The pros and cons of naming valuation and terms when raising capital.
The pros and cons of each approach
I recently got a question from an entrepreneur who was about to start the fundraising process: should they list the valuation/terms they want or just describe the amount they are raising and why? There are obviously pros and cons to each approach, so I’ll share a few ways to think about it below.
Naming terms and valuation
Some entrepreneurs are direct in fundraising (i.e. I want to raise $2M on a $20M post-money SAFE). This can help filter out investors who would not get to that valuation early so you don’t waste your time. This approach tends to work well when you have a strong team/market/product and are confident you will have a competitive bidding process. This can also be beneficial when raising a small amount where you want to move quickly.
Just naming amount raised
Some entrepreneurs just say what they are raising (i.e. $2M to fuel sales growth) and let the market dictate the valuation/terms. This allows the entrepreneur to be flexible to what the market will allow; they are also not at risk of setting valuation too high or too low. This process can lead to some very different interpretations of valuation. Even with an amount listed, people will generally assume that implies +/- 20% equity for early stage companies and less than that if you are further along with the business.
While there are advantages to each approach, in most cases I recommend just naming the amount and letting the market determine the valuation and terms. This shows a more relational approach that the right investor, not just the money, is important. Just as in life, a better investor likely is not the cheapest product (i.e. highest valuation). If all you want is the cheapest money then pick the highest valuation, but be careful with the risks of that approach. I have also seen scenarios where the entrepreneurs set their initial valuation too high, scare off many investors, then try to circle back to raise at a much lower valuation but the damage has usually already been done. Furthermore, be careful that if you raise at too high a valuation and market conditions turn, you may be at risk for a down round (a scenario playing out now). Be sure to give yourself a chance to grow into a likely valuation 18-24 months from now.
Also remember valuation is both art and science (more art earlier stage, more science later stage) and is subject to market conditions that are independent of your company. Finding the right partner that you want to go on a 7-10 year journey with is most important!