In a series of two guest blogs Thomas Mensink will look at crowdfunding valuations and success of Dutch startups.
Friends, family and fools. That’s how we refer to the group of investors that is willing to put money in your startup business when the risks are high. How foolish are they? I analyzed the equity crowdfunding deals in the Netherlands to see whether the valuations people are willing to pay are rationally explainable or emotionally nuts.
My hypothesis was that crowd investors are less sophisticated (i.e. less rational, calculated and in for the profit) and more willing to pay a premium price if they like the product or the vision of the entrepreneur, than professional investors. In other words, valuations of crowdfunding projects are expected to be higher compared to valuations of startups that are engaged with professional equity investors (such as business angels and venture capitalists).
To find out what the crowdfunding valuation are, I looked at publicly accessible data from Symbid, an equity crowdfunding platform in the Netherlands. (CrowdAboutNow, another platform that provides crowdfunding for equity, is not really transparent about the (implied) valuations of the projects so I didn’t include them in my research sample). I collected Symbid data manually, by browsing their website and searching their newsletter emails with upcoming crowdfunding campaigns. I excluded pledge and one-off projects such as the movie ‘Wiplala‘ from our sample. This resulted a total research sample of 70 projects.
Crowdfunding valuations are high
The post-money valuation is already provided by Symbid but the calculations are simple: post-money valuation = investment amount/ % of equity. The average investment amount and valuation of all Symbid projects are presented in the figure below.
Conclusion: the average project on Symbid (excluding one-off projects) raises EUR104k for a total company value of EUR1.4m, which represents an average equity stake of 7.5%.
When we look closed in to the different ‘raising statuses’ of the crowdfunding campaigns, we find that successful projects (N = 38) search for a smaller investment amount than unsuccessful projects (N = 17), but have higher valuations (and thus a lower equity stake of 5.9% and 12.5% respectively).
Conclusion: it seems that the valuation is not a critical success factor for raising crowdfunding money; projects that were able to successfully raise the investment amount sought have higher valuations. Maybe crowd investors don’t look at the valuation or don’t care about it. The personal connection to a project might be a better reason to invest than investing to actually make money.
In the sequel of this post, I’ll dig deeper into the valuations of two subsamples: pre-revenue companies and companies that generate revenue already. One would expect that the latter has higher valuations than the pre-revenue companies, right? In addition, I will compare the valuations of Symbid projects with other disclosed valuations such as the standard terms of Rockstart and Startupbootcamp. This will lead me to the conclusion: how foolish are the friends, family and fools?
Guest post by Thomas Mensink, business engineer at B&M Business Development and also working on Golden Egg Check, an online toolset for entrepreneurs and incubators to test the potential and investor readiness of venture propositions.
Image creds: www.doobybrain.com
Frontpage photo by Pieter van Marion (creative commons via Flickr)