Gregory ShepardArchitect, GregoryShepard.com · GregoryShepard.com · The Startup Architect | Author of The Startup Lifecycle

Don't Out Price Your Business ! | Gregory Shepard | Minute Mentor

12 Mar 2021 · 1 min

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1:07

Gregory Shepard explains that investors expect 2-to-5x returns on their capital, which sets the ceiling for realistic valuations at each funding round. A $10 million raise at 2x implies a $20 million post-money valuation. Overpricing now can trigger recaps, kill future fundraising, or tank your exit.

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A common misunderstanding is that when you're raising capital, you have to understand that the investors want 2 to 5 times on their investment. What that means is that if you're raising capital, you have to calculate what the investors want to get out of the deal in order to understand what valuation you're actually going to have realistically when you sell— when you raise capital. So for example, If you're raising capital at a $10 million valuation, 2x means $20 million. So your company is already at $20 million. If that's your first round, you can see how easily it is to outprice your round, meaning to make your company more expensive than it's worth. That can cause a recap, that can cause you not to raise capital, and on and on. So you need to be very careful and consider the ramifications and actually plan out All of the different rounds all the way up into your exit to ensure that you're not outpricing your business.