What Turns Investors Off - Part 1 - Understanding, or More Importantly, Not Understanding Your Valuation

I was at the gym this morning and I overheard a discussion that it took all of my effort to not join in on.  So, if you were at Fort Sanders West Gym in the locker room in the back at 7:30am this morning talking about business and startups, I was listening to every word you said.  I’ve seen this all through out my career, and I have to chime in with a few things that really turn investors off.  The following list is in no particular order, so here goes.

• “Ruling from beyond the Grave”
• Not Understanding your valuation and more importantly your competition for investment.
• This is a business, not a hobby.

I’m going to start with understanding valuations, or more importantly, not understanding valuations.

Valuations are important.  What is the value of your company?  What is the value of a startup in the early stages?  Public markets are pretty good about getting to valuation, but even then, things do go haywire.  Recently, we’ve seen this with the valuation of memory stocks in the AI/semiconductor phase of life with the growth of datacenters.  Is Micron Technology, the largest US producer of memory, really worth 9 times what it was worth in August a year ago?  Is Micron Technology really worth 15 times what it was worth in April a year ago around the time of the Liberation Day tariffs?  Is Marathon Petroleum really worth double what it was worth on January 1, 2026?  Who really knows.  What we do know is that over the long term, the public markets do tend to flesh out the value of a company to something being realistic to their actual realistic value.

The problem is that startup founders don’t understand is that they are not public market companies. For the sake of discussion here, we’ll limit discussions to the software technology world.  Startup founders are in a situation of having a product that they are trying to build.  They must overcome (derisk) some things that they don’t understand

• Can they actually build something?  Just deciding what should be built ina monumental task and is based on a very slippery slope with the goal posts changing.  Can they get an MVP out the door that someone somewhere will use? Do they understand code and customers to the point of being able to build something that satisfies customer needs?
• Can they make a sale?  Understanding technology is great, but do you understand customer needs?  Can you understand their problems and turn that into code?  Do you understand the sales process?
• Can you take a customer problem, turn it into code, and do it in such a way as to use that same code for other customers?
• Are you growing your number of users?  Are you growing the number of users that come back each day?  How do you monetize those users?

Given all of the above, and assuming you’ve gotten over these potholes, what are you worth?

I’m going to give you a hint, it’s mostly likely not as much money as you think.  Why?  Because of the following

• You haven’t proven anything at scale.  You might think that you’ve proven a lot, but you haven’t.  You have to prove yourself to investors every day, even when they aren’t looking.  Go and start to scale the number of users and scale the product to solve more problems.
• Investors don’t invest in potential.  They invest in the here and now.  Yes, yes, yes, you can and should get a bump for growth, but you don’t get 10x your current income if you are currently bringing in $200k with no growth.
• If an investor were to invest, their money becomes locked up in your business.  They can’t access the money until there is a liquidity event.  Getting founder led businesses to a liquidity event is really hard.

Those are the things that you can control.  You can make the choice to invest in more marketing and sales.  And you have to budget for that. And you have to go out and do it.  Founder led companies have a hard time breaking the founder out and getting them out of their comfort zone.  So, if the founder is in technology, they are going to have a hard time investing in marketing and sales.

There are also things that are outside of your control.  Answer this question, “what is your startup a better investment than just buying an S&P 500 index fund and sticking the money in that?”  Investing in a simple index fund will basically double its value over the next 10 years with very little risk (let’s not get hung up over the lost decade for the moment, we’re talking averages).”  How are you going to increase the value of this investor’s money is an important question to answer.  Because the money is going to be locked up until there is a liquidity event, you have to increase that value and you have to offset the risk of investing in a startup.

Now, the next point to make is your valuation.  If you can prove that a startup is going to be worth big money in the future, say $100 million, that doesn’t mean that you are currently worth $100 million.  Investors aren’t going to invest in your startup at the fully fleshed out price today. I know I don’t put $100 into in an index fund and expect to get $100 out in the future.  If I do put that money into an index fund, I’m expecting to get $200 out in ten years.  If I put $100 into a startup today, I’m expecting to get a minimum of $1,000 out in ten years.  So basically 10x is a return that I want to see.  This will take care of my money being locked up for ten years as well as the risk of the startup failing.

So, this is a lot of data for me to throw at you.  I’ll get around to Parts II and III shortly.