In a series of two guest blogs Thomas Mensink will look at crowdfunding valuations and success of Dutch startups. You can read his first post, which lead to a healthy discussion, here. Now on to the second post:
In my first post on crowdfunding valuations, I showed that the average project on Dutch crowdfunding platform Symbid raises €104k for a total company value of €1.4M, which represents an average equity stake of 7.5%. Moreover I concluded that it seems there is no correlation between valuation and success in raising crowdfunding money. This could be because 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.
So, the average post-money valuation of all projects on Symbid is €1.4M (pre-money: €1.3M). How does this number compare to other valuations? Angellist, a website where ‘angel investors’ and startups can meet, says that in the Netherlands the average pre-money valuation is $2.9M (~€2.3M). This valuation is based on done deals but includes companies that raised second, third or even fourth rounds. In that sense, the sample of Angellist is not really comparable to the one of Symbid, as most projects on Symbid raise their first round.
Within the Symbid sample, I made a distinction between pre-revenue companies (N = 39) and companies that generate revenues already (N = 19). This ‘monetization status’ was not always explicitly provided by the company, so I made a rough estimate based on the description of the project and, if available, financial statements. The result is presented in the figure below.
As expected, the companies that generate revenue have a higher valuation than pre-revenue companies (€2.0M and €1.3M respectively). Interestingly, the investment amount is approximately the same for pre-revenue and revenue companies (around €100k).
Nota bene: the average valuation of pre-revenue companies that raise money via Symbid is €1.3M. €1.3 million! These companies have barely made any money yet and still think they’re worth more than a million euros. Wow, that sounds almost like a bubble, doesn’t it?
But who am I to judge? Let’s compare these pre-revenue valuation with other known valuations for startups. Most entrepreneurs and investors do not publish valuations, hence it is difficult to benchmark the Symbid valuations. Nevertheless, accelerators Rockstart and Startupbootcamp, who both invest in early stage (also pre-revenue) companies, do publish their standard investment terms: €15k for 8% equity (implying a valuation of €187.500). When we visualize this, we get the figure below.
Concluding: for companies that are more or less in the same stage, valuations at Symbid are much, much higher than at commercial accelerators Rockstart and Startupbootcamp. In fact, projects on Symbid think they’re worth almost 7 times more than the startups that are accepted at Rockstart and Startupbootcamp, that by the way offer more than just money for this equity.
What’s wrong with high valuations?
So it seems that valuations (especially for pre-revenue companies) are high at companies that try to raise or have raised crowdfunding. There is a risk for companies with (too) high valuations: what happens when they want to raise a next round of funding? If they then turn to other/ professional investors, there is a risk that they don’t value the company as high as the crowd did before. There are roughly two options then:
- There will be no deal
- There will be a down round
The consequence of the first option can be catastrophic for the company and the shareholders if they can’t get a deal from any investor: they lose all or most of their money.
In case of a down round (the value of the company is below the valuation at the previous round), current shareholders either lose equity or have to invest more money to keep their stake. Think of this as a pie: the size of the pie stays the same or gets smaller but more people want a slice of it. If the crowd had anti-dilution rights (which I don’t know but don’t find likely) the founders of the company have to distribute some of their equity to the new investor (a piece of the slice of the founders is for the new investor). Alternatively, all current shareholders, including the crowd investors, lose some of their equity. This would mean that the crowd investors end up with less than the average 7.5% of the company that they own now. Is it still worth it?
In my opinion, the average valuation of the crowdfunding projects on Symbid is overestimated. But then again, who am I? There is a Dutch saying that goes: your company is worth just as much as the fool is willing to pay (it’s worth whatever you can get for it). If investors are willing to invest an amount for a certain share of equity, then I guess that is as close to market value as it can get.
I really support and welcome the crowd funding concept because it offers a new set of financing opportunities for entrepreneurs in a stage where it is hard to get funding. However, I am worried that both entrepreneurs and crowd investors will get disappointed when valuations of the crowdfunding round are set unrealistically high. The risks are that companies won’t be able to attract new investors in a subsequent round, or that there will be a down round, resulting in lower equity stakes for current shareholders (both founders and crowd investors).
Entrepreneurs and their crowd investors enter a long term relationship (5 years? 10 years?). To make crowdfunding a sustainable financing instrument, I would ask entrepreneurs to think beyond this crowdfunding campaign and keep any next funding rounds in mind when establishing the value of their company. Concerning the crowd investors; you’re very much needed but if you’re in it for the money then don’t shy away from a rational approach. You, entrepreneur and investor, both are in it for the long run, so a false start is so unnecessary.
Do you agree? What do you think? Are the valuations of crowdfunding projects overestimated or not? Do you have experience investing or raising money for equity through a crowdfunding platform?
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 Edward Horsford