Valuation Expectation Mismatches

This happens so often – almost like a couple’s love story – expectation mismatch of what the relationship means! Unlike a romantic relationship, startups need some money at some point to keep moving – pick the next partner? Well, that’ll lead to restatement of expectations from the start, isn’t it? Forget it – let’s come to the real world. You have an idea with a working prototype - you got customer responses too in your bag – you saw some equivalent companies which may or may not be exactly same (else where is the secret recipe for the investor?!) – and you do some magic with discounted cash flows, comparative ratios, and some useful projection to value your startup, say at £ 5 million. You are asking for say, £ 500,000 now, and so you need to part with 10% of the company. Simple, isn’t it? Story sounds familiar? Well, what does an investor think?

If there has been no financial revenue track record, any money given by an investor is generally for 51% (or controlling stake!) – to put it in simple words. Your preparation, customer feedback, advance invoice or contract receipts, financial projections, and other such paraphernalia will help to a certain extent – but not much. Think of your own money when giving to someone else – what would you keep in mind? Some clause to bail out when things look worse? And what’s better than stake in hand than to hide behind legal clauses? It really helps if you try to assuage the risk to a greater extent – many methods exists – choose the lease costly one – and use that to ask for more money for lesser stake – else, good luck with your relationship! ;-)

 

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