You're facing founders with rigid valuation expectations. How can you navigate negotiations effectively?

Founders are devoted to their startups and always ask for higher valuations. It's common for them to pursue higher valuations for their startups. As investors, we generally use current revenue multiples or DCF models, while entrepreneurs estimate it based on projected future revenues, sometimes neglecting sector and market discounts. I use a two-step approach. First, I explain how valuations are determined in our industry using examples. Then, I illustrate why the other startups' investment rounds were closed at those specific valuations. If the founder remains insistent, I suggest they continue sending us regular investor updates throughout the investment round and contact me after receiving the first term sheet.

To navigate negotiations with founders who have rigid valuation expectations, start by building rapport and trust to understand their motivations. Present data-driven insights using market data and industry benchmarks to support a realistic valuation. Emphasize the non-monetary benefits you bring, such as strategic guidance and industry connections, to demonstrate added value beyond capital. Offer flexible deal structures like earn-outs or performance-based milestones to align incentives. Focus on common goals and educate founders on market realities using examples of similar deals. Be prepared to walk away if necessary, and consider using an independent third-party valuation to provide an unbiased perspective.

As an investor, I've found that navigating valuation gaps with founders often requires a focus on shared vision and collaborative problem-solving. Start by emphasizing the long-term growth potential of the company and how your investment can accelerate that growth. Then, propose a milestone-based valuation approach where the company's valuation increases as it achieves pre-defined milestones. This aligns the interests of both parties, motivating founders to achieve growth targets while ensuring that investors are rewarded for their contributions. By focusing on collaboration and shared success, you can overcome rigid expectations and create a win-win scenario for both the founders and the investors.

In addition to understanding and leveraging data, it is crucial to recognize and address the psychological factors that contribute to rigid valuation expectations. Founders often have an emotional attachment to their company and may overestimate its value due to factors like sunk cost fallacy or a fear of losing control. As an investor, it's important to acknowledge these emotions and approach the negotiation with empathy and understanding. By building rapport and demonstrating your commitment to the company's success, you can foster a more collaborative negotiation environment and guide founders towards a more realistic valuation.

Im Endeffekt müssen Investoren verstehen, was die Gründer nicht alleine können und wozu sie Hilfe brauchen. Es geht um die Pains, Gains und Jobs der Gründer, und nicht um die Eigenansichten der Investoren.

I work with founders to discuss the downside of their valuation. They often don't understand how a future down-round could impact their business, prevent an exit event, or that they are beginning to enter the entrepreneurial ponzi scheme of hitting growth rate metrics. I find those understanding these three points often are willing to back down off their valuations and consider something more reasonable --> often allowing for decreased pressure to hit unattainable metrics.

Investments in Firmen sind immer Investments in Menschen. Daher haben Emotionen eine hohe Bedeutung. Beide Seiten (die Gründer und Investoren) wollen monetäre Vorteile, Sicherheit und Stimulanz aus dem Abschluss einer Zusammenarbeit ziehen.

Es braucht auch Flexibilität bei der zeitlichen Planung der Zahlungen (Investment und Earn-Out), bei der Art der Beteiligung, bei der rechtlichen Struktur, bei den beteiligten Personen und Höhen. Umgekehrt braucht es aber klare Entscheidungen dann für den endgültigen Abschluss der Beteiligung.

Data is the objective truth in perception, though can be subjective. The representation of data depends on your analysis, which inherently introduces biases. Masterful data analysis is about storytelling with your data as it is a trusted character by all -- even though it is a character essentially by you.

Welchen Mehrwert kann ein Investor überhaupt einem Gründer bieten? Es geht nicht nur um das, was der Investor als seinen Mehrwert versteht, sondern vielmehr um das, was Gründer von Investoren benötigen. Also welche Pains, Gains und Jobs haben Gründer, bei denen sie alleine nicht weiterkommen?

If you're facing founders with rigid valuation expectations, you navigate negotiations effectively by - 1. Giving a fair chance to speak and explain how he arrived at this number. 2. Explain the context of how you're valuing it and you should always respect the business emotion while explaining as most startups come out of a need and followed by emotion. 3. Give a few market research data for its direct or nearest competitors. 4. Now add what other than just the monetary you're bringing to the table, say your extensive network, your resources, and services at subsidized rates, etc 5. A co-believer in the dreams rather than just an ordinary investor. 6. Allow him some time and tell him to rework his numbers based on some market research.