High Valuations May Be Bad for Your Business…And Your Ulcer—PE Hub

An Overly High Valuation Can Scare Away Investors or Spark a Down Round that Dilutes an Earlier Angel Investment     

Mark Boslet at PE Hub explains that with IPOs on track to have their biggest year since 2010 and some major technology disruptions sparking infectious excitement, it’s important to keep in mind key fundamentals including not accepting too high a valuation for your business or investment properties.   Here’s why: 

I was reminded of this by Saad Shahzad, who has been around the venture capital block a few times. Shahzad, presently SVP and chief strategy officer at dinCloud, was an investor at Norwest Venture Partners, and before that a member of the investment banking group at Goldman Sachs.

In a recent note, he offered advice on several fundraising mistakes to avoid. At the top of his list is the suggestion entrepreneurs resist the temptation to accept too high a valuation.

“Taking a high valuation, as many founders do today, could be a big mistake in future rounds,” he warns. “It may seem lucrative now to accept a rich deal from angel investors. But when institutional investors come in for the next round, a high valuation could scare them away or spark a down round and significant dilution for the angels.”

 So how do you know what’s a high valuation?  Things to pay attention to include forward revenue, any multiple you select for that revenue, and comparables from peers in the existing markets.   Boslet also discusses the importance of business capitalization structures, a business’ financial model, a diversified angel investor support network, and a rigorous look at competitors.  

Read the full piece to find out more. 

At PEHub, Saad Shahzad and Mark Boslet discuss the importance of careful valuation metrics and a solid investment plan for small and mid-sized businesses