It was explained by Growthdeck that most platforms allow those seeking capital to value the business themselves and that entrepreneurs often tend to overvalue those firms. This, the platform claimed, made itdifficult for investors to calculate whether the valuation was justified.
Having analysed the funding requirements of 114 businesses seeking investment on six UK crowdfunding platforms in December 2015, Gary Robins, co-founder of Growthdeck, claimed that on average companies seeking crowdfunding were valued at 3.2m. Although the average investment target is 311,490, a significant proportion of investment opportunities listed were looking for 1m or more.
Robins said: Investors should not assume that all crowdfunding platforms are the same. Its as important to be as assured about the professionalism of the platform they are using as the investee business itself. 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.
He further explained: Shareholders at the crowdfunding stage are often asked to accept a very small shareholding even though the cash they put up represents almost all of the investee companys assets. Handing over just a tenth of the company to crowdfunders in total is not a very significant proportion, given what that investment means to the business. Excessive valuations in crowdfunding can also put both investors and business owners in a weak position for the future.
Later and larger rounds of fundraising might well involve professional investors whose valuations are based on core private equity principles. If an original valuation was far too high then early investors could well see their equity stake heavily diluted by such later fundraisings. The founders could also suffer this dilution, along with reputational damage caused by seeing their equity declining in value rather than growing.
Investors need to question whether they are getting an adequate stake for their money, 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.
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Crowdfunding platforms also have an important role to play in order to ensure that the deals being offered are of good value for both investors and investee companies and that the interests of each are well-balanced, Robins claimed. This, he said, included carrying out due diligence to ensure that companies are realistically valued, well-run and offer good prospects for growth.
If crowdfunders dont start putting sensible valuations on companies 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,” he added.