Anyone who has caught an episode of ABC’s hit show Shark Tank understands the need for an accurate valuation for a business. Valuation helps to determine how much an equity investment needs to be for an appropriate percentage of the business. Investors have traditionally placed valuations on start-ups as a way to measure their potential, but crowdfunding has started to do so as well.
The difference has been amazing. Just compare two start-up breweries in the UK. Camden Town Brewery came in with an initial £75 million valuation, which was later lowered to £50. BrewDog Brewery, however, came through with a crowdfunding valuation of £305 million.
Are these accurate results? Or is the upward trend a result of undisciplined investing from a market filled with people who aren’t performing their due diligence?
In Valuation, Mob Rules Win the Day
When it comes to modern funding, the crowd always has the upper hand. More companies than ever before are turning to crowdfunding platforms for money before looking at what a venture capitalist might be willing to provide. VCs don’t mind this process because it lets them see if any idea can be proven in the market before they risk their money.
The only problem is that crowdfunding might eventually skip the VC altogether. That’s because less equity is typically given to investors through crowdfunding when compared to traditional equity fundraising methods.
Data by Beauhurst shows that when a company raises less than £500k through crowdfunding, less than 20% equity is sacrificed to achieve the desired amount. In comparison, 44% of the company is sacrificed to equity when traditional capital raising efforts are taken.
Why Is Crowdfunding Valuation So Important?
Let’s take BrewDog Brewery and their £305 million valuation. This company has revenues that are just below £30 million in 2014 and an operating profit of £3.8 million. Great figures, but the traditional valuation with normally be somewhere in the vicinity of £50-75 million. Crowdfunders put that valuation at a level potentially 6x higher. That means more money and less equity for the brewery.
Are the returns lower for investors with crowdfunding? Yes. There also tends to be less risk involved as well. For the moment, it appears that crowdfunding investors seem content with this trade-off. Maybe that will change in the future, but maybe it won’t. What we do know is that equity crowdfunding is here to stay with valuations like these.