Has anyone had issues with too high of a seed-stage valuation?


3

I was sitting down with an experienced entrepreneur a few days ago who was telling me about a guy he was advising who was having no luck raising a Series A round. Apparently, when he got seed money from friends, family, and fools, he was a great salesman and got a pretty high valuation. Now, as he is dealing with sophisticated investors, the valuation he is pushing is 2x - 3x what his company should really be worth, and nobody will give him money. Further, even if he does raise a Series A of 1.5M or whatever he needs, he's still going to need another round of 5M or so to do what he is trying to do, and eventually he'll have to take a down-round, which will obviously not sit well with his current investors.

My response was: "Wow, I hadn't really thought about it that way. I guess I had just assumed that it was advantageous to the entrepreneur to give away as little equity as possible to get as much seed as possible from the get-go." My friend went on to explain that, no, having too high of a valuation is one of the worst mistakes young entrepreneurs can make, and that he has seen companies literally torn apart because early investors refused to take a down-round and would sue to prevent it. Obviously, when investors are suing their entrepreneurs, no sophisticated investor will touch the company.

Has anyone seen or experienced this issue?

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asked Feb 6 '10 at 06:53
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Frederick Cook
301 points

2 Answers


1

Absolutely. If you set your valuation way outside the normal parameters, then institutional investors will stay away.

http://venturehacks.com/articles/seed-valuation http://www.entrepreneurship.org/Resources/Detail/Default.aspx?id=11242

answered Feb 6 '10 at 07:17
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Jim Galley
9,952 points

1

Yes, this is entirely possible. Entrepreneurs should not simply solve for the highest possible valuation.

Another risk is that deals signed might trigger undesirable things when doing a down-round in the future.

answered Feb 8 '10 at 10:17
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Dharmesh Shah
2,860 points

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