By Guglielmo de Stefano on 1st April 2016
UK equity crowdfunding platform Growthdeck publishes research on crowdfunded businesses.
Recently launched equity crowdfunding platform Growthdeck today announced the results of a survey of UK businesses that have used equity crowdfunding as a method of raising funds. According to this study, businesses that use equity crowdfunding are, on average, giving up just 12.4% of their equity to investors. The figure has been calculated by analysing the funding rounds of the 114 businesses that were seeking investment on six UK crowdfunding platforms during December 2015.
This figure supports growing concerns about excessive valuations. The percentage of equity offered depends on a pre-money valuation – or in other words on the value of the business prior to investment. If a start-up aims to raise £500,000 through equity crowdfunding and its pre-money valuation is £500,000, the business is giving away 50% of its equity. Conversely, if a company aims to raise the same amount of money, but is valued £1,000,000, it will be giving away only 33.33% of its equity.
The mechanics here are clear: the higher the initial valuation, the lower the equity offered. Growthdeck claims that overvaluations expose minority shareholders and company founders to unnecessary risks.
An excessive valuation could make it harder for the founders of an underperforming company to raise further capital at a later date as it can be difficult, or even impossible to ask for further investment in a company with a deteriorating value. The second potential risk relates to the negotiating power of minority investors. The small collective shareholding of minority investors translates to a weak negotiating position.
Gary Robins, Co-founder of Growthdeck, offered comment:
“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 over just over a tenth of their 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.”
Ultimately a reasonable valuation is in the interest of all market participants. As time passes if valuations are seen to be excessive investors will lose interest. Equally if valuations are too low then companies may look elsewhere for funding. To develop a sustainable marketplace crowdfunding platforms should seek to do all they can to allow companies to fund at a valuation that has been achieved in the light of as much realistic information as possible. This should include extensive historic disclosures and reasonable forecasts.
According to Growthdeck, investors and equity crowdfunding platforms can play a critical role in the process. Gary added:
“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.”
“Crowdfunding platforms have an important role to play here 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.”
Growthdeck argues that due diligence is the key to understanding whether companies are realistically valued, well-run and offer good prospects for growth, with clear and realistic exit plans. Growthdeck claims to employ a private equity methodology to crowdfunding which, through extensive due diligence of the investee businesses, and robust assessment of their prospects long-term through to exit, allows them to establish a reasonable valuation.
“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.”
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.