ICO: Initial Crowdfunding Offering (Part Two)

An introduction to Equidam Valuation Academy (Part Two)

Valuation Report

Valuation for Equity Crowdfunding

The following post was written by Gianluca Valentini – co-founder of Equidam (a start-up that used equity crowdfunding to raise capital).

As promised in a prior post, here it is the second part on Initial Crowdfunding Offering as part of Equity Crowdfunding.

With regard to the stock exchange, information transparency shall be a major issue in equity crowdfunding, not only about the business itself, but also and especially about the stocks being offered. So far, crowdfunding platforms are requiring their entrepreneurs to disclose information mainly about the business, the team, and the product, but little or no effort has been made with regard to price (in other terms, valuation).

Yet, the observable set-up in operating crowdfunding portals resembles that of established stock exchanges: the stock price is set before the launch of the online campaign. What indications are provided to crowd investors about the determination of the price? Is this one of the reasons preventing angel and VC organizations from embracing crowdfunding out of hand? In addition, what shall be the approach for such an estimation process, accounting for challenge to the sense investor appeal? Again, the combination of a preliminary estimation along with adjustments according to the demand-supply balance looks like the best way.

As in the case of IPOs, investors, especially at this early stage, have the incentive to lower the price as much as possible. At early stages, this effect is possibly even stronger because they may try to gain a larger stake (and voice!) in the company. On the other hand, fixing a price without testing the demand may be quite a gamble. I don’t even mention fixing the price without any credible valuation model. So, how can entrepreneurs value their company in a way that is accurate and resembles that of more mature companies? A credible valuation methodology shall be applied.

The famous business angel Louis Villalobos suggests that a combination of methodologies is even more appropriate. The explanation, reasoning, and assumptions underlying these models shall be made available to potential investors via information documentation. The more intuitive and concise, the easier it will be for the crowd to understand the how the price has been determined. On the other hand, the investors’ appeal of the start-up also shall be considered in the aforementioned documents. But, again, investors are likely to bet a low price, especially when the audience is limited. Therefore, the “expected” demand (and price) may be hard to estimate and analyze. A solution sees the “expected” demand being substituted by the “observed” demand of comparable companies, or peers. This is also one of the valuation techniques broadly applied by financial institutions (e.g. valuation with multiples), especially when it comes to IPOs, as the paper by Roosenboom mentioned before can prove.

The lack of a database of comparable transaction constitutes a hurdle. Data is spread across several organizations investing in early-stage companies and the aggregation struggles with their reluctance to share this information. Concluding, it is clear that valuation of going-crowdfunding companies is an important piece of information, and yet entrepreneurs may find substantial challenges in estimate it. At Equidam, we believe the first step entrepreneurs should take is informing themselves, and learning!

In the coming weeks, on Equidam blog, there will be a series of posts to inform and educate the participants in equity crowdfunding about start-up valuation. Also, we, at truCrowd(tC) will re-publish some of the materials.

What do you think? How important is valuation for equity crowdfunding (from both investor’s and issuer’s perspective)? Your response is highly appreciated because You Are Awesome!

Posted in Capital Formation, Equity Crowdfunding, Investors, Start-ups, Startup Valuation, Uncategorized

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