The myth goes like this: investors respect ambition, so you should go in with the biggest valuation you can justify. A high number signals confidence, protects the founders from dilution and shows you know what the business is worth. Ask for the top of the range and let them talk you down.
The reality
Investors are not buying your confidence. They are buying a share of future value at a price that leaves them room to make a return. Every pound you add to the valuation is a pound taken out of their upside. A price at the very edge of what you can justify tells them there is little room left.
It also changes how the conversation goes. A stretched valuation invites harder scrutiny of every assumption behind it. Instead of discussing the business, you spend meetings defending a number. Some investors will not bother to argue. They will simply pass, and you will never hear the real reason.
The bigger risk comes later. If you raise this round at a price the business cannot grow into, the next round may have to be priced lower. A down round, as it is called, hurts everyone: earlier investors are diluted more heavily, the team’s options lose value, and new investors ask what went wrong. A modest price that the company comfortably beats is a far better story to tell next time.
The right valuation is the one that gets the round closed with good investors and leaves the next round an easy step up.
Why the myth persists
- Headlines. Large valuations make news. Sensible ones do not, so founders see a distorted picture of what is normal.
- Dilution fear. Founders feel every percentage point they give away. A higher price looks like the only way to keep control.
- Anchoring. There is a belief that you must start high so you can concede ground. With experienced investors, an overreaching opening can end the talks rather than start them.
- Confusing worth with price. A business may well be worth a great deal in five years. The price today has to reflect the risk of getting there.
What to do instead
Start from what the money is for, then work out a price you can defend line by line.
- Set the raise by milestones. Decide what you must achieve before the next round and how much it costs to get there, with a buffer. The amount comes first; the valuation follows from how much of the company you are willing to sell for it.
- Find honest comparables. Look at companies of a similar stage, sector and revenue. Be realistic about where you sit among them, not where you hope to sit.
- Test your assumptions. Ask someone who has no stake in the outcome to challenge your forecast. If a number cannot survive a friendly question, it will not survive an investor.
- Think about the next round now. Sketch what the business needs to look like for the next raise to be priced higher. If that looks like a stretch, your current price is probably too high.
- Value the investor, not just the price. The right backer at a slightly lower price can be worth more than the wrong one at a higher price. Experience, contacts and patience all count.
Your pitch should make the case for the price without shouting about it. If the deck explains the market, the traction and the plan clearly, the valuation should look reasonable by the time the reader reaches it. Our guide to the pitch deck investors actually read covers how to set that up.
A quick check before you set your number
- Can you explain how you reached the valuation in two or three sentences?
- Would you be comfortable if an investor checked every comparable you used?
- Is there a believable path to a higher price at the next round?
If any answer is no, revisit the number before you send a single deck. A fair price is not a sign of weakness. It is a sign that you understand the investor’s side of the table, and that usually makes the raise faster.
This article is general information, not financial, legal or tax advice. If you are planning a raise, talk to BDM Capital.
Frequently asked questions
No. A high valuation that the company cannot grow into makes the next round harder, can trigger down-round protections and can leave founders worse off than a lower, defensible valuation would have.
A later funding round at a lower valuation than the previous one. It dilutes existing holders more heavily and can trigger anti-dilution clauses that transfer further value to earlier investors.
As one term among many. Investor quality, governance rights, liquidation preferences and the realism of the next round matter as much as the headline number.
