The Venture Capitalist Pitch Deck: Your Valuation Story
Valuation is a touchy subject, but it needs to be discussed as part of your pitch. You can do tons of research and analysis to determine your valuation, yet if you simply state a valuation to investors, you may come off sounding inflexible, and if the number is much higher than they expected, you can be shown the door immediately.
If you’re asked to share your valuation during a presentation, answering with a valuation story rather than just stating a number is a wiser approach.
Valuation does not have to be a slide on its own, but you do need to discuss it. Keep your conversation about valuation relevant by discussing it along with risk, traction, and the ask.
Your story should have five “chapters” that lead the investor to accept the logic of your assertion:
Chapter 1 – Your marketing traction and well-supported rationale for sales
Chapter 2 – Your projected future earnings within a three- to five-year horizon
Chapter 3 – A future valuation based on your industry research of recent exits
Chapter 4 – The milestones that you face between now and your exit horizon and the likelihood of success for each one
Chapter 5 – Your current valuation based on discounting the future cash flow based on your risks
Valuation is tied tightly to risk and traction. When you discuss the value you’ve already put into your company (not the cash or time you’ve put in — the value), investors will be more likely to nod along when you give a valuation.
In reality, most people have a valuation range. Under certain conditions, they would be happy with one number, and under other conditions they would require a different valuation. For example, if one particular venture capitalist (VC) firm is well-known in your industry, and you really want to work with that group, you may accept a lower valuation for the clout that the firm can bring your company.
Determine what conditions you would prefer and identify the range you’d be comfortable with. Let investors know that the valuation is negotiable, but remember that if you say your range is $1 million to $2 million without stating the conditions under which you would accept the $1 million valuation, then you really haven’t given a range; you have just set your valuation at the lower end of your range!
When working with angel investors, size up the investors to determine what they bring to the table. If you’ll take a lower valuation for a “smart money” or strategic investor, then you need to find out whether the person you’re talking to fits that category before providing her with the adjusted valuation.
A VC is going to develop her own valuation regardless of what you tell her your value is, so be prepared for negotiation. Just like selling anything else, your company is only worth what someone will pay for it.