An introduction to Equidam Valuation Academy (Part One)
Who, among the entrepreneurs reading this post, feels confident in explaining what an IPO is?
Sure, you probably know the meaning: Initial Public Offering. You might know it is the process that brings companies to be traded in public stock exchanges. In a nutshell, via an IPO a company is granted access to the crowd of investors active in the market, thus allowing the company to issue shares and raise funds. If you are acquainted with equity crowdfunding, doesn’t this ring a bell?
I’m sure it does. One can reasonably claim that established stock exchanges and raising crowdfunding portals are serving the same principle: enabling companies to access capital resources. In this post, I intend to highlight the similarities between the two and stress what entrepreneurs approaching crowdfunding portals should take into consideration when it comes to financial information disclosure.
Unlike crowdfunding, existing stock exchanges are heavily regulated and every country has an authority in charge of ruling and controlling the trades. (e.g. SEC in the United States). Most of the regulation is aimed at promoting and enhancing the market transparency regarding the nature of the financial asset being offered, its price, and its location.
But how is the initial price determined – that is, the opening price of an asset, especially a stock, never traded before?
In regulated stock exchanges, there are different approaches to determine such value. In principle, the price should be “what the market is willing to pay,” namely, the demand-supply balance determined by the market trades. Nonetheless, the lack of trading history sets substantial challenges to this approach.
For IPOs, the going-public company typically appoints an investment bank as lead manager (known as book runner or lead underwriter) that is in charge of estimating the opening price. Here, there are two options: the fixing of a price via valuation models, or the analysis of the investors’ expected demand in what is called the book-building. Usually a combination of the two is applied in order to pinpoint the best opening value. The lead manager sets a preliminary price of the stocks and then senses the investors’ appeal during a road show or an auction. The preliminary price may then be adjusted according to received interest, although this adjustment is partial and mainly only upward (source: P. Roosenboom, Valuing and Pricing IPOs).
I invite you all to check it out before continuing.
Doesn’t it look like any of the videos you can find on equity crowdfunding portals?
Well, if you noticed the same similarities, you can understand why I feel confident in associating equity crowdfunding with existing stock exchanges. In addition, crowdfunding portals as much as stock exchanges are available to every individual with a bank account, some savings, and an internet connection.
In the second part of this post you will read more about how the valuation is possible, recommended, and beneficial to going-crowdfunding companies.