Follow Crowdfunding

How valuation impacts a crowdfunding round

In Crowdfunding, Planning growth, Raising finance, Rapidly scaling - 1 year ago - 4 min

How valuation impacts a crowdfunding round

Guest Author: Tom Smith, Partnerships Associate, Crowdcube

Company valuation is one of the most talked about topics on the forums of an equity crowdfunding campaign, and one of the main reasons why campaigns fail to hit their target.

There are tips, tools, and guides available out there that are good starting points for calculating your company valuation. However, a company may go through all the valuation models and draw reasonable comparisons on paper, but, potential investors may not part with their cash; because ultimately, the value of a company is dictated by the price an investor is willing to pay.

The three points below aim to help companies understand the importance of getting their valuation right:

1. Generating lead investment

All equity crowdfunding rounds require some investment to be pre-committed for the campaign to launch publically. This capital is an essential component of a crowdfunding campaign for many reasons; primarily because it serves as a way to validate the price of the investment round, but also because it serves as a momentum-building tool to kick off the campaign with a strong launch.

If a company cannot generate any initial investment for their round, this may be because the share price they are suggesting is higher than what investors are comfortable with. It’s therefore important to listen and act upon feedback regarding the valuation ahead of launching the campaign publically.

Phased growth through multiple funding rounds informs a company’s valuation discussion.

2. Painting a compelling picture for new and existing investors

One of the main benefits of crowdfunding is to have a community of investors who believe in you and your product or service. Crowdfunding can have a very positive impact on user acquisition and can enable you to get your brand in front of thousands of people, so you want to attract the right kind of attention to your pitch.

Every equity crowdfunding campaign has a forum, which is an online discussion area where prospective investors can openly ask questions to the team. If the forum is being dominated by questions about the company’s valuation, the danger is that this can be difficult to manage, and may deter new investors.

It is also important not to underestimate the sophistication of investors on an equity crowdfunding platform. Crowdcube has half a million registered investors who are a mix of everyday, sophisticated and high net worth (HNW) investors; with 59% of investment coming from HNW or sophisticated investors. It’s worth noting that although not all Crowdcube members invest in startups as their profession, they will do their due diligence, look at your social media, website, and monitor the pitch forums to see what other investors concerns may be.

In an equity crowdfunding campaign, a company needs to ensure they are creating an attractive proposition for investors who are looking for a future return while being armed with a robust justification for arriving at the company valuation.

3. Considering future funding

It’s important to consider how you’ll show growth in the next funding rounds, as this will help inform the company’s valuation discussion now. The danger for businesses in setting a valuation that it would have to grow in to is that it may be painful down the line when it comes to securing follow-on finance.

Even if a company can do a down-round (future funding round on a lower valuation than it’s previous round), this may damage the credibility of the business and the confidence of investors. Creating a compelling picture for investors requires a company’s valuation to be set at a point which considers the long-term vision and bigger picture. This requires consideration not only on this investment round now, but the investment round(s) to come.

Choosing equity crowdfunding as the vehicle for an investment round is a very exciting decision for a business, so it’s important they do what they can to make it a success. One part of this is to calculate a fair valuation. Some implications to consider are that equity crowdfunding rounds require lead investment to be secured; equity crowdfunding campaigns have public forums where investors can discuss topics and ask questions, and the valuation set will have an impact on current and future funding success.

If you want to find out more about crowdfunding and growing your business, you can sign up to Crowdcube’s monthly funding newsletter here or if you’re ready to get started, you can apply here.

Guest Author: Tom Smith, Partnerships Associate, Crowdcube