Steve Goldberg is a partner at Finistere Ventures, an early-stage venture fund focused on food, agriculture, and sustainably feeding the world. This is our sixth article from a single half-hour interview.
I have always found it difficult to find anyone who will give me simple, straightforward, sensible answers to valuation questions for early-stage companies. The few principle discussions I have seen are based on variants of the Berkus Method.
It should surprise me that Steve has a surprisingly simple take on it.
If they raised money before with a priced round, presume that it was priced correctly and evaluate the progress they've made since then. This is very common and as a result, mispricing of an early round is often compounded in later rounds. I have seen various “creative” methods to make the early round valuation look higher than it actually was in order to exploit this.
To combat this, Steve looks at valuations of comparable deals within the space.
There is an information asymmetry here as the professional investor has access to a lot more information about comparables than the startup company does. One of the key functions of a good startup lawyer is to be able to provide the startup with information of similar quality.
For brand new companies that haven't raised money, Steve says that it is just too hard to agree on fair valuation and he generally ends up using a convertible note. He says that there normally just isn't enough information to find a fair valuation.
I am told by others that the use of such a note on average gives the startup that stays on track about a 20% advantage over getting a valuation set at that point. It also protects from the embarrassment of a down-round when things don't stay on track.
In the case where the company is no longer brand new, but all the previous rounds have been convertible notes, Steve relies heavily on comparables and can use them effectively with the greater amount of information that the long history of the company has created.
After learning what the expert experts do, I feel less lazy in my use of convertible SAFES, thought on the investor side of the transaction, perhaps I will start negotiating a little more strongly on the caps.