Gregory Shepard explains why founders set valuations too high without considering eventual exit prices. Investors typically want 2-5x returns, but founders often ignore what acquirers have historically paid. Research your target buyers on Crunchbase and model future funding rounds to avoid mismatched expectations and dried-up capital.
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I think it's important to talk about overvaluation. A lot of businesses that I see on an ongoing basis, they come in for investment capital. We look at the business and they set their valuation at a certain price, but they don't understand how much they're going to end up selling their business for down the line, right? So, and most investors and most accelerators and mentors and all this sort of thing, they say, you don't need to know that right now. You're going to sell it for as much as you can later on down the line. The problem with doing that is that if you don't have some sort of an idea in the first place, 2 things happen. The first thing that happens is maybe at the very beginning, you start out with like a $5 million valuation, and then you raise $2 million. Now you have $7 million. The investors want 2 to 5x on that. So a lot of the entrepreneurs are thinking, oh, you know, I'm at— I'm in it for $7 million, but they're really in it for $14 or $28 million. And what the problem with that is, is that that early in the game when you're on your first round or maybe your second round, you haven't thought about all the rounds that are going to be happening down the line. And if you haven't thought about that, you can get into a position where you're overvalued. The second thing is not understanding down the line again, if your ideal customer profile— sorry, your ideal acquirer profile is a certain company, and then you look at their history, which you should do when you go through their ideal acquirer process to figure out who these acquirers are. You can see a history. You can find this in Crunchbase and a lot of other places where you can see the business buying other businesses. You can see a pattern. They have never bought a business over $25 million, $50 million, something like that. And so if you don't think about that early on, you can get into a position where You— your investors already expect more than it looks like you're going to be able to sell your business for. Now they're going to stop making investments into your business, the money will dry up, and a lot of businesses go out of business because of this. I hope this helps everybody.
