Behind the scenes #2 | Greed is shortsighted
היIf you’ve just entered the ring and are about to start your first (or maybe a new) round of financing, you’ve come to the right place. We will take you behind the Venture Capital scenes, revealing how we think the process of securing financing is best managed, what sorts of things we are looking for, and what strategies are most likely to knock your project out of the ring and further contention. We hope this will help you understand VC that little bit better and allow you to run your business with greater awareness all the way towards a masterful exit. We keep our fingers crossed for your next round and hand you over to Wojtek & Daniel.TDJ Pitango Ventures team
Greed is shortsighted!Many founders would like their startups to achieve the highest possible valuations as quickly as possible. We know that, especially at the start of your journey, this sort of perspective is particularly appealing. It’s great when you believe in yourselves, your project and the chance of monetising your ideas, because this shows how motivated you really are. Yet, you must keep in mind that there is a trade off between quick increases in valuations at the start of your journey, and the overall perspective of creating a sizeable and sustainable business. Over-inflated valuations, especially early on, can lead to a whole host of unwelcome consequences, which will in the long term negatively affect your relations with existing investors, while also scaring off new partners, which in effect can limit the chances of you securing financing for further project development.You have to keep two things in mind – most VCs, and this includes us, will take a careful look at startups before investing in order to adequately assess both technological advantages and adequate business models, as well as the risk involved in achieving the expected scale of business operations and the dangers involved. Thanks to our detailed analyses, the valuation we come up with will be a reflection of the development stage a startup is at and the level of risk involved in each undertaking. A difference in the expectations we will have in terms of valuation will lead to us saying “pass”.Even if you manage to convince a VC to invest when the price is too high, it might turn out that you will voluntarily enter a vicious circle where you raise your price, while we – as a result – expect faster and more meaningful effects which will ensure an increase in startup valuation in the next round. Yet if this should not happen, we will begin to doubt your business model. This will lead to other investors beginning to have doubts… causing you problems securing financing at subsequent stages. In this way, you will get stuck in a “vicious cycle of pressure and difficult to meet expectations”.
Rule of a thumb – first, focus on the best investor you can get. Second, try to agree on a valuation acceptable for both sides. Don’t sacrifice #1 for #2 – it’s not worth it. This is the long game, and in the long term #1 will make all the difference. Wojciech Fedorowicz
As a VC organization, we like our companies to clearly exemplify and pursue a determined and ever increasing value proposition. This should lead to new investors being convinced that the company will command the highest possible value in the market at their stage of growth. Besides showing an increase to shareholders’ value, the “ideal” valuation needs not be optimized for the current round. Instead, it should allow for next 1-2 rounds following smoothly and making investors free of worries of a negative price adjustment to keep the funding coming-in in the future.Daniel Star
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