This is a guest post by Tom Smith, Partnerships Associate, Crowdcube.
We live in an age where conventions are being disrupted more frequently than ever, and it is no news how the rise of alternative finance and specifically how equity crowdfunding has challenged the investment landscape. From an investor’s perspective, ‘everyday investors’ now have access to an asset class traditionally reserved for private institutions, and can benefit from managing their own portfolio with no investment management or carry fees. Meanwhile, from an entrepreneur’s perspective, whilst not all information is entirely public, the validation of a company’s valuation is shifting from being a private process, to being a very public one. Although Crowdcube do not advise or approve valuations for businesses that list, we have found that out of the hundreds of listings on Crowdcube every year, the companies who are successful in closing equity crowdfunding investment rounds use two basic tools to calculate their valuation.
There are many valuations guides available online, but each company is different, so each company has its own set of rules. A basic starting-point is to draw reasonable comparisons with similar companies, and apply objectivity in the process. To determine what constitutes a similar company, simple attributes to consider are the company stage; size; sector; geography; growth rate; funding route; and strategy to deliver the business plan.
An important comparison to make is the funding lifecycle stage of a company. This will not only help to inform on the amount of equity to have available, but also to set a valuation that accommodates for future investment rounds. Even if a reasonably comparative company had an aggressive valuation, setting a relatively lower valuation could generate greater interest in the pitch; provide scope for follow-on rounds; and aim to avoid potential damage through future dilutions. An example of a company who did this well was BeerBods; who raised £155k in 36 hours on Crowdcube in Feb ‘14 with a pre-money valuation (meaning the valuation before the fundraising round closes) of £440k, and did a follow-on round in Aug ‘17 after increasing its revenue fivefold, at a pre-money valuation of £2.25m, all considering competitors HonestBrew and Beer52 completed crowdfunding rounds in between BeerBods’ own two rounds.
Most equity crowdfunding rounds are private until they reach a certain percentage of the round before going public, to strategically gain momentum prior to asking the wider community to come on board. This provides an opportunity for businesses to listen to investors’ opinions before publicly launching the Crowdfunding campaign. That being said, companies still have the flexibility of being able to change the valuation based on the traction of the campaign, while it is live; so are not completely constrained to the valuation it launched with.
In the recent case of field&flower, the company acted on feedback from potential investors via the live forums to have a valuation more inline with competitors Mindful Chef, which successfully funded on Crowdcube at a similar time. In response, field&flower lowered the valuation whilst its pitch was live and at 62% funded, from £12m to £9.5m. Within three days of doing this, the company achieved its fundraising target of £750k.
The challenge a company faces when equity crowdfunding is to publicly corral a multitude of investors on the same terms and therefore the same valuation, so the valuation itself is a crucially important factor that leads to funding success or failure. Drawing reasonable comparisons and acting on continuous feedback are two critical (but often neglected) tools that can help entrepreneurs or advisors value a company appropriately, so they can secure the funding they need to grow.