Startups · Entrepreneurship

How important is the valuation vs. the investor that gives you the money?

Sahedi Khan Internet Marketing Executive & Web Developer

September 13th, 2016

A friend of mine received recently two term sheets for his online marketplace. One of the term sheets was significantly higher than the other one. The lower valuation came from a very sophisticated and top tier investor in the valley while the other came from a less active investor in the startup space. Which one should he take and what are your thoughts?

Mike Bebel Digital Media Executive/Entrepreneur

September 13th, 2016

Important question. If the "sophisticated investor" is truly committed and can clearly bring added value that will directly impact the business, then they are worth the premium. However, this takes real due diligence on the part of the founder/management team to clarify and understand. The last thing you want to do is give away value for a marquee name and find that the return to the business isn't realized. Understanding who in the firm will be involved, their track record, domain knowledge and personal commitment of time to bring success to the venture are among the important items to clarify and are key components of the value exchange.

Michael Leeds CEO & Founder

September 13th, 2016

He should be very realistic about what the "sophisticated" investor can actually deliver more than the $$$. Can the investor help with recruiting, actual customer introductions, bringing other investors into the deal, etc? It's easy to overestimate the value an investor will add beyond the money. But real help, especially at the early stages, can be incredibly valuable -- it just needs to be considered realistically.

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

September 14th, 2016

A word of caution. "Valuation" is more than a number stated in a term sheet. It's apples to apples if the other terms are identical, otherwise, not so much. A detailed analysis of terms, with a sophisticated advisor, would make sense.

Valeriia Timokhina Eastern Peak Software: Custom software development

September 16th, 2016

The answer depends on two factors. First, is the difference in numbers really huge? Is project starving for some extra money at the moment? Or it can stay afloat even with a less sum?
Second, the expertise can be much more valuable in the long run. You have to decide what will be more important in your situation - experienced investor or the extra resources.
By the way, I'd like to share this useful article, maybe it will be helpful to someone: How to create an MVP that can get your startup funded
Information about how the MVP helps to get investors for startup and what features they will be looking for in your product.