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Crowdfunding Valuations in the Netherlands: Are We Crazy? – Part 2

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.

Monetizing Status

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 Most entrepreneurs and investors do not publish valuations, hence it is difficult to benchmark the Symbid valuations.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.

 Comparable Valuations

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:

  1. There will be no deal
  2. 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?

Concluding remarks
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?

Thomas MensinkGuest 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

Guestblog
StartupJuncture welcomes guest authors from the Dutch startup community / ecosystem to publish guest blogs. for more information, send an email to team@startupjuncture.com
  1. Hi Thomas, Your comparison with the accelerators doesn’t fully hold. The accelerators themselves feel they also provide a couple of EUR100k’s of value. I think their valuation is somewhere between EUR600-800k of the startups entering the program (and yes you’re right EUR15k is the only cash).

    Most startups post/during accelerator program in the Netherlands are in the EUR1.2-1.7m range (valuation or cap in case of convertible) when they raise seed money. Although there are obviously plenty of exceptions that have gone higher (even uncapped convertible…)

    Comparing an average EUR1.4m Symbid valuation vs. c. EUR1.5m post accelerator valuation I personally would think the “Symbid value” is on the high end. But it’s nowhere near a 7x difference implied with the EUR15k for 8%.

    • Great addition, Wouter! I was aware that accelerators offer more than just the money but I think it’s hard to put a price on that (besides: crowdfunding also has its ‘side-effects’ like marketing and distribution channels). I knew that a direct comparison in valuation is therefore hard to make, but because of the lack of other valuation data this was the best I could get. Hopefully other people will share their experiences and opinions.

      • Ron Z says:

        This is a perfect example of my worries. If you find it difficult to compare the two, then why on earth would you? And, if for some reason you must, then why not add the reasoning behind the difficult comparison? Like you did earlier in the article when comparing with Angellist – which made the paragraph rather useless, but at least you finally questioned something your analysis.

        • I don’t find it difficult to compare them, but it’s hard to directly compare them (that’s a different thing). I wanted to provide context and to put the valuation figure in perspective. Unfortunately, there is little data in the market about valuations and the numbers I provided were the best available. Feel free to add what you know, Ron Z.

          • Ron says:

            Well, you didn’t “provide context” nor did you “put the valuation figure in perspective”, because you didn’t provide the context you were supposed to, used the wrong perspective and based it on insufficient data. If the data were sufficient you should have mentioned that:

            “on average valuations on crowdfunding platforms are ‘X’, which is much higher than those reported for accelerators ‘Y’, but that comparison doesn’t hold one bit because accelerators also put a value on the ‘non-cash-services’ they provide, the height of which is completely unbeknown to me.”

    • Hi Thomas, Hi Wouter, to elaborate a bit more on this. Of the approximatey 50-55 seed deals (whether in one time rounds or multiple ones) we advised on in the last three years, around 50 % were in respect of accelerator alumni. The average pre money valuation is slightly higher, and more towards 2.2-2.3 million EUR, and of course with some going up to 4.5 million and down to 1 million EUR. Comparising valuations of startups, whether with revenue in place or not, raising seed money at a crowdfund platform or by ‘traditional’ methods, I would like to add the following:

      – the ‘crowd’ effect of Angellist makes those metrics as such quite incomparable with metrcis from the more conventional type of funding, the one on one angel / VC deals or co-funded deals with not more than 3-4 investors;

      – to what extent turnover realised by a startup when raising at a crowdfund platform is representative to turnover realised by a startup in an accelarator plays a role I guess, where finding the right business and price model for startups in an accelerator program and to what extent that any such turnover has been realised according to that model is an significant goal in the program, and therefore import in terms of validation and investors investing in accelerated startups find this much more important than investors investing on a crowdfunding platform.

      The effect of crowfunding in the seed stage for startups in pursuing to close a Series A Round should be more discussed. With exponentially more startups being seed funded, follow up funding becomes more difficult and the gap, cruch, or whatever you would like to call it, towards Series A becomes larger. Smaller amounts, for more startups where maybe we should invest higher amounts in less startups. On the other hand, the critical mass factor plays an important role as well, as you could say the more startups are seed funded, the more potential. Finally, by not needing more than 50-75 k to have a good and workable beta version, perhaps investing less in more companies is just a simple result of less money needed.

      Best, Dave

  2. Ron Z says:

    Well… this doesn’t get any better does it.

    This second part starts off with drawing the same faulty conclusions as the first. Although one is written up differently now: “Moreover I concluded that it seems there is no correlation between valuation and success in raising crowdfunding money.” The conclusion was actually “valuation is not a critical success factor for raising crowdfunding money”. Which is something different. But both are wrongly made.

    Then, this next analysis tries to get even more out of the limited sample by going into more detail, although an attempt has been made to keep the numbers up a bit by interpreting whether a business is pre-revenue or not…

    And, really, you cannot make any comparison like this: “for companies that are more or less in the same stage”. It’s truly awful. There are loads of venture-backed companies worth tens of millions that are pre-revenue (and not limited to the ones that are heavy on IP, like life sciences companies, but also Internet and mobile plays that focus on users instead of cash in). This makes the ‘bubble’ talk some paragraphs earlier rubbish as well.

    Thomas, you might have all the background information on these companies to able to draw all these conclusions, but as long as you don’t share them in your articles, they are of no value at all.

    To be fair: I do like what you are trying to achieve and share your worry in your concluding remarks. Some of your advice is relevant as well. But you really need to dig in deeper, or rather have someone else do the research for you, and stop drawing unfounded conclusions.

    NB: the values in your first graph don’t add up (revenue plus pre-revenue valuations have a considerably higher tally than the ‘total’ bar next to it)…

    • The bars don’t add up because they’re not suppose to add up. The numbers are averages.

      You’re right in first paragraph; the mentioned conclusions are indeed different (this is the editor’s job, not how I actually wrote it down). Nevertheless, the initial conclusion is not wrong at all, but I’ll get back to that in the comments of the first post.

      The sample size is 70 projects. That is almost (because CrowdAboutNow also does some equity crowdfunding) the entire market in the Netherlands. This might indeed not be enough for a scientific paper but guess what: this is blog post. This post is intended to share knowledge and ideas on the topic of crowdfunding valuation in the Netherlands. I really appreciate your interest in the methodology but I intentionally left details out, to keep the post readable and the discussion on the main topics.

      You make an interesting point though; pre-revenue companies can have a high value if they have other valuable things such as IP or users. Pre-revenue isn’t necessarily pre-value. However, most (if not: all) of the cases in this sample were pre-revenue because they had no product or users yet. They use Symbid to kickstart their product and business. Therefore, I believe that a €1.3M is on the high side.

      • Ron says:

        Thanks Thomas.

        I’ll be stepping out of the discussion on methodology, we’re running around in circles. But would like to respond on the explanation of the bars not adding up… Not sure what you take me for but any reader of this site will know that averages don´t add up. But if you multiply the averages by the Ns given, then it should add up. Rounding could be a cause, but not enough to explain this difference. Anyway, that was only a minor detail.

        • The difference can be explained by the unknown cases (N = 12), for which I was unable to determine whether they were pre-revenue or revenue. As said in the text, total sample size = 70, pre-revenue = 39, revenue = 19, and unknown is (hence) 12.

          • Ron says:

            You leave a lot to the imagination of the readers then Thomas. It seemed to me that the text said that you made a guess re: the pre- or post-revenue status of the companies for which this was not provided. Also, the 70 is actually NOT mentioned in the text. It is in the first, but not in this article. It would make things much clearer if you would add the Ns to the graphs.

            Anyway, it does surprise me that this second ‘analysis’ looks at all 70 projects. As far as I can understand the first article, the 70 also includes companies that are still in the process of raising. Which you rightfully omitted from the first article’s analysis. Now suddenly they pop up again, without letting us know. I am not saying you can’t add this bunch to the mix as you have not discussed “success” in the second article, but I wish you would have been more clear.

            The whole ‘analysis’ leaves so much room for speculation it has the word “UNPROFESSIONAL” written all over it. I recommend a more strict policy at startupjuncture with regard to publishing research like this.

  3. Ronny says:

    As much as fans are willing to pay a premium for their stake in their favorite startup I guess they will accept a failure or a downgrade of stock value better than professional investors. Reason: fans enjoy the ride as well – and are willing to pay for it. For some insight into the way “professional” investors treat founders of startups who didn’t meet expectations: http://stackstreet.com/10-hard-lessons-learned-starting-precog/ (lesson 10).

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