If you have ever required capital for your start-up company, you may have an idea of the value of your company when going to the deal table. It is highly likely that there is a deviation between what your valuation is and what the investor’s valuation is at the onset. In order to close this gap, you should be familiar with how to negotiate a lower cost of capital and higher valuation for your company. In many cases, companies are fearful that appearing greedy will push investors away and they will be without any money whatsoever. However, this is rarely the case and the valuation is negotiable like many other things that are for sale.
Therefore, this article provides insight on how to effectively negotiate startup capital financing in a way that is effective and will not draw back investors from the deal table. In some cases, you can potentially risk the overall investment if you fail to follow a structured procedure and remain calculated in your responses and proposal. Therefore, we encourage you to analyze and adopt the following techniques:
Build a Logical Argument
You may be astonished to learn how frequently capital discussions turn emotion or are based on illogical arguments that have nothing to do with value. For instance, arguing how much money you have invested or time spent building the technology really means very little. Instead, focusing on the brand recognition in your early stage or competitive advantage strength can boost the value. In fact, getting emotional or personal about the effort can draw investors away from the investment opportunity. Being emotional may come across as being attached and lacking the ability to think in an unbiased manner about the company’s exit strategy, which is a purely financial decision for investors.
Show the Value Quantitatively
The most effective method of building a strong investment case is to demonstrate the value of the company through the financial model. If the revenue projections are reasonable and conservative, they are more likely to be taken seriously by investors. This means using accurate market research as the basis of the assumptions and being able to adequately explain all of the drivers that went into forming them. For instance, your pricing strategy having been demonstrated in the market through tangible sales or validated in a focus group.
Receive More than One Offer
Nobody likes to feel like they are the only one interested in something. The simple law of supply and demand will always work in your favor if you can get more than one investor interested in your company. This will not only increase your negotiation power, but also build a stronger safety net that grants you more power at the deal table by increasing your leverage. As you receive more offers, investors may also be interested in a co-investment relationship. Under such an arrangement, multiple investors will enter a deal together and reduce one another’s risk. This not only means a potentially higher valuation, but doubles the resources that you have access to from investment acquisition.
Understand the Screening Process
Understanding how investors analyze your company can be advantageous when you are soliciting for these offers. Investors will analyze both the quantitative factors and qualitative factors that will influence your company’s risk and impact your bottom-line. One of the most important points for any investor is what your competitive advantage is and what market problem that you are addressing.
Even if your company does manage to solve a problem in the market, the question then becomes how you are able to sustain your competitive edge in the market. It is extremely likely that investors will compete against you for market share and you must be able to effectively outperform them in a manner that they cannot easily replicate.
We hope that this article has provided you with quality information about how investors analyze your business and the method of leveraging that knowledge to arrive at a higher valuation. We have seen many companies agree to a lower valuation due to the inability of companies to negotiate their valuation.