Startups' Valuation Gap and Asymmetry of Information: What Lead to Align Business Angels and Founders' Perspective?

This paper takes a close look at one of the most controversial problems founders and investors face: Startup Valuation. More precisely, I undertook a lengthy research in close collaboration with a Business Angel Network (BANs) called Be Angels to understand what causes such valuation gaps between both parties. Literature review suggests that these gaps are a direct consequence of the separation between ownership and control. In fact, early stage company valuation is a difficult exercise right in the middle of computing and guessing because it requires making various assumptions which are difficult to verify. The separation between ownership and control leads to information asymmetry, different hypotheses, and thus, different valuations. Field data suggest that traditional valuation methods, relying on such hypothesis, do not apply to early-stage companies. Upon reflection, I insist on the fact that it is essential to understand the complexity of valuation, beyond the fear entrepreneurs have when getting diluted. It is therefore interesting, in the valuation process, to focus on interest alignment and strategic financing instead of a fixed number, generated by valuation methods and then purely negotiated. Finally, in order to focus on interest alignment and strategic financing, I believe in the importance of proceeding to priced rounds rather than convertible notes or other terms postponing the valuation to future events. The outcome of this paper makes us believe that BANs and business angels must step up in the education of entrepreneurs and make them understand the danger of extreme valuations at an early stage.