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Entrepreneurs Panel

Brian Hay
David Pollock
Michael Oliver
Jennie Johnson
Julie Meyer
Debbie Pierce
Laura Tenison
Steve Purdham
Charlie Mullins
Tony Caldeira
Jeremy Roberts
Richard O'Sullivan

Venture Valuations

Steve Purdham

Has worked in the software industry for more than 25 years. Founded Surfcontrol in the early 80s and built it into a global provider of internet filtering software before it was sold to California-based Websense in 2007 for £201 million. Moved straight onto the launch of We7, an advertising-funded music download company supported by rock legend Peter Gabriel. We7 was relaunched in 2008 as an internet jukebox with 3.5 million songs which users can listen to for free. Purdham is hoping for user figures of two million in 2009.

Question: 

I'm seeking venture capital investment to build up my year-old technology company. However, the amounts I am being offered fall well short of the sum I think will be needed to provide the kind of return those funders want. What would you suggest I do?

Answer: 

It's not unusual for the UK VC world to offer less than is asked for, effectively underfunding the opportunity from the get-go. This invariably puts pressure on possible success right from the beginning. However, there are things that are under your control – look at your pitch, look at the VCs, negotiate and create competition.

First off, your pitch should set realistic but optimistic ROIs – if the return on investment is too low this will push down the valuation and hence the investment. However, you have to take care getting the right balance. If you are over-bullish you run the risk of being discounted very quickly.

Secondly, each VC has a 'sweet spot'“ a range within which they are comfortable investing - and if they like the story there will be a tendency to push the valuation to fit their sweet spot. So, qualify the VC: if their 'sweet spot' is £500,000, you will not get £2 million (and vice versa). And negotiate - find out why they will not get closer to what you believe is needed and horse trade.

And, finally, if possible create competition between VCs. If you can get more than one term sheet on the table, you can increase the terms.

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