The Art of Valuation: Fundraising Sells Confidence
Higher valuation is better? Lei Jun's conclusion is the opposite: a high valuation means you're selling a higher expectation—and if you can't deliver, you'll pay the price. This lesson covers how to price (do market research first, then start from the midpoint and work up), and the true nature of fundraising: selling confidence.
A High Valuation Is Not a Good Thing
A high valuation means you're selling a higher expectation. If you can't deliver, investors will be disappointed and will pressure you in various ways, causing you to make bad decisions. Unilaterally chasing a very high valuation is a very mistaken approach.
The Hangover from the Bubble
During the internet bubble in the first half of last year, every company priced high—many by nearly double. Now countless boards are stuck fighting over it. The best companies are fine; the worst have already died. The hardest cases are the majority that are neither great nor terrible.
No One Will Lead Your Next Round
Once you burn through the cash raised at an inflated price, the next investor looks and thinks: "You're so expensive—how do I get in?" A high valuation isn't an honor; it's digging a hole for your future self.
Who Invests in You Matters Most
Once someone comes in, you're looking at five to ten years together—board meetings, site visits, no escaping it. Lei Jun tells his investment managers to "learn to fall in love with founders": once you invest, you live and die together for many years. If you don't genuinely like them, don't invest. The same logic applies to founders choosing investors.
Lei Jun's pricing secret: first find three to five funds that have almost zero chance of investing in you and ask them what they'd price you at—get a feel for the market—then start from the midpoint and go up. Click "Next Step" to compare this path against "set a high price first, then cut it down."
Because investment is a confidence game. Getting someone to believe that a company with nothing can reach a billion dollars depends entirely on a thin thread of confidence. It can appear in an instant and vanish in an instant. A small thing might add a bit of confidence; another small thing might take it away entirely. It can change at any moment.
So there's only one thing you can do: keep building their confidence. At $50M they're confident, at $55M they're still confident—it might even rise to $100M. But if they're not confident at $100M, tomorrow they find one thing lacking, the day after another, and they walk away. Cutting your price is the most damaging signal you can send to confidence.
The investor is watching you. Click the founder actions below (each can only be used once) and watch how the confidence level rises and falls. Notice how slowly it goes up and how quickly it falls.
For a solo business, "valuation" is your pricing. Lei Jun's market research method applies directly: before setting a subscription price or quote, find a few potential users who are almost certainly never going to pay and ask them "how much do you think this is worth?" Once you have a market feel, start from the midpoint and go up.
Never benchmark against a top product, set a high price, and then discount it. Cutting your price sends the same signal for an indie product: even you don't believe it's worth that much.
The "selling higher expectations" trap, OPC version: publicly committing to big things. The more you overpromise on your roadmap, the more damage one missed delivery does. If you say weekly updates, ship weekly—your changelog is your users' confidence thermometer: small consistent deliveries raise it a notch; one missed promise drops it a chunk.
Choosing customers is like choosing investors: one subscriber willing to be with you for five years is worth more than ten enterprise clients forcing you into bad decisions. Fundraising sells confidence. So does building a product.
"Fundraising, entrepreneurship—all of it is selling confidence." Confidence can only be built up continuously; there is no going back.
Aim for a reasonable valuation—reasonable does not mean the highest: a high valuation means you're selling a higher expectation, and if you can't deliver, you'll pay the price.
Do market research before setting your price: ask the people least likely to invest what they'd pay, start from the midpoint and go up—never set a high price and start cutting.
More important than price is who invests in you: this person you'll have to see for five to ten years.
Source: compiled from Lei Jun's public entrepreneurship lectures