Charlie O’Donnell has a great post on getting momentum in a seed financing round. He is talking about momentum, but an understated undercurrent is how to get a higher valuation. I’d like to elaborate on one of his points, which is “understanding the social graph of the investors.” Charlie’s point is a great one - that if you can get a group of investors who talk with each other (and invest with each other) to talk about your company then you dramatically increase the chances of closing a deal with them. Thus, he recommends focusing and lighting a fire under one of these groups and using that to push toward a close. He is 100% correct.
However, I’d like to point out that this strategy does not maximize the chances of a higher valuation. I’ve found that angel investors who regularly invest with each other tend not to like to compete with each other - instead they like to co-invest with each other. While this is great if you can get things going, since you are likely able to raise enough capital to hit your fund raising target, it does not help you create an auction type environment where you get a higher valuation. As I’ve said before:
Once one group (an angel group) sets a pre-money valuation I don’t think the other angel groups are going to get into an auction type-process. These groups need each other to fill in bigger financing rounds. One group can’t outbid another aggressively, or they will not be able to find enough capital to meet most startup’s financing needs. A startup can get different syndicates of venture capitalists in a bidding war; I don’t know if this is as easily possible in the angel financing world. It may be a better idea to try to pit a VC against the angel groups if you are really valuation sensitive.
(That quote came from my post on how angel groups are professionalizing)
So, I will moderately disagree with Charlie’s last point of not pitching in too many places. If you are going to get a decent valuation, you probably need a couple of different groups interested - groups that don’t naturally invest together or information share with each other.
