A Range Not A Price
Entrepreneurs often struggle with how to signal their valuation expectations to investors.
Investors rightly want to know what the entrepreneur’s price expectations are before investing significant time on the opportunity.
But entrepreneurs don’t want to negotiate against themselves and certainly don’t want to undervalue themselves.
So what I always recommend to the entrepreneurs we work with and, frankly, anyone who asks is to “give a range, not a price.”
Let’s say you are raising a Series A round and have an aspirational valuation in mind of $30mm pre-money, raising $6mm.
But you know that is an aggressive valuation and you may have to accept something materially less in order to get a deal done.
Then I would tell investors “we want to raise $4mm to $6mm and don’t want to dilute more than 20% including any increases to the pool.”
An investor could read that as you would accept $4mm at $16mm pre-money but you have signaled that $30mm post-money is where you are aiming.
And, because you said “don’t want to dilute more than 20%”, you have left some room for your aspirational valuation of $30mm pre-money in which $6mm would dilute the company roughly 17%.
Try this the next time you are asked for a valuation from an investor. It works well.
i don’t labor much over regrets Fred though I do regret that I never had the opportunity to raise and work with you on a project.Who knows, maybe it will happen yet.
you’re both still young.
thanks!never felt more productive and adding value than I do right now for certain.and crazy me formulating new projects.exercise, nutrition, ego and luck are a good combination.
Look who’s talking
Valuation is in the eye of the beholder.
If a tree falls in a forest and no one is around to hear it, does it make a sound ? – attributed to Bishop Berkeley/Others.”Value is there, like Bishop Berkeley’s tree that made a noise when it fell in the forest whether or not anybody heard it fall, only value is only one part of the game.” – George Goodman (Adam Smith)
Adam Smith one. What a game. Great quote, thanks.
not for the bird that was nesting in it.
Two views of value. One practical. One impractical, but occassionally of much value (pun intended).1. Value is that which the market assigns. If the market does not place value, there is none.2. Value is the sound that falling tree made when there was nobody to hear the sound it made. (I know that physics also approaches this question based on how sound is produced, but Berkeley was speaking philosophically, not scientifically. And later Quantum mechanics forced the question – does reality exist independently, or does it exist through your interaction with it).Where value is concerned, the world operates to #1 above. And I believe #1 is true most of the time.But I like to think that there is also something to the idea of value as the sound in the forest that was not heard. Maybe its the romantic in me.
If an entrepreneur asks for $30mm valuation and you as a VC believe that you would come in at $20mm, would you tell this to the entrepreneur or let the deal pass without quoting the valuation as the deal breaker?
At seed this works too. Priced equity rounds are better
I would also like to include that this tactic works well with some of the more mature investors such as USV. Not all entrepreneurs have the luxury to obtain 100% of their funding round from mature investors.
I’ve tried to indicate a fund raise range with an equity dilution range – usually that means it will be +10% with the ESOP pool which is something investors automatically price in as well.
Fred – Would you expect range explicitly coupled to anticipated change, or to see short term ” bumps or dips ” ignored as nickel and dime events that smooth out in the end ?I ask because short-term change can be significant to funding needs and dilution even if a small incident in the bigger trajectory of the company.
Time to expected exit effects valuation. I’ve yet to see it discussed?
Fred, Simply great advice / perspective here. This subject made me recall how many times in Q&A sessions people ask the V question and get no help. This is very helpful. While the community can see it from so many different angles your perspective is right on target and very helpful. Thanks! Dana
.”It works well,” said the venture capitalist. Yes, it works well for the venture capitalist.Any funding should be approached as an auction. The entrepreneur should know his industry, the targeted venture capitalists, and have a sense of the attractiveness of the enterprise.To find a prince, the careful and prudent entrepreneur will kiss a lot of frogs. Get your pitch deck perfect, strap on your knee pads, polish your begging cup, wear lip balm — go hunting for money.The quest is not to find the “right” deal, but to find the “best” deal.Pricing is not the same as valuation. Auctions set prices while valuation is an appraisal function. In the context of this conversation, they are very close, but not the same. Sort of like an alligator v a crocodile.Fund raisers need to know what they are doing. They need to study the issue and have a damn good idea of the width of the chalk stripe — the difference and breadth amongst a deal, a good deal, and a great deal.There is no easy way to do this other than seeking the truth in a painstaking and methodical manner. All of the easy deals got done in the 1960s.An entrepreneur — a zealot by nature for goodness sake — should have a high aspirational valuation in mind. They are buying your soul.Don’t worry, the VCs will beat the snot out of the number regardless of whatever it is. But, you have to set one of the goalposts and you should not be afraid to do it. Where one edge of the playing field is set matters.Pricing — not valuation — is at an instant in time.I was selling an extensive portfolio of mid and high rise office buildings in ATX back in the mid-1990s. The deal was a big fraction of a billion dollars and it would be more than a billion today.A guy came in from a huge pension fund advisory firm and we laid the deal out for him. A month later, he returns with the most comprehensive analysis and valuation I had ever seen. I have never seen one its equal since.It was comprehensive, taking into account every possible variable. I thought it was fair in its assessment — not unduly pessimistic. It even contemplated the cost of maintenance (net leased properties, so maintenance paid for by the tenants) and it had a creditworthiness matrix evaluating the credit of every tenant.The valuation was about a foot thick. Took me a week to weed through it. Best ever.The pension fund advisory firm had two clients who both offered me the exact price that the valuation said the portfolio was worth.I rejected it.I told them, “I’m not looking to sell them for what the numbers say I should. I want to sell them to the buyer who makes the biggest arithmetic mistake, the buyer who needs it, the buyer who falls in love with it.”Everybody laughed and they said they’d be back in a month to check with me when my divorce from reality was annulled.I sold the portfolio for 150% of the valuation number. I met a lot of buyers. I kissed a lot of frogs. I found a buyer (public company) who HAD TO OWN those buildings as they had just cobbled together a secondary offering and needed a bell cow acquisition to drive the road show.You are looking for the BEST deal, not the right deal.The world is divided between those who are consumers of capital and those who are providers of capital. There is an understandable and necessary tension between those two competing interests.Do you really want to take advice from your adversary? [Adversary in the nicest sense of the word.]Stay in your lane. Talk your own book. Do no do what is easier for the other guy. Find the guy who makes the biggest arithmetic mistake and just loves your deal.BTW, the buyer of the office buildings hit a long ball with men on base and crushed the long term investment. His gut on the future of ATX was perfect.Pricing is a negotiation. In life you do not get what you deserve or what is easy, you get what you negotiate.JLMwww.themusingsofthebigredca…
I told them, “I’m not looking to sell them for what the numbers say I should. I want to sell them to the buyer who makes the biggest arithmetic mistake, the buyer who needs it, the buyer who falls in love with it.”This is so true. You have to wonder why the greenhorn wasn’t able to size up your personality in advance to know that angle would not work with you. He just stuck to what he read in some airport book I guess (don’t read those books, never have, never will, just guessing based on how over the years people have approached me with formula behavior.).Funny way back when I was looking to buy a retail store I met with a particular seller. They laid out some details and I then started to ask all sorts of questions. They immediately ended the meeting with ‘I can tell this isn’t for you.’. Why? Because they were a ‘JLM’ that was selling. (A compliment if not obvious).That said Fred’s method is probably a safe harbor behavior for a newbie. They don’t typically stand a chance against an experienced operator (and you know this is the case).
You had the luxury of a good bank account that gave you time. A lot of people are toast without cash now. It comes through too.
.Not sure I am understanding what you mean, Tom.I decided to sell because ATX was as hot as a pistol.JLMwww.themusingsofthebigredca…
You had the the time to wait for the right deal. It helps to be able to do that. Not everyone, even with cash, can do that. Great story and deal congrats
.OK, fair play to you. Thanks.JLMwww.themusingsofthebigredca…
> His gut on the future of ATX was perfect.Okay, then, in one word, the pension fund advisor with the foot thick analysis was badly wrong, too low by 1/3rd. Big error. Lousy analysis, foot thick or not!
Okay, but supposedly nearly all the VCs know each other, e.g., want to and commonly do deals together. So, maybe they talk to each other? Indeed, there have been suggestions that an entrepreneur who has been trying to raise money for a long time is shop worn or some such and that this reputation spreads among VCs by word of mouth.Talking to other bidders in an auction is considered, what, maybe rude?
Sorry. I know this business better than you. You are completely and totally wrong here
I agree with you and if JLM used a construction financing example, I bet it would sound more like your advice.JLM’s advice makes sense to me, at the other end of the process, which explains the example he used.Plus, we know you went into the one part of ‘providing’ capital where supply never meets demand ……. #cagey #typical5
.Huge difference in the playing field. Fred is doing tiny, seed deals which are entry level with unsophisticated sponsors whilst I was doing $50-100,000,000 transactions. Entirely different frame of reference.Not to put words in Fred’s mouth, but I recall his saying he sometimes went more than a year without doing a single deal. I was doing acquisitions, financings, re-financings, and sales on a regular basis. The deal flow was continuous and some years I might close as many as 25 transactions. This went on for more than a decade and a half.There was a very dynamic market as different types of investors were in and out of the market — traditional commercial banks, the credit companies (GE Capital), pension funds, insurance companies, high net worth individuals, PE players, special funds, and the residual of the LBO business.During the time period I was active, the population of the markets I dealt in doubled. So, the deal flow was enormous.The term “construction financing” is a bit of an archaic term.When I was in the game, we were raising equity (which is more similar to what Fred describes but the numbers were just much, much bigger and the deal flow was deeper and faster) as a prelude to obtaining a “mini-perm.” “Mini” relating to the term of the commitment as it was shorter than a traditional 30 year mortgage.These arrangements provided for construction funding and then an automatic close into a permanent mortgage (the mini-perm).During construction, when there is construction/completion risk, the borrower has personal liability for completion. I used to lay that risk off by obtaining a completion bond from the contractor.Once you completed construction and hit a certain level of lease up and the attendant cash flow, the personal liability was removed and the loan became a secured loan, secured by a first lien on the improvements.All real estate loans have a carve out for fraud. If you commit fraud, you are always personally liable for the loan.As I suggested above, we would put our deal together — projections, market studies, design professional contracts, construction contract, land ownership (which we typically bought with our own money), leasing costs, lease up projection, void funding (the difference between debt service and break even while leasing up), and then go shop the deal.These packages were as sophisticated as an IPO, moreso sometimes as we had to live with the results.In good times, we would get 20-30 quotes from Citi, Deutsche Bk, Royal Dutch Shell, TRS, Fidelity, and the usual cast of characters.Each prospective investor/lender had their own moveable feast of quirks. They would be in/lout of the market, have a full plate of a certain type of deals, be full in a state/geographical area, be concerned about the experience of a particular operator, have a change of personnel and lose their market knowledge and intel. Just a changing smorgasbord of considerations.It would change every 60 days.Sometimes, your deal was perfect and you had somebody just salivating to get the deal. I had such a relationship with GE Capital. They never told me “NO” ever. There is a lot more to it.But, you had to work the market to get the right deal even when somebody like GE said “yes” before you met with them.Sometimes, certain investors would not be willing to work with you because they perceived you as being “GE’s boy.” That’s what happens when you do 15-25 deals with one source of capital.Plus, companies like GE would give you both the equity and the debt. In for a dime, in for a dollar.Since I have been doing the CEO coaching — something I got into because of this blog — I have helped a couple of dozen startups obtain funding and advised more on how to approach it. All the companies I have mentored at TechStars Austin got funded. One has shut down.In the last 12 months, I have had seven companies obtain VC funding. All but two were greenfields.There is a huge world of VCs out there and many of them are not as iconoclastic or fixed in their view as others. I have helped startups make their initial DB of potential funders by industry, size, geography, and experience.This exercise is something that most VCs never encounter. They are on the other side of the list.I have routinely hired people to drag through the trade publications and find 200 +/- targets. There is a lot of kissing of frogs. Ten percent are hits. Half of those hits are deeply interested. Half write checks.I have worked with quite a few folks who made contact with me through AVC.com. In the last week, I have spoken to two such contacts.There is a whole world out there of people who do not get traction from one or another brand name seed VC who get their deals done somehow. In fact, I would say more entrepreneurs get their smaller deals done with someone other than the name brands.There is an enormous difference in the view from the side of the desk of the entrepreneur v the VC. I see that view that others may not.The other day I added up all the deals I’d worked on pre my involvement in VC/CEO coaching and post. It is a huge number and the deal making psychology is startling similar. Money is money.I have a library of term sheets, counters, etc. which seem to cover every variable. It is not a terribly sophisticated financing at the end of the day. The terms are pretty standard and the funds are relatively small.There is a Yale study which suggests that 15-20% of all of the world’s wealth is held in real estate which supports the notion that it is a more sophisticated and frothier market. VC, on the other hand, is a very small allocation amongst pension funds and the likes who become LPs.I used to know the Texas pension fund numbers and they were up to 15% real estate while they were 1-2% VC. There is just a huge difference in the size of the asset class, the size of deals, the frequency of deals, and the results.It may take 3-4 years to invest a $150MM VC fund while it may take 3-6 months to put the same amount of money to work in real estate.One last point — when a real estate investment is able to attain 75% LTV and 1.5 – 1.75 DCR, it is a rated credit. One can also look through a rent roll and obtain a fair assessment of the creditworthiness of any set of tenants thereby creating a derivative sense of the underlying credit. I used to teach pension funds how to do this and it was very useful.This slightly more sophisticated financial analysis is not something that ever happens in the early stages of VC.Of course, the majority of the VC deals do not succeed, so there is that.JLMwww.themusingsofthebigredca…
.Believe me, Fred, if it were a matter of VC and you told me tom’w was Easter, I’d be home dying eggs.But, you have a blind spot. You’ve never been an entrepreneur and had to make the rounds to raise money. Entrepreneurs think about money different than VCs. They have to. They should.What I am suggesting — based on decades of experience having raised billions of dollars — is that an entrepreneur have a firm idea of what they are looking to do, no differently than having a clear vision of the hypothesis upon which the company will be founded.If I have it “totally wrong”, show me. Don’t tell me, show me.JLMwww.themusingsofthebigredca…
I think you are both right. For people that are able to get in front of you and entertain this discussion. You are right. If they are good enough to get in front of you they have other options.For most entrepreneurs they are desperately seeking that one investor that can help them fulfill their dreams.We talk about doing due diligence on your investors, choosing smart money over dumb, etc.That is a great discussion.The reality is for the vast majority of entrepreneurs that is a theoretical discussion. You know this from how many deals you turn down without even looking. You posted about that once.
This is nicely said Philip – for me it’s really about what an individual entrepreneur can tolerate / excel at.Fred’s approach is something I use constantly, both in raising money and in all sorts of negotiations. But it took a long time to get good at, and it requires a certain tolerance of ambiguity + willingness to be uncomfortable. That is not appropriate for all founders, and I can think of 4-5 scenarios where I helped someone approach it in that manner and they tanked (which taught me in turn that some people need absolute firm lines, and that’s often a learning styles thing).On the other hand, if you can get good at “range not price” the world opens up in some impressive ways. For ex. you can leverage FOMO even with the smartest of investors, sometimes by boldly telling them that’s what you’re doing. But range not price definitely requires practice and style and you have to learn fast, and be inquisitive and good at relationship building. For many founders, it is simpler and smarter to give a price and work the entire list with that price.
I’m just saying it depends on your position. If you have five people really interested? Hell yes, give a range. They want to know are we in the same ballpark. You have to give them the ballpark.If you are desperate for money and can’t get anybody interested, then you have not given a range your floor is their ceiling.
I like the cut of your jib JLM!
Investors rightly want to know what the entrepreneur’s price expectations are before investing significant time on the opportunity.A decent manipulation is also giving a low price expectation. Then after the buyer (the investor) has spent significant time on the opportunity they will be potentially likely to pay even more than they thought they would ever do.So yes there is value to ‘wasting someone’s time’. The more time spent the less likely to walk. General rule.This is also part of the beauty of giving a range (which is 100% applicable in many cases of negotiation). It allows you stick to the high number if necessary and even exceed it.None of this works all the time which is why it’s an art and you develop your methods and techniques with experience.I guess a similar example of starting low as a technique could even be auctions that start at a $1 when everyone knows they price will never be $1.5.
I know; I know; the VCs, smartest guys in the room, are busy, busy, busy, busy each day sifting through several more, new cases that all arrived before 8 AM from friends, portfolio CEOs, along with over the transom, e-mail, phone messages, meetings at a Sand Hill Road coffee shop, of Apple, Microsoft, Cisco, Google, Facebook, throwing away $500 billion exits like non-Masters of the Universe throw away toilet paper! Everyday. Hundreds of billions here; hundreds of billions there; it gets so boring!So, being so busy, the Masters of the Universe can’t waste their extremely valuable time on ugly deals that won’t move the needle, cause them to have to travel more than 10 miles to a BoD meeting, etc. Did I mention busy, busy, busy?So, some entrepreneur with a deal worth only a few million dollars, basically chump change, trying to buy baby food for his most recent baby born last month, is just a waste of time for the Grand Masters of the Universe!!!!!So, that’s the story???So, if call a VC and a secretary says “He’s in a meeting” right away say “So am I, and I have to return to it.” Click!If $10 million is too small, then he wants to invest $100 million? Okay, as an entrepreneur, that would sound like good news. Sure, the VC, I know, smartest guy in the room, makes money only from the exit, not the investment (except maybe for the 2%), so should be thinking about the potential of the exit to move the needle, not the investment! Gee, I’d think the smartest guys in the room would have figured out this difference!Maybe that’s some of why average VC ROI has often been poor, as inhttp://www.kauffman.org/new…http://www.avc.com/a_vc/201…As a former B-school prof, it’s so much fun to see just how bright the smartest guys in the room are!
Thanks Fred this is helpful. We’re about to enter the raise foray albeit at pre-seed or seed (I’m not quite sure which!). I assume given our stage we’ll need to set aside a larger pool than that implied by your example? Would that initial ESOP need to be around 20% at this early stage? Should that set aside also have a range or is it a fixed level? Are there any other adjustments to make to the “range not price” position given our earlier stage? Thanks in advance for any advice from anyone in the community.
I think (correct me if I’m wrong) at those levels you take what you can take. My Angel round cost me 15% of the company, but bought me a great and experienced “board member” that is making my dream slowly into a reality, and I think they are going to continue investing at higher valuations (as we reach those fundable milestones) which will make these numbers more normal in the long run.
“Pre-seed”? That’s done with a tin cup?
i’m not seeing how this relates to a native blockchain startup.
Silly, don’t you know those go straight to an ICO?
The entrepreneur is selling and wants the highest price. The VC is buying and wants the lowest price. So, in this case, there is really only one seller and potentially dozens of buyers. So, implicitly there is an auction. So, the buyers make their offers.So, it seems to me that the entrepreneur should just let the buyers make offers.Revision: Sorry, @JLM, honest, I wrote the above before I read your post!
How does this work at Seed or even Pre-Seed? Or is it that at those levels the startegy is take whatever you can get?
Hi Fred! I’ve been your follower for years, but have never commented – thanks for a great community.I’ve met with dozens of VC’s lately who actually advise the opposite of this post. They say “tell me exactly what you’re raising, not a range” because they say it signals you’re just fishing for a good deal, and not clear on how much you need to reach your next milestones.Would love to get your reaction to this, thanks again for your great posts!
I’ve also found this advice helpful for salary negotiations.
Let’s say your typical tech company is already generating some revenue (1), there is a patent pending for new technology being developed (2) and you still want to recruit key people to the company (3). As an entrepreneur you will very likely have to invest 6 – 12 months to get a funding partner. During this long negotiation period with VCs you should also sell (and hopefully be able to show) that your company has created more value last months. A price range will start a different kind of discussion and reveal a few things about the personality from the VCs you will work together with for the next 10-20-30 years. From my experience as business developer and entrepreneur I think Fred is right.
What a great discussion! And yes both sides owe it to themselves to get the best deal they can. It’s all fair game…
This reminds me of Getting to Yes. Create yourself a range of options and a BATNA, and you’re good.Maybe people should just read that book?
.They didn’t need to give a range as they got exactly what they expected and went after. As I said, the lowest number one gives is the one the VC hears.Companies coming through TechStars, Capital Factory, DreamIt and other accelerators/incubators leave a strong trail of breadcrumbs for others to follow.I usually work with two TS companies per session. Every one I have worked with has gotten funded and all but one are still in business.There are several entrepreneurs groups in ATX and the entrepreneurs all talk to each other. There is a tendency to overlook how chummy the entrepreneur community is. They’re smart as Hell and there are plenty of guys who have a notch or two on their pistols.VCs have a tendency to discount this phenomenon. They think they are the only ones talking to each other.Deal expectations are fairly well documented and term sheets all look the same.Austin, Dallas, Houston, San Antonio, Corpus Christi and 3-5 other cities in Texas. I had office buildings, office parks, office showroom/tech space, apartments, warehouses, retail, and mixed use land developments.I did a significant number of deals where a troubled financial entity brought me a portfolio and I worked them out for them. I got a lot of calls from people who had more than one product type in the portfolio. There is a technical reason it was advantageous for them to dispose of all of a single portfolio of assets in a single transaction. So, If I would take more than one asset class, it was to their advantage to deal with somebody like me. Also, there were some very stringent laws as to whom they could sell given the implications of the bail out legislation.To get the ones I wanted, I had to kiss some frogs in places I would never have gone otherwise.Those workouts were very interesting and had all the characteristics of a startup in that you got some piece of a future created value. If I could get a piece of the future created value, I didn’t want to own the deed and many financial institutions did not want to “mark to market,” so they would convert to “investment in partnership” which is held at depreciated book value. Simple GAAP stuff, but you have to know the accounting rules to make it work.As an example, I handled all of Mutual Benefit Life of NJ (Newark)’s Texas properties. It was a huge deal. MBL, I think, was the largest insurance company failure in the history of the US. It was a company from pre-Civil War and they funded Williams and Fisher Island in Florida and it took them down.Interestingly enough, the initial receiver for them was Jon Koskinen, the guy who is the current IRS head. He’s smart as Hell and a Rhodes Scholar. He looks the same today as he did then.Sometimes, they were easy as pie as the failure mechanism was obvious and apparent.Oddly enough, some of those weird locations had the best returns. The deal size was just too small — less than $10MM.JLMwww.themusingsofthebigredca…
I would not see it that way. This is a conversation about price and not really anything else
.Not possible to read it any other way.Tell me, “Four to six million for 20%.” What do I hear?I hear $4,000,000 for 20%.Any weakness in valuation is the “real deal.”JLMwww.themusingsofthebigredca…
I fear you may be the exception here Fred.One of the forever strategic negotiation discussions is how to get the conversation going without it shutting down or setting collars that you don’t want to be bound into.Setting the pricing discussion is still one of the greatest arts of sales.
Agree with Charlie on this. Did not understand your comment.
This is one of these cases where people taking you to task and pointing out why you are wrong proves that you are right. Shows that seat of the pants people don’t understand the psychology of what you are trying to say even if you take into account the self serving nature of the statement. For a newbie your advice is a good safe harbor behavior for sure.Hard to get by someone with experience in this area.
I completely agree EXCEPT if there is a bidding war for your company.I think Fred has the luxury of only investing in deals that are “hot”In which case his advice his right. In the majority of deals, you do not have tons of buyers and you are right you have set the price at the low end.My advice to anybody would be that unless you have set up an auction situation, the lowest price you give is where the top point of where the negotiations start, then things move down in price and with tougher terms.You do have to set the price because no buyer (the one with the cash) in their right mind is going to negotiate with themselves.