Early stage startups should generally remain flexible on valuation. If you set your valuation too high, you run the risk of filtering out investors you might really want.
When startups are focused exclusively on price above all, the best investors often self-select out. If you set it too low, you can send a signal that you don’t know what you’re doing. Either way, you’re signaling inflexibility and sending a message that valuation matters more to you than building the best possible team.
For startups, I generally advocate not going to the investor market asking for a specific valuation. Instead, go with a specific amount of money that you want to raise that is appropriate for your stage and your audience. Pitch your company and your vision and you will start the conversation off with excitement and opportunity.
Let the valuation come to you early on by going out to the market with extreme flexibility. Focus on looking for great investors. The response that I always recommend startups use when investors ask about valuation expectations early on is “I’m expecting it to be a valuation appropriate for our market and our stage, but I value the investors and what they bring to the table so I’m flexible.”
Recognize that many investors ask this question early on just to figure out if you have a clue or not, and they realize that they’ll ultimately drive pricing anyway unless there is heavy competition for the financing round.
The best way to build momentum is to get someone excited about what you’re doing. Often this person will turn into your “lead” investor. Then you can work with that investor to get an offer or negotiate a valuation. Of course there are some situations where you would eventually want to set the valuation.
For example, in a round where there is no clear lead investor but there is enough soft commitment around the table to complete the round, you can work with the most influential investor to set a mutually acceptable valuation. Then you would seek input from the second-most influential person, then the third-most influential, and so on down the line.
Generally speaking, you want to avoid going to market in a “valuation first” fashion. By remaining flexible, you’ll demonstrate that you value the investors you’re pitching to and you will start the conversation off on the right foot.
This post recently appeared on The Accelerators at the Wall Street Journal, where startup mentors discuss strategies and challenges of creating a new business.