July 18, 2022

When it comes to company valuations, startup CEOs need to take ego off the table

When it comes to valuing your startup, don't be distracted by shiny numbers

Katy Wigdahl

5 min read

Katy Wigdahl

The process of finding the right investor is far from straightforward. When we started the fundraising dance for our recently announced Series B it was in the midst of a frothy market at the back end of 2021 — and it ended in altogether different conditions this year.

We were inundated with investor interest and were offered a huge range of valuations — those at the top end were more than 2.5x the ones at the lower end. And though I can’t deny that the big shiny numbers can give you a boost, when you’re raising, it’s not about grabbing the biggest valuation you can get at all costs and self-proclaiming yourself a unicorn — or even a “soonicorn”: save that for your exit.

The terms you agree on — and getting into the details with your investors — are far more important, and it’s critical you take your ego off the table and do what is right for the business and your employees. Here’s the questions you should be asking. 


Are timelines aligned?

The pressure on investors — and therefore the pressure they’ll put on you — to deliver a return within a specific time frame varies hugely. I asked every investor I spoke to where they were in the lifecycle of their fund — how “patient” would their capital be?

This “ticking clock” would directly impact the decisions we would have to make about the business over several years — if we were two years into a five-year fund, for example, our investors could have added a clause into our term sheet that encouraged a sale after three years. 

Do they care?

I spoke to nearly 40 different investors — from both coasts of the US, big banks, big brands, growth investors and smaller niche players — and I was as thorough in my due diligence as they were in theirs. These days, any investor worth their salt will claim to offer more than just deep pockets. Many tout their “platforms” or value creation teams, but you need to look under the hood to work out exactly how real that value-add is. In far too many cases, it’s little more than marketing hot air. 

I was given the contact details of every CEO in our eventual lead investor Susquehanna’s portfolio to speak to them about the nitty gritty. It was important that our investors shared our vision and understood our market positioning and the opportunity. Susquehanna asked the right questions that both challenged us but also demonstrated their insight into our market and technology. Ultimately, your confidence in the practical support your investor will offer is critical, especially as we look ahead at uncertain and challenging times. 

Do the VCs understand your business, tech and mission?

The whole team needed to know that the investor really understood our speech recognition technology and the market we serve — and that they also cared about both. Our commercial objectives will be delivered via a moral one — to understand every voice across the world and significantly reduce the AI bias in a technology that is becoming deeply embedded in so many aspects of everyday life for so many people. 

We needed alignment on that vision, and it was important to hear investors asking the right questions and getting into the issues with the right depth. All investors today care about how you remain capital efficient while also growing ambitiously, so it’s important to be prepared for questions around strategy for innovation, your ideal customer profile and your product market fit and differentiation.

Is the relationship authentic?

It’s imperative that your investors drive value and challenge you to achieve commercial potential — but authenticity is key. We might have the best tech in the market, but we value grace and humility. We needed an investor whose track record and behaviour — rather than aggressive marketing tactics — spoke for themselves.

Integrity is everything and we made sure we chose investors who we believe will back us and our leadership team despite the inevitable challenges and bumps along the way, while also offering true support through their valuation creation team. 

Is the price right?

My job wasn’t to bring in as much money as possible. It was to bring in the right amount of money to execute our ambitious plans, on the right terms and at a valuation that prompted sustainable growth. We came to this by forecasting to work out how much we needed to raise.

We also looked at our dilution and interrogated the specific terms on our term sheet to ensure we had clean terms with no control or vetoes. Unnecessary dilution works for nobody, and frothy valuations only lead to downrounds and disappointed stakeholders — employees included. 


Will your investors deliver the deal?

In 2022, deal “deliverability” is critical. We are already seeing significant price chipping — reductions of up to 30% on valuations — or term sheets being pulled completely. In choosing our investors, we had to really understand their place and confidence in an increasingly chaotic market. We had to understand any exposure or nerves, and feel confident that the deal we chose would actually close.  

Fundraising is hard, because choosing the right investor is hard and keeping your eye on the real prize is hard. Last year’s valuations were crazy and didn’t follow any science. The dry powder in the market led to unsustainable inflation, and we’re now seeing the impact of that — particularly at Series B stage. 

Regardless of the market though, I truly believe you have to take your ego off the table and be pragmatic — evaluate every opportunity in minute detail, and don’t be distracted by shiny numbers. A good investor will be with you for years to come, and the road to global growth is hard enough without disabling yourself with the wrong partner, the wrong terms and an inflated valuation. Good luck out there.