Category Equity Financing

3 Key Reasons a High Valuation could kill your Startup

A major problem that many startups encounter when they embark on the capital raising process is to have a high valuation that scares investors away. There are three key reasons this will become a problem for you.

The 3 key reasons are:

1. Investor will not take a meeting, or if they do, they will not take another and they will have lost a lot of respect for you as a founder. First impressions last and a first impression of a founder with their head in the clouds never goes away.

2. Smart and strategic investors that add value to your startup will not pay high valuations and you want to attract investors like these from the beginning. Having high value investors that help you grow can make the difference between success and failure. They will also help you achieve a higher valuation in the next round, one which other investors trust because of the quality of the investors in the last round.

3. A high valuation creates significantly more challenging milestones and objectives you will need to hit than if you’d start with a lower valuation. If you miss any of these milestones then investors will lose confidence in you and your business, possibly resulting in a “down round” (where you have to raise capital at a lower valuation than the last). A down round is the kiss of death for a startup.

by Jeremy Liddle, cofounder and CEO of CapitalPitch, Australia

Top 10 Lies of Entrepreneurs (and Investors)

Read these two sets of top ten lies: one of entrepreneurs and one of investors, so that you know what not to say and what not to believe.

Top Ten Lies of Entrepreneurs

1. “Our projections are conservative.”

2. “Jupiter says our market will be $50 billion in ten years.”

3. “Several Fortune 500 companies are set to do business with us.”

4. “No one else can do what we’re doing.”

5. “Hurry up because other investors are about to do our deal.”

6. “Our product will go viral.”

7. “The large companies in our market are too big, dumb, and slow to compete with us.”

8. “Our management team is proven.”

9. “We filed patents so our intellectual property is protected.”

10. “All we have to do is get 1% of the market.”

The average number of these ten lies that I hear in most pitches is ten. At the very least, tell investors new lies.

Top Ten Lies of Investors

1. “I liked your company, but my partners didn’t.”

2. “We are patient investors who want to help you build a great company.”

3. “If you get a lead, we’ll invest too.”

4. “There are no companies in our portfolio that conflict with what you’re doing.”

5. “Show us some traction, and we’ll invest.”

6. “We love to co-invest with other firms.”

7. “We’re investing in your team.”

8. “We have lots of bandwidth to dedicate to your company.”

9. “This is a plain, vanilla term sheet.”

10. “We will get other companies in our portfolio to work with you.”

Do you know what the difference is between the lies of entrepreneurs and the lies of investors? The investors have money.

It’s not all bad news. Think of everything that an entrepreneur needs (tech ones, anyway), and you’ll see that most things are free or cheap.
Marketing: use blogs and social media to promote your products.

Tools: most tools are Open Source and free. Microsoft offers free versions of applications like Word, Excel and PowerPoint in the cloud!

Infrastructure: More cloud goodness-you don’t have to buy servers anymore.

People: callous for me to say, but in a recession, people are free or cheap.

Office space: what office space? You can work out of your garage (like David Hewlett and Bill Packard) or just form a virtual team.

The bottom line is this is one of the cheapest times to be an entrepreneur, so go into your garage and start prototyping.
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By Guy Kawasaki

Guy Kawasaki is the author of Enchantment: The Art of Changing Hearts, Minds, and Actions. He is also the co-founder of Alltop.com, an “online magazine rack” of popular topics on the web, and a founding partner at Garage Technology Ventures. Previously, he was the chief evangelist of Apple. Kawasaki is the author of nine other books including Reality Check, The Art of the Start, Rules for Revolutionaries, How to Drive Your Competition Crazy, Selling the Dream, and The Macintosh Way. Kawasaki has a BA from Stanford University and an MBA from UCLA as well as an honorary doctorate from Babson College.