Imagine a big company has approached your startup, and they’ve floated the idea that they might want to buy you. You're having the first rounds of discussions about a potential deal, and they seem to be going well. You don’t have an offer on the table yet, but you’ve been laying out the chess board well, developing relationships and positioning your company as way for your partners to unlock the future. Both you and the would-be acquirer are excited, but you both know there’s a lot of ground to cover before a deal gets done.
Then you get the critical question, a question whose answer will determine how much all that storytelling is actually worth. At the end of a long meeting, the VP of CorpDev casually inquires: “One more question — what kind of guidance can you give us on how we should value your company?”
A whole world exists inside that question, and how you answer will have major impacts on both the probability of a deal getting done and the acquisition price. Inside that question, the acquirer is asking several things at once:
- Are you willing to give them a number at all?
- How valuable do you think your company is independently?
- How good are your other options if you don’t sell?
In this moment, untrained founders might instinctively reference their last valuation, the amount their investors need to get paid back, or a multiple of their company’s revenue. Others will adhere to the idea that the acquirer should name a price first and dodge the question altogether.
For most strategic product acquisitions – where the target company has a compelling product but not yet a full-fledged business – none of those answers are optimal, and millions of dollars in value could hinge on acing this particular test. Here’s the right way to do it.
Start with why
Before anything else, we need to recognize the subtext of the question being asked. The prompt requests much more than a number (though they are asking for that too). When you answer, they’ll be listening for signals on where your price anchor is, how motivated you are to sell, how confident you are in your independent business, and how much they can push you on price. But most importantly, they’re listening for a framework — the why — behind whatever value you do communicate. The reasoning you present early-on forms the foundation for future negotiations — the field on which the game is played. The framework can make good deal feel bad and vice versa, and can often determine whether a deal gets done at all. In order to get to the right framing, we have to zoom out first.
In most acquisitions, deal price is bounded by two things: on the bottom end, the target’s walk-away number is determined by its other options if the deal doesn’t get done (its BATNA). If an acquirer knows that the target is going to go out of business if it doesn’t sell, the sale price will rapidly move towards zero. On the high end, the acquirer will walk away if they think the company is too expensive relative to impact it can have inside their enterprise. The definition of "impact" varies widely, from roadmap acceleration to revenue to the story the acquirer wants to tell to investors. Therefore, a startup's best deal often uses “impact-based pricing”, where the two parties evaluate and define the post-acquisition opportunity they’re both trying to capture.
Importantly, impact-based pricing has little to do with the startup's current traction, valuation or financials. All of those metrics serve as proof points inside the impact narrative, but they should not directly determine the company's value. At the same time, the acquirer has every incentive to steer the conversation away from impact and towards current metrics – that's how they'll get the best deal.
A simple example: consider a startup that has a good product but hasn’t nailed its GTM motion yet. The company is doing $2 million in annual revenue, and they've raised $10m in total capital at a last valuation of $50m. They're still growing but are open to strategic options. In fact, they might be willing to consider a number lower than their last valuation, as long as common shareholders are well cared for. Of course, higher is better.
For their part, the acquirer is pursuing a revenue opportunity projected to be $20m/year, but it would take them several years to build a similar product. Buying instead of building would accelerate their timeline dramatically, but all acquisitions come with risk. Assuming a revenue multiple of 10x, their total "impact value" of the opportunity is $200m. After adjusting for risk and upside capture, they'd be willing to pay a maximum of $75m for the company. And of course, lower is better.
In this example, the startup CEO could respond to the question about value in a few different ways:
- She could reference her current traction and revenue, allowing the acquirer to assign a multiple to those numbers and work from there. Even with a generous 15x multiple, the deal would land around $30m. A good exit, but with tons of money left on the table for the startup.
- She could reference her last valuation, which is a decent number but a flimsy rationale. Any seasoned CorpDev team knows that fundraising valuations often say little about the deal the startup will actually accept, and they’ll be able to push past that number. The deal might land at $40m. Better, but not great.
- She could set the stage to discover the impact value of her company, which will both allow the acquirer to solidify its business case and allow the startup to discover its true worth.
Set the stage
When first asked about value, it'll often be too early to know what kind of value the target company can add to the acquirer. In those situations, it's perfectly acceptable to punt on presenting a number, but nod to the idea that the company should be priced based on its strategic value:
"It's important to us that our value is a function of the impact we can have on your company. We think we can have a big impact, but we don't know the specifics yet. We'd like to explore that with you."
From there, you can describe the type of impact you think you can have on their business. That can be a new product offered to their customers, a new route to a new audience etc. We’re not talking about numbers yet, and that's ok. In early conversations, your job is to signal that the company should be valued based on its strategic assets, and that our job is to figure out what that number is over subsequent sessions.
In the background, CorpDev is wrapping their head around what a good price might be for your company, which they’ll use to rationalize any bid internally. If presented well, the framework you give them could also be the one they use in the deal memo they write. That’s ideal for you, because it ensures that if they win, they’re paying for the value they get.
Fill in the gaps
In subsequent discovery calls, you can start asking questions related to the impact you can have on the acquirer. These questions are best aimed at whoever owns the product roadmap for the acquirer, rather than CorpDev. The questions can start high-level:
"Three to five years from now, how will we know if this acquisition has been successful?"
"Why is our product important to you?"
Over time, the questions can get more specific, depending on their motivation:
"What portion of your current customer base do you think our product is applicable to? What you think a good attach rate is?"
"How do you think the addition of our product will impact your win rate against x competitor?"
Or for public or soon-to-be-public companies:
"How do you think this acquisition will impact your revenue multiple given by the street?"
Inside those questions, you're looking for data that will allow you to present back your understanding of your company's strategic value.
Present it back
Once you feel confident that you have a good grasp of the reasoning behind their interest, quantify your findings in a simple model and walk the acquirer through the math.
For example, if you believe your product can be cross-sold to the acquirer's existing customer base, multiply their applicable customer base by a reasonable attach rate, times your current per-customer unit economics (or some reasonable adaptation thereof). That'll give you an estimate of the incremental revenue your product can add to their existing business.
From there, attach a revenue multiple to that incremental revenue to arrive at a reasonable enterprise value for the initiative your company will lead once acquired. That number is the combined value of your product plus the other resources the acquirer will contribute.
The acquirer will likely push back on your thinking, saying that you’re taking credit for their customers, or that they're taking on risk by acquiring the company, or a long list of other reasons. But if you've gotten that far, you've already won. The debate then becomes how much of that impact value is reasonable to attribute to your company versus the assets they bring to the table. Often, even if the impact value is discounted by 50% or 70%, it still produces a value far above anything anchored to the current business.
In strategic product acquisitions, millions of dollars can trade hands based on the strength of a simple story. Most founders are used to telling their own story: about how with the right resources, their business can scale and have a positive impact on customers and the marketplace. All they need is cash and some advice, and they'll be off to the races. Even in other talks with a potential acquirer, we're often focused on how a future, combined entity has potential beyond either independent company. If done well, the story is about how the acquirer's vision can only be complete with the product, talent or strategy your company possesses. They're interested in you because of the future you represent, but they'd only like to pay for your past performance. If that's the best and final deal available, fine. But if founders frame their value correctly from the outset, they often succeed in aligning what an acquirer is getting with what they're paying for. When that casual question about valuation arises, be ready to steer the conversation away from the past and towards the transformation, scale or public image your company represents. That’s where the real value lies.
