What's the difference between raising money and selling your house?

January 27th 2017 | via:

Valuation expert Joachim Blazer came up with a fun little thought experiment: is there a difference between raising money for your startup and selling your house? Well, there should be none. Here’s why:

Sell your house

You want to sell your house.

So:

-You set a fair price
-To ensure you reach many potential buyers, you put your house up for sale on sites like Funda
-You sell to the first buyer who pays the price
-Because there are many potential buyers, each buyer has an incentive to (1) pay a fair price – otherwise someone else will, and (2) act fast – otherwise someone else will.

The potential buyers compete against each other instead of against you.

Sell your shares

You want to raise money.

In 95% of the cases I see that founders ask only 1 more or less random potential investor for a term sheet and a valuation.

What do you think will happen? Three of these things happen most of the time:

-He will he lowball you
-He will stack the deck by putting in favourable terms like anti-dilution and liquidation preference
-He will take forever to decide

You either accept his offer or go bankrupt. You have zero negotiation power because you have no alternatives lined up.

This is a typical conversation I have with founders:

You: I am negotiating with an investor!
Me: That’s great! How many other investors are you talking to?
You: Uhm, none?
Me: Then you are not negotiating. You will have to accept whatever is offered.

Sell your shares – revisited

Fortunately, this is easily fixed.

You want to raise money.

So:

-You prepare a term sheet, which includes a fair price
-You seek out 3-5 potential investors
-You sell to the first investor who pays the price
-Because there are multiple potential investors, each investor has an incentive to (1) pay fair price – otherwise some else will, and (2) act fast – otherwise someone else will.

The potential investors compete against each other instead of against you. It’s just like selling a house.

Joachim Blazer is a valuation expert and corporate finance advisor at Venture Value. He helps founders raise money. Contact him at hello@joachimblazer.com. The original article appeared on his blog.

Image: Pexels

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