Platforms in the equity-crowdfunding space must help to gauge the valuations of the ventures for which they attract finance, according to a report from industry player Growthdeck.
In a study of 114 companies across six different platforms, the firm found that entrepreneurs tend to overvalue their schemes when preparing for crowdfunding rounds – and, on average, return just 12.4% of equity to their backers.
Growthdeck co-founder Gary Robins said: “Shareholders at the crowdfunding stage are often being asked to accept a very small shareholding – even though the cash they put up represents almost all of the investee company’s assets. Handing out just over a tenth of their company to crowdfunders… is not a very significant proportion, given what that investment means to the business.”
Robins warned that excessive valuations in crowdfunding also risk weakening the positions of both investors and business owners further down the line.
“Investors need to question whether they are getting an adequate stake for their money,” he stressed, “and consider the impact if their shareholdings get diluted in the future by any subsequent funding round. If the investee company grows as they hope, there is a good chance that additional funding will be needed.”
Judging when such measures are necessary, as well as coming up with the initial valuation figures, are matters that entrepreneurs tend to take care of themselves, Robins noted. However, he pointed out, that means the platform is often sidelined – despite being a crucial presence in any funding round, operating the shop window for the incoming funds and working as the backers’ point of contact.
“Crowdfunding platforms have an important role to play here,” Robins said, “to ensure that the deals they offer are good value for both investors and investee companies, and that the interests of each are well-balanced.”
He added: “Knowing whether an equity stake offers fair value, or if a valuation is sound, can be a challenge for many investors. At these kinds of pricing levels and investment targets, it is particularly vital that crowdfunders can satisfy themselves that a sufficient slide rule has been run over the numbers.”
Failure to take a more proactive role, Robins cautioned, could harm the industry as a whole. “If crowdfunders don’t start putting sensible valuations on companies,” he said, “then there are going to be thousands of disgruntled investors in the future – something which would be very damaging for what is really a hugely exciting concept with great potential.”
However, Robins’ misgivings about excessive valuation emerged as the UK witnessed two of its biggest crowdfunding success stories within days of each other.
On 30 March, Hybrid Air Vehicles (HAV) – a Cardington, England-based aeronautical start-up – announced that, in less than 10 hours, it had surpassed a £500,000 funding target for its Airlander project: an initiative to launch a new type of airship with the potential to revolutionise the freight industry. Working through Crowdcube, HAV has since amassed more than £425,000 of overfunding.
Just five days later, beverages purveyor Chapel Down revealed that it had exceeded by 70% a £1m funding drive for a new beer and cider brewery – a round (no pun intended) that had begun in October and reached its original target by the middle of the following month. Backers contributed sums from £100 to £35,000 via Seedrs to support the brewery.
Chapel Down chief executive Frazer Thompson said that “to have earned the support of 895 shareholders who believe in the brand and who want to support us on our journey with their hard