You're probably pretty insecure about your valuation. Guess what? Everyone is. Founders report that the most uncomfortable moment of their VC discussions is when they get the most important "buying" question of them all:

"What are your valuation expectations?"

Most founders feign confidence and do the standard put-out-a-reasonable-to-high-number in the expectation that they'll end up getting negotiated lower, to a figure that they aren't happy with but can agree to. Others give a range, based on doing some diligence on market comps, and hope that they're somewhere in the right ballpark.

How do you answer that valuation question? Here’s the Goldilocks analogy:

• Do you go a little high? Is that too high? Are our comps right? Are we going to get laughed at?
• Should we ratchet it down? Is that too low now? Are we undervaluing ourselves? Are we going to get the fisheye, when the VC is asking, ‘why is this so cheap? what’s wrong with it?’
• Did you come to that “just-right” figure? Brace for impact, because now they’re going to find a way to negotiate us down…
• We might as well just give a range… that’s the simple answer, right? But is our range so wide that it lacks credibility?

My advice: Valuation is a dark art, and beauty is in the eye of the beholder anyway.

When asked the Valuation Question, here's what the Chosen Ones respond:

"We're letting the market price this round."

There are a number of reasons as to why you should be doing this:

1. You're in demand: It implies that you're speaking with multiple parties, and those parties are coming to you with Term Sheets, and if this VC wants to play ball with you, they should be the ones to provide guidance on how they would approach valuation for this round.
2. Often you'll get an APPROACH, not a hard number or range: In my experience, when you turn around and ask, "How might you approach valuing a company like ours, given the market?" the most common response to this gentle script-flip is a valuation approach rather than a hard number. These would be things like "10-20x EBITDA", "somewhere in the range of 2-4x Revenue," or even "we'd look at the closest transaction comps - many are in the realm of $350-500M pre-money"
3. But when you work through the math, you'll probably even get a higher number: When you run through the valuation approach they come up with, it will likely be good-to-favorable (read: it will probably result in a higher number than the one you'd initially quote) because the market provides a "floor" and they know it better than you do.

But why not give a range or a specific number?

In general, each VC has their own way of looking at valuation. And you better be asking that VC what it looks like, because that VC will almost inevitably be pitching the deal internally to the Investment Committee (IC) on the basis of the valuation approach, rather than the final valuation number. And the IC will be judging any final number against their market-linked yardstick regarding approach.

That's why you might have heard at some point a VC saying: "We just couldn't get there." You might not have understood it at the time, but here's the translation: "Using our internal approach to valuation, we couldn't achieve the number / range you stated you were looking for."

The important part is the valuation approach. The final number is an outcome of that approach.

When you throw out a number or range, you've set the negotiating range, and have potentially glossed over the more important discussion on the approach that the VC might take to get to a valuation.

Follow it up with, "How might you approach valuing our business?"

When asked your desired valuation, consider going with "We're letting the market price the round. How might you approach valuing this business?" Have that discussion on approach, and you'll end up with some far more interesting information that'll help guide your raise.

(And if you're like us, you'll build that in as part of your Financial Social Proof in your next discussion - for example, "We're letting the market price the round - and so far, other firms who expressed an interest in leading the round have indicated they would look at valuation somewhere in the realm of the 12-18x Revenue range." If you don’t see the value in a statement like that… well then I don’t know, I guess we can’t be friends 😉)

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Yes, valuation is a dark art, and in fact I suggest all founders who don’t want to lose their shirt get smart on it, and fast. Structuring funky deals where you can’t figure out the dilution is the hallmark of an aggressive VC, and YES, they DO EXIST. You don’t need to convert to the dark side, you just need to know their tricks.