The fine line between dilution and delusion

It has been stated that there is a fine line between genius and insanity but who’s to tell where one ends and the other begins.  I can also say that there is a similarly fine line between dilution and delusion but this one is easier to draw.  Recently my partners and I were discussing the merits of a term sheet that came in for a portfolio company.  While the term sheet did not meet our expectations 100%, there were a number of strong points.  Unfortunately, the entrepreneur was not terribly pleased as he had a much higher expectation for round size and valuation in his head.  As we walked through the process for the current round of financing, my partners and I clearly understood that while we can guide the market with our pricing expectations, that ultimately the market decides.  So if faced with this situation, my only word of advice for entrepreneurs is that it is important to know that there is a fine line between dilution and delusion.  Talking to 1 or 2 investors does not ultimately give you a great idea of what you are worth and under that scenario I would encourage you to meet a number of folks to get an idea of what the market thinks about your business.  However, if you have already met a number of firms and they are giving you consistent feedback about how much money to raise and at what price, you may be delusional to keep pressing on in search of optimizing a valuation which no one is willing to pay.  In fact, to be clear, valuation isn’t everything and there are many situations where having too high a valuation for an early stage company can be detrimental as it can set unrealistic expectations for your team and your investors.  Being priced for perfection means that:

1. a company that is performing quite well may be still be viewed as a failure in the eyes of the existing investors and team. 

2. your company must really hit significant milestones to raise a next round of funding at a higher price.

3. it may take too long to raise funding to find the right investor who will pay the valuation you are looking for

4. a potentially great exit for your company may never happen because it doesn’t meet the bar for your last round of financing.

So if the market is giving you a strong signal, listen and remember there is more to a financing than price and you need to carefully balance a number of factors such as other terms in the deal, an investor’s ability to add value, and your ability to work with the lead partner and his firm.