Middle Market Deals and how to buy, sell and raise capital from $5 to $500 million

Let the investor tell you what they think the valuation is then negotiate from there. Its just like any other negotiation - the guy who gives his number first loses.

Of course, the investor won't do that. I don't think it is fair, good, right or proper for the investor to insist that an entrepreneur provide a valuation up front before he decides whether to investigate your deal at all, but if he does, I think responding with a real number is the only way to keep the discussion going. I think it is fair for an entrepreneur to decide not to play the game on the investor's terms, but I think that means meaningful discussions with that investor are over. If the entrepreneur is ready for that outcome, it may be the perfect strategy.

Devin,

First of all, thanks for attending the event -- we had nearly 40 early-stage investors in attendance yesterday!

Great question... I started to respond and realized that I might leave a novel in your comments section so I just left the response on my blog. Let me know what you think.

Brock

I've heard that same question. Having seen all the same pitches yesterday I'd suggest this answer as an entrepreneur: "We'll discuss valuation with seriously interested partners".

That question's often used as a crutch. Investors love these "hoop tests" (as in, can I get the entrepreneur to jump through mine.)

Entrepreneurs need to be just as picky since they can spend a lot of time talking to someone who will never end up funding them. I can't see that the answer above would turn off any seriously interested potential investor.

Jeff,

I like your answer. It works for me from a negotiating standpoint because it is a legitimate reason to push off the price/valuation discussion. It is also a good reminder that not all investors are serious and are ready to proceed. It think it is important for investors to realize, too, that entrepreneurs to conduct due diligence on the investors while the investors are doing their diligence. Your response helps to identify which investors will be a good fit for an entrepreneur.

ddt

Great post Devin. This is a very interesting issue. I have been asked this question in my personal experience as an entrepreneur. It seems like nearly a no-win situation for the entrepreneur. I like Jeff's response as well but I would also add this thought. I believe that most VCs ask this question not as a negotiating tactic but as a test of the the entrepreneur's thought process and expectations (maybe I give to much credit to the VCs). If we can assume the question is asked for that purpose (part of the time at least), I think entrepreneurs need to be ready to respond confidently and with a well thought out response. This may be possible without offering a valuation number. For example, "Our model is driven by........ using assumptions that align with industry data such as..... (demonstrate knowledge of the market) and valuation is based on multiples used in the following comparable deals (demonstrate knowledge of the deal market)." I think concluding with Jeff's suggestion "We'll discuss specific valuation with seriously interested partners" is then appropriate. Your opportunity to have further discussions with a VC will not turn on the answer to this question if you have a company that has merit. i view this question as an opportunity to show that you understand valuation and its components.