Valuation Tug-of-War: A Strategic Game Between Founders and Investors

“"The company founded by this professor was too expensive, and the price could not be agreed upon.".” Fu Jun (pseudonym), an investor who has long focused on the healthcare sector, lamented that he had lost in a valuation tug-of-war with a founder.

Likewise, during his career he has been involved in some projects that were inherently promising, but becauseThe founder’s insistence on an excessively high valuation has resulted in the failure to secure funding even one year after launching the financing plan.This not only causes companies to miss their optimal growth window but also easily leads to significant negative repercussions in the capital markets. He stated, “The investment community is relatively small; if news of unsuccessful fundraising efforts circulates for an extended period, even ventures with strong prospects can easily be mistaken for poor-quality projects.”

Both investors and founders often find themselves stuck on valuation issues during the financing process. The reason is simple: valuation not only reflects a company’s current market value and potential but also directly influences investors’ decision-making regarding investments in the company.The valuation tug-of-war between investors and founders is a very normal phenomenon..” said Fu Jun.

Investors, by leveraging the existing marketCognitive Discrepancy, make corresponding investments to generate profits.

More specifically, investors identify a company with strong future prospects. Although risks persist in the current stage, investors can seek certainty of success amidst uncertainty, thereby creating investment opportunities. After investing, if the company achieves robust growth over the subsequent years and its valuation increases multifold, investors can exit at an opportune moment to realize high returns on investment.

“Investment profits are derived from judgments about future risks and prospects, which are reflected in changes in valuation.“said Fu Jun.

It is easy to identify the common traits among investors who profit from cognitive asymmetry: when investing in sectors they deem promising, they are either willing to accept project risks or capable of controlling them. By investing before these risks are fully realized, investors can secure a larger equity stake with less capital at a more fair valuation at the current stage. This approach enhances return on investment and boosts capital gains. In this process, investors bear the project risk and capture the value differential resulting from post-risk resolution valuation adjustments, while their assessment of such risks constitutes their cognitive advantage.

In contrast, founders often overestimate the potential and value of their ventures or projects, leading them to underestimate current risks, lack objective valuations, and maintain inflated valuation expectations.

Therefore, during the investment process, the valuation tug-of-war between investors and founders is often due toResulting from differences in perception between the two parties regarding the enterprise or project. Investors determine investment amounts and valuations based on their own judgment and expectations, while founders, holding an optimistic view of the future of their enterprises or projects, form their own perceptions of value.

Even investors ultimately need to examine how valuation assumptions are constructed within valuation models. “However, I have never seen founders and investment institutions reach a consensus on valuation simply by sitting down and running the numbers through a model,” said Fu Jun. In fact, valuation methodologies such as the P/E ratio, P/S ratio, P/B ratio, and EV/EBITDA can indeed help investors determine a relatively accurate valuation range, provided certain conditions are met and various factors and data points are taken into account.

However, in today’s investment landscape that prioritizes early-stage and small-scale ventures, the valuation figures derived from models become increasingly distorted for earlier-stage projects. On one hand, every valuation model has its specific scope of application; the variables in the formula are valid only when their underlying assumptions are met. On the other hand, early-stage projects typically lack historical financial data and reliable market benchmarks, while also facing high levels of uncertainty and risk. As a result, the computational variables across various dimensions hardly reflect future realities.

Therefore, in many cases,The valuation of early-stage projects is often negotiated between investors and founders, taking into account a variety of factors.

This is also a company spun out of scientific research achievements. Its CEO is Xia Peng (a pseudonym), who has already gone through three rounds of financing. He has accumulated considerable insights into valuation negotiations with investors. He told VCBeat,Startup Founders Must Not Be Misled by ValuationsWhen the market is hot, most founders tend to raise valuations to demonstrate their companies’ future growth prospects. However, when the market turns cold, founders are forced to lower valuations; at that point, even if they wish to negotiate with investors, securing financing becomes extremely difficult.

“Valuation should be the founder's most fundamental understanding of the enterprise..” he said.

Regarding valuation, he stated candidly that founders need to rationally calculate how much capital is required in the early stages, what it will be used for, and over what period, and then determine the valuation range based on the equity stake being offered. Before product launch, companies should clearly account for costs such as hiring full-time or part-time staff, legal fees, and operational expenses. This funding must suffice until the company’s next financing round or its next major milestone. To safeguard against unexpected contingencies, companies should also maintain a cash reserve covering several additional months of operating expenses.

In addition, to calculate a more reasonable valuation, Xia Peng stated that he would alsoLinking the primary and secondary markets“After all, every company that has raised funding aims to enter the secondary market. By identifying comparable companies in the secondary market, our current valuation can serve as a useful reference prior to filing for an IPO,” he said.

In formal negotiations with investors, Xia Peng also prefersFirst, clarify with investors the amount of funding the company requires, and then specify the company’s current valuation range.“Generally speaking, deals do not fall through due to valuation disagreements. If investors are truly keen on investing but find the company’s asking price too high, they will certainly try every possible means to persuade us to adjust the valuation to a level satisfactory to both parties,” Xia Peng told Chengguo Bureau.To date, he has not lost financing opportunities due to valuation issues.

What rationale can persuade founders to adjust their valuation? One isCompetitor Analysis“Generally, investors help us identify a comparable company whose business is similar to ours, though its development stage may be somewhat ahead of or behind ours,” said Xia Peng. By using a comparable company as a benchmark, investors enable founders to evaluate their company’s valuation more objectively, minimize subjective biases, and persuade them to adjust the valuation based on existing market examples.

Another isBaseJin's Self-Worth“Most founders recognize the value of our institution,” said Fu Jun confidently.

First, during valuation negotiations, top-tier funds have accumulated extensive investment experience and possess strong professional expertise and insights. This gives them greater “confidence” and a more balanced, composed demeanor when negotiating with founders. Second, top-tier funds offer significant value-added support: their high brand recognition and reputation can bring additional benefits to founders, as their endorsement helps attract greater attention in subsequent funding rounds. Finally, these funds provide robust resource and network advantages, typically maintaining extensive investor networks and comprehensive post-investment services that offer founders greater support and assistance.

Amid the tug-of-war over valuation, investors and founders are constantly balancing their respective interests. In this process, financing advisors such as financial advisors (FAs) may become involved. However, regarding FAs, Xia Peng believes that,FA can only serve as a bonus factor., and cannot be regarded as the essence of financing.

“The essence of fundraising lies in founders having a clear understanding of their own companies. If the project’s valuation has not been thoroughly calculated, the involvement of a financial advisor (FA) is of limited use. An FA can only strive to raise the valuation as much as possible within a reasonable range,” said Xia Peng. Similarly, Fu Jun believes that while experienced FAs will discuss valuation ranges with founders, the final decision ultimately rests on the founders’ own judgment.

Let us revisit the failed valuation tug-of-war between Fu Jun and the founder. It is understood that the company Fu Jun approached had already reached a valuation of several hundred million yuan at the angel round.

In fact,Early-stage project valuations are heavily tied to the sector in which the project operates and the composition of its team.. Valuations vary significantly across different projects and teams. Projects backed by star teams or operating in high-profile sectors often demonstrate promising market prospects at an early stage. This is particularly evident in the commercialization of scientific and technological achievements.

A wave of professors is stepping out of the ivory tower, translating their research findings into practical applications. However, cognitive gaps persist in the commercialization of their scientific achievements. While professors may assign a certain valuation to their research outcomes, this often diverges significantly from market perceptions of their value.

This is primarily because professors tend to place greater emphasis on evaluating the value of outcomes from an academic perspective, often overlooking factors such as market demand, technical feasibility, and business models. It is precisely these disparities in understanding that truly impact the effectiveness of translating scientific research achievements into practical applications.

“"We are not afraid of cognitive gaps or significant disparities; what we truly fear is a founder's closed mindset."“Fu Jun stated. In actual investment and financing processes, investors are most concerned about professors and founders becoming trapped in self-deceptive numerical games.”

In reality, valuation is merely a temporary price tag assigned to a company by investors and founders. The primary priority for a company should be securing funding to fuel its growth; it must not miss out on financing opportunities or its own golden period of development by becoming overly fixated on the specific valuation figure.

Corporate valuation is not necessarily better when it is higher; excessively high valuations in one funding round can create obstacles for subsequent financing rounds. Furthermore, inflated valuations often impose significant performance commitment pressures on entrepreneurs, which can severely undermine the healthy development of the enterprise.

“As long as a valuation reflects the reasonable value of a company, it is successful. Founders should devote more energy to operations; if the company is well-managed, going public and securing financing will naturally follow,” said Xia Peng.

Finally, in the face of the current cooling trend in the healthcare market, Fu Jun and Xia Peng both said the same thing: “"First, ensure the survival of enterprises."。”