--- title: The high valuation trap | SFC Capital description: Why maximising your startup’s valuation may not be a good idea image: https://sfccapital.com/hubfs/Imported_Blog_Media/banner_1615390898.webp --- Disclaimer Please note, company introductions through SFC Capital Ltd ('SFC') are only suitable for ‘High Net Worth Individuals’, or ‘Sophisticated Investors’ as defined by the Financial Services & Markets Act 2000 (FSMA) who are familiar with and willing to accept the high risk associated with private investments. Any investor requesting to contact a company through SFC Capital does so at his/her own risk and is solely responsible for conducting any legal, accounting or due diligence review. There has been no investigation to the accuracy of any information or terms contained herein and we strongly suggest that you seek advice from a person authorised under the FSMA who specialises in advising on investments of this kind prior to commencement of any potential transaction. 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Information on the Fund is intended for professional investors only; any reproduction of this information, in whole, or part, is prohibited. The content is for information purposes only and should not be used or considered as an offer or solicitation to purchase or sell the securities mentioned herein. The SFC Angel Fund (the ‘SFC Fund’ or the ‘Fund’) is defined as an ‘unregulated collective investment scheme’ (‘UCIS’) and the promotion of a UCIS either within the UK or from the UK is severely restricted by statute. Consequently, this document is only directed at professional clients and eligible counterparties as defined by the FCA and also to persons of a kind to whom the Fund may lawfully be promoted by an authorised person by virtue of Section 238(5) of the Financial Services and Markets Act 2000 and COBS 4.12.4R. Any decision by an investor to buy shares in a fund must be made solely on the basis of the information and terms contained within the Fund’s offering memorandum. Investment in the Fund is made entirely at the investor’s own risk and professional advice should be sought in case of doubt. SFC Capital Partners Ltd (‘SFC’) is authorised and regulated by the Financial Conduct Authority (‘FCA’) in the United Kingdom, firm reference number 736284. This document is intended for professional investors only; any reproduction of this information, in whole, or part, is prohibited. The content is for information purposes only and should not be used or considered as an offer or solicitation to purchase or sell the securities mentioned herein. The SFC Angel Fund (the ‘SFC Fund’ or the ‘Fund’) is defined as an ‘unregulated collective investment scheme’ (‘UCIS’) and the promotion of a UCIS either within the UK or from the UK is severely restricted by statute. Consequently, this document is only directed at professional clients and eligible counterparties as defined by the FCA and also to persons of a kind to whom the Fund may lawfully be promoted by an authorised person by virtue of Section 238(5) of the Financial Services and Markets Act 2000 and COBS 4.12.4R. The SFC Angel Fund is managed by SFC Capital Partners Ltd (‘SFCCP’) which is authorised and regulated by the Financial Conduct Authority in the United Kingdom, firm reference number 736284. Information on the Fund is intended for professional investors only; any reproduction of this information, in whole, or part, is prohibited. The content is for information purposes only and should not be used or considered as an offer or solicitation to purchase or sell the securities mentioned herein. The SFC Angel Fund (the ‘SFC Fund’ or the ‘Fund’) is defined as an ‘unregulated collective investment scheme’ (‘UCIS’) and the promotion of a UCIS either within the UK or from the UK is severely restricted by statute. Consequently, this document is only directed at professional clients and eligible counterparties as defined by the FCA and also to persons of a kind to whom the Fund may lawfully be promoted by an authorised person by virtue of Section 238(5) of the Financial Services and Markets Act 2000 and COBS 4.12.4R. Any decision by an investor to buy shares in a fund must be made solely on the basis of the information and terms contained within the Fund’s offering memorandum. Investment in the Fund is made entirely at the investor’s own risk and professional advice should be sought in case of doubt. The SFC Angel Fund is an SEIS/EIS fund which raises money for early-stage businesses by investing in SEIS and EIS eligible ventures with the aim of returning a profit for investors in the fund. Investment in early-stage companies involves risks such as illiquidity, lack of dividends, loss of investment and dilution. Investment in SEIS/EIS funds should be considered as part of a diversified portfolio. The availability of tax relief depends on individual circumstances and may change in the future. The availability of tax relief depends on the company invested in maintaining its SEIS/EIS qualifying status. There is no assurance that the investment objectives of any investment product will be achieved or that the strategies and methods described herein will be successful. Past performance is not necessarily a guide to future performance and the value of an investment may go down as well as up. Investors may not get back the full amount invested. No warranties or representations of any kind are expressed or implied on this website. I Accept The Terms ## FCA Mandatory Risk Warning & Risk Summary > ## Risk Warning > > **Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment, and you are unlikely to be protected if something goes wrong.** ## Risk Summary **Estimated reading time: 2 min** Due to the potential for losses, the Financial Conduct Authority (“FCA”) considers this investment to be high risk.   What are the key risks? 1\. You could lose all the money you invest. Investments made by the SFC Angel Fund SEIS (the “Fund”) will be in shares in early-stage businesses. Investors in these shares often lose 100% of the money they invested, as many early-stage businesses fail. 2\. You are unlikely to be protected if something goes wrong Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here: [https://www.fscs.org.uk/check/investment-protection-checker/](https://sfccapital.com/fca-mandatory-risk-warning-and-risk-summary/%20https://www.fscs.org.uk/check/investment-protection-checker/)    Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here: [https://www.financial-ombudsman.org.uk/consumers](https://www.financial-ombudsman.org.uk/consumers) 3\. You won’t get your money back quickly Even if the businesses the Fund invests your money in are successful, it may take several years to get your money back. The most likely way to get your money back is if the businesses invested in by the Fund are bought by another business or list their shares on an exchange such as the London Stock Exchange. These events are not common. 4\. Don’t put all your eggs in one basket Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.  A good rule of thumb is not to invest more than 10% of your money in high-risk investments.  [https://www.fca.org.uk/investsmart/5-questions-ask-you-invest](https://www.fca.org.uk/investsmart/5-questions-ask-you-invest) 5\. The value of your investment can be reduced The percentage of each investee company that the Fund owns will decrease if the business issues more shares. This could mean that the value of your investment in each investee company reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.  These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment. 6\. S/EIS tax reliefs are not guaranteed Whilst it is the Fund's intention to invest mostly in companies qualifying under SEIS legislation, SFC cannot guarantee that all investments will qualify for S/EIS relief (or IHT relief) or, indeed, if they do initially, that they will continue to do so throughout the life of the investment. The tax advantages of investing through the Fund are therefore not guaranteed.  If you are interested in learning more about how to protect yourself, visit the FCA’s website here: [https://www.fca.org.uk/investsmart](https://www.fca.org.uk/investsmart)  Close Don’t invest unless you’re prepared to lose all the money you invest. This is a high risk investment and you are unlikely to be protected if something goes wrong. Take 2 minutes to learn more. [![SFC Logo + Title x web](https://sfccapital.com/hs-fs/hubfs/SFC%20Logo%20+%20Title%20x%20web.png?width=2000&name=SFC%20Logo%20+%20Title%20x%20web.png)](https://sfccapital.com) - [Startups](https://sfccapital.com/raise) - Investors - [SEIS Fund](https://sfccapital.com/seis-funds) - [EIS Fund](https://sfccapital.com/eis-funds) - [SEIS Explained](https://sfccapital.com/seis-explained) - [EIS Explained](https://sfccapital.com/eis-explained) - [Angel House](https://sfccapital.com/angel-house) - [Advisors](https://sfccapital.com/advisors) - [Portfolio](https://portal.sfccapital.com/portfolio) - [About Us](https://sfccapital.com/about-us) - [Blog](https://sfccapital.com/blog) - [Login](https://portal.sfccapital.com/login) # The high valuation trap [Angelika Burawska, Chief Operations Officer](https://sfccapital.com/blog/author/angelika-burawska) SFC Capital's COO since 2014, uses her extensive business education and experience to drive operations, growth projects, and strategic implementation. - - 2 Mar 2023 [Startups](https://sfccapital.com/blog/tag/startups) ##### Share on - - - #### Why maximising your startup’s valuation may not be a good idea Valuing a startup has never been easy. Despite many methods that have been developed and tested, it is still a matter of balance between supply and demand, risk and return, and often, pure guess. It is not uncommon that entrepreneurs come up with very high valuations that are totally disconnected to where their ventures are (what value and traction they collected until the time when they ask for investors’ money). The moment they find the first investor who accepts a high valuation without questioning it is the moment when things start going in the wrong direction. Inexperienced entrepreneurs are tempted to defend their equity and minimise dilution. Existing investors in their businesses might also be happy because the paper value of their share might increase significantly. It is easy to overlook the negative consequences of setting up a high valuation as they are likely to come at a later time. In this article, we will explore some of the negative consequences that setting a high valuation can bring. ##### 1. Wasting time on trying to find the “perfect” investors There are many reasons why entrepreneurs set valuations high when they go to investors. Many of them overestimate the importance of how much equity they are giving away. Also, they protect their own shareholding without taking into consideration that, without the investors’ money, their equity is worth nearly nothing. In certain cases, a high valuation is the result of comparing their own company to other startups. This happens when relying too much on publicly available information on crowdfunding and/or data platforms. This type of benchmarking, often without insider knowledge of other startups, can be very misleading. Recently, we even came across an opinion that if you don’t [value your startup](https://www.wallstreetoasis.com/resources/skills/valuation/startup-valuation-methods) high, investors will think it is worth nothing. This is incorrect – investors would instead think that you are not being realistic. Setting a high valuation on an early-stage startup will turn off investors because they will see it as an unattractive opportunity where risks are high and the potential ROI is lower than what it should be. Entrepreneurs might waste a lot of time trying to find an investor who can agree on the given valuation and will turn down those that can invest quicker, but at a lower price. In the early-stage startup world, time is equally – if not more – important as money. ##### 2. Troubles closing the round When entrepreneurs are challenged on their valuation, they will try to prove you wrong by ushering that they already have investors who accepted the high price. This is not a strong argument if we are talking about less than 50% of the round size. It is possible to attract some cash at a high price, particularly from less sophisticated and less experienced angel investors (not to mention *friends, family, and fools*), but the bigger the round is, the more difficult it is to find enough people who are willing to invest at a high valuation. This then leads to the situation where either not enough funding can be raised or the price has to be decreased halfway through the funding round. The second situation can be, in a way, a solution. However, it is not an ideal one as entrepreneurs will have to face existing shareholders and might end up losing credibility – and time. ##### 3. Pressure on the next round It is common practice that businesses raise multiple rounds, and it is also a common expectation that the next rounds are raised at a higher valuation to reflect progress and to keep the first investors satisfied. What entrepreneurs often forget is that expectations towards their businesses grow with each new round, and new investors will be looking at numbers and performance, and not so much the potential of the market and/or the team. Entrepreneurs tend to be overoptimistic and plan their rounds without taking into consideration the obstacles on the way. If a business raised its first round at a valuation that is far from the real value, raising every next round will be a tough (if not impossible) task – and the later the stage, the more crucial revenue and profit are. It will be increasingly difficult to meet performance and valuation expectations from new and existing shareholders. ##### 4. Investor pressure Investors that pay high prices for their shares will expect a lot, which means fast progress and fast revenue growth in their investment. This is not always possible if the company is behind in terms of technology, team and sales development. Entrepreneurs might find themselves in a very uncomfortable situation where they want to keep investors happy, but know they need more time to reach the desired stage. It is a psychological pressure on the CEO, and can potentially cause conflicts, misunderstandings and errors in the company. Keeping all of this in mind, valuations should not be the main concern of entrepreneurs in the early stages, but should be a part of a well-thought-through, long-term strategy. There is nothing special about keeping the majority of shares since the business will not be better as a result of that and the real value of the business is only the one at its exit, which tends to be a long and complex journey. Sticking to your gut when raising investments at a high price might just be a won battle in a lost war. ![](https://sfccapital.com/hubfs/Imported_Blog_Media/2021_03_11%20-%20Startups%20-%20The%20high%20valuation%20trap%20-%20Blog%20pic%202(1)_1654091001.jpg) ## Related Articles 23 Feb 2023 [Investors](https://sfccapital.com/blog/tag/investors) ##### [SEIS and EIS Funds Explained: How to Invest in UK Startups with Tax Relief](https://sfccapital.com/blog/seis-and-eis-funds-how-do-they-work) Last updated: 11 December 2025 Key Takeaways Tax Relief: Claim back up to 50% of your SEIS investmen... [Read More](https://sfccapital.com/blog/seis-and-eis-funds-how-do-they-work) 26 Jan 2025 [News](https://sfccapital.com/blog/tag/news) ##### [SFC Capital Invests Into 500th UK Startup](https://sfccapital.com/blog/500) SFC Capital is marking an important milestone: We have now officially invested in our 500th portfoli... 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This website is intended for  professional investors, high net worth investor or certified sophisticated investors only for the purposes of the FCA's Conduct of Business Sourcebook.; any reproduction of this information, in whole, or part, is prohibited. The content is for information purposes only and should not be used or considered as an offer or solicitation to purchase or sell any securities. Investment in early-stage companies involves risks such as illiquidity, lack of dividends, loss of investment and dilution. Investment in SEIS/EIS eligible companies should be considered as part of a diversified portfolio. The availability of tax relief depends on individual circumstances and may change in the future. The availability of tax relief depends on the company invested in maintaining its SEIS/EIS qualifying status. There is no assurance that the investment objectives of any investment opportunity will be achieved or that the strategies and methods described herein will be successful. The investment products cited herein may place capital at risk and therefore investors may not get back the full amount invested. Past performance is not necessarily a guide to future performance and the value of an investment may go down as well as up. Investors may not get back the full amount invested. Companies’ pitches for investment are not offers to the public and investments can only be made by members of SFC Capital. SFC Capital takes no responsibility for this information or for any recommendations or opinions made by the companies. Neither SFC Capital nor any of its employees provide any financial or tax advice in relation to the investments and investors are recommended to seek independent financial and tax advice before committing. 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