I’m probably going to get slaughtered for this but I can’t help it. I disagree with Paul Graham. Oh boy, that’s difficult to write. Paul Graham is a personal hero, not just because he’s a successful entrepreneur but with what he’s done with YC, the guy’s the closest thing to a rockstar in the tech industry.
However, I think his post about not talking to Corporate Development is a bit self-serving (wow, that was really difficult to write). While I agree on his point about knowing when you want and don’t want to sell. However, as an entrepreneur, once you take outside capital you have a responsibility to talk about potentially selling the company – even if you think you’re really early in the process.
A big company’s corporate development team also help you put a figure on the value of the business helps in negotiations with fundraising as well – this is where every VC will shout at me now. So, if Fund A is trying to screw the entrepreneur on valuation, having a data point around what someone else is willing to pay for the company puts you in a solid position in negotiations. As an entrepreneur, I agree you need to focus, but you can also delegate and have someone either internally or an advisor / friend to the business who can have the corporate development meeting for you. Maybe even a board member or an investor – as long as there’s trust that all the information will be shared.
I do think investors are instrumental to the long term success of a company, but when you’re negotiating on price / valuation, those can be really tough conversations and an entrepreneur needs all the help they can get for getting the most capital for the highest price. This is probably especially true for the companies he identifies as most at risk, the young, fast growing companies that are less than or around a year old. They have little data to show how fast the growth might continue and an investor is likely to offer them a significant amount of investment but the valuation might be off.
How do you figure out if the multiple you’re discussing is the right one? How do you determine if the capital and dilution are fair? You need all the data you can get.
Don’t get me wrong, there are some investors who have their portfolio’s best interests and won’t screw the entrepreneur on valuation, they may even be giving the entrepreneur a great deal on where they’re valuing the company, but as an entrepreneur you just don’t know… unless… maybe… you’ve spoken to someone in Corp dev.