Valuation is all about all alignment. When we’re working on a round together we have to align each of four factors.
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Capital: how much you’ll raise and spend
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Valuation: the price you’ll raise it at
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Inputs: what you’ve done to date
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Outputs: what you will do with the money
Easy to say, hard to do.
Setting up a round and a plan means thinking about how each of these factors relates to each of the others. They all have to be in harmony together for things to work well.
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Capital and outputs are efficiency and use of proceeds. Spending too much money to accomplish too little is an inefficient, bad bet.
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Capital and valuation are dilution. I need my ownership, you want to retain yours. Those are mutually exclusive but only problematic at the limit (where either I don’t make money or you don’t make money). Lets be reasonable and fair.
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Capital and inputs are credibility and track record. Where’s the evidence you can spend the money well? Have you earned the right to invest more and how much more? If you can’t spend it efficiently, you’ll spend it inefficiently. Don’t over-raise.
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Valuation and inputs are risk. What have you done relative to how much I’m paying for it? How are we pricing the risks and cards left to turn over? Bad risk leads to bad returns.
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Valuation and outputs are expectations. What kind of bar are you setting to stay in the game and raise more money? If you set that bar too high relative to what you can accomplish, you’re building a bridge to nowhere.
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Track record and outputs are card flips, the key mechanism to creating value. How many things have to go right/how much do you need to prove to get from where you are to where you’re going?
If we’re ever across from each other at the “negotiating table” I’ll push you on each of these and expect to be pushed in turn. Doing a deal together is just as much about deciding to work together (can we communicate honestly and openly) as it is about deciding what to work on (is this a race worth winning). Otherwise it’s empty calories in a zero sum food fight.
I wrote
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There’s real costs, downsides, risks in getting too rigid and too systematized too early. You may wind up hitting local maxima at the expense of global potential.
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It’s ok – necessary even – to keep devoting resources to things that don’t scale even as your business does. Those random walks are how you’ll find your next breakthrough or phase shift that breaks through the slope of incremental progress.
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Credit to Nikhil Aggarwal for coining the term which I will shamelessly steal.
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If you can’t generate inbound, you can’t afford to do outbound.
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Looking ahead, the only possible answer is build businesses on the back of brand, owned distribution, network effects, and virality. Growth needs to organically, structurally compound off the back of earned advantages or your CAC will just get worse until you die.
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Mailbag
I’m doing my first ever mailbag and reader survey. You can submit questions here.
I’ll be taking questions (anon or named) here and answering them in a mailbag post in the coming weeks. AMA – I’m a pretty open book and definitionally you care what I have to say if you’re reading this.
You can of course just directly email me your Qs, tweet them at me, or leave them as a comment here. LMK if you want to be anon or named. No snitching.
NYC SMB Summit
Entrepreneurial culture in America is changing. It’s time to double down on platforms powering, orchestrating, and catalyzing long-tail entrepreneurship in the real economy.
Come join us for panels and a portfolio demo night featuring leaders empowering real world entrepreneurs, including:
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Michael Brown: co-founder and CEO, Teamshares
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Michael Garrison: Chick fil-A Innovation and New Ventures
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Chat Joglekar: co-founder and CEO, Baton
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Dan Friedman: co-founder of Moxie and Meadow Memorials
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Brad Hargreaves: Thesis Drive, Common, and General Assembly
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Cole Riccardi: founder and CEO, Authentic
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Oren Falkowitz, co-founder and CEO, Area2Farms
