I’m lucky enough to currently have two investors interested in my business.
One has substantial domain experience but the other is prepared to invest at a higher valuation. What should I do?
Most early stage investors will claim to add value when evaluating prospective investees.
Typically this claim is a mixture of fact (proven track record) and fiction (insecurity of being viewed purely as a source of money).
While an investor can add value in many ways, substantial domain experience and proven operational experience are at the top of the list.
Relevant domain experience can assist in mitigating unforseen obstacles, closing early sales and enhancing industry credibility. Operational experience mitigates the risk of unrealistic or overly simplistic expectations and can assist with management decision making.
Provided the investor is also experienced in the art of venture capital, such a combination can make a significant difference and is unquestionably worth sacrificing a few extra points of equity.
The challenge is verifying claims made. It is incumbent on the investor to make her case – just as it is incumbent on you to prove your value as an investee. You’re entering a partnership so the “job interview” goes both ways.
I’ve met many entrepreneurs who nevertheless fixate on the valuation. Typically this is driven by the belief that all they really need is the money because they have everything else worked out. Even if this is largely true (rare but possible) there are other realities one must take into account.
These can be summarised as three guiding principles:
1. It doesn’t matter what the starting valuation is… only the exit valuation matters – 5% of $100 million is much better than 20% of $10 million.
2. For early stage businesses, it inevitably takes more money and more time to achieve the business objectives than originally planned (even after taking into account this rule). This means you will probably need to raise more money at a price attractive to investors at the time – the starting valuation will become a distant memory.
3. The more heads with relevant experience on your side the better… you’re not in it to be a hero, you are trying to build a business. Tap into quality people (investors and executives alike) – they are rare and valuable – however much you believe you have all the bases covered.
So the short answer is that you should never decide on your investors based on the valuation alone. Sure it has to be reasonable, but investors with operational and/or entrepreneurial skills and, ideally, relevant domain experience will provide you with a far more productive partnership.
I’ve been on both sides of the fence on multiple occasions – take it from me – you want the real deal… not the cheap one!