Q: We are looking for venture-capital money for our one-year-old company. How useful or advantageous is it to have an independent valuation by, for example, a Big-Five consulting firm? Do VCs accept these valuations, and does it help validate the company when VCs are in the due-diligence phase of evaluating a firm? Or is it a waste of money?
A: Having a valuation may not be a complete waste of money for a firm with limited resources but the cash and effort needed to obtain the valuation is best spent elsewhere. For example, if there is a choice between engaging an accountant and purchasing a Yankee Group market report on the firm’s precise focus, the report will be much more valuable. The valuation may provide some ammunition for the negotiations but there is usually a cheaper and more direct way to do this.
Most VCs have their own method of valuing firms and will disregard most figures calculated by other parties. The accountant’s valuation may be great for insurance, taxes, etc. But ultimately, the value set is a combination of negotiation position and market conditions.
Pi Capital Group LLC
Noel Fenton of Trinity Ventures concurs, adding his own firm’s short list of valuation criteria:
Most venture capital firms would not pay much attention to a valuation done by an accounting firm. We base valuation on the management team, market size, strength of the technology, barriers to competitive entry, readiness of the market to adopt (penetration rate), goss margin potential, channel economics, valuation of comparable companies, state of the market, etc. Because we are “in the market” every day, we believe we have a good handle on valuation factors, and are not very influenced by what others think the valuation should be. We see reaching a proper valuation as our job and our expertise. Most venture firms will independently arrive at about the same valuation for a given company at one given time.
You may, however, want to get an independent valuation estimate for your own edification.
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