Equity crowdfunding platform Growthdeck has updated their platform. The new approach is said to be designed to improve their private equity style approach to raising capital online. Growthdeck has always set the bar a bit higher than some of the other UK crowdfunding sites. By allowing minimum investments starting at £1000 Growthdeck wants to appeal to a more sophisticated or High Net Worth individual looking to invest in early stage companies.
Growthdeck also believes that valuations for companies raising funding online has gotten a bit out of hand. The company states that businesses are “giving up just 12.4% equity on average” leaving investors with a minimal stake. Unjustifiably high valuations may lead to “unnecessary risks” that make it harder for founders to raise new capital if the company is underperforming and the valuation goes into decline.
“Shareholders at the crowdfunding stage are often being asked to accept a very small shareholding,” states Gary Robins, Co-founder of Growthdeck. “Handing over just over a tenth of their company to crowdfunders in total is not a very significant proportion, given what that investment means to the business. Excessive valuations in crowdfunding can also put both investors and business owners in a weak position for the future.”
Robins says that later funding rounds may involve professional investors who will demand a valuation reset thus driving heavy dilution for earlier investors.
“The founders could also suffer this dilution, along with reputational damage caused by seeing their equity declining in value rather than growing. Investors need to question whether they are getting an adequate stake for their money, and consider the impact if their shareholdings get diluted in the future by any subsequent funding round. If the investee company grows as they hope, there is a good chance that additional funding will be needed,” explains Robins.
While acknowledging that calculating valuations for a young company can be a challenge, Growthdeck said it analysed 114 companies raising capital on 6 UK crowdfunding platforms in December of 2015. On average, companies seeking crowdfunding are valuing themselves at £3.2 million. Although the average investment target is £311,490, a significant proportion (8%) of investment opportunities listed are looking for £1 million or more.
Robins says that frequently the funding represents the bulk of the firms assets;
“Shareholders at the crowdfunding stage are often being asked to accept a very small shareholding even though the cash they put up represents almost all of the investee company’s assets.”
While entrepreneurs tend to overvalue themselves – in part due to the optimistic nature of risk taking entrepreneurs – a better approach is to employ private equity methodology to crowdfunding. Through extensive due diligence of the investee businesses on offer and robust assessment of their prospects long-term through to exit are more reasonable valuation may be derived.
Robins believes that not all crowdfunding platforms are equal. Engaging the platform to validate the value of a listed company may mitigate some investor risk as well as positioning the company better for follow on funding rounds. This is good for both founding entrepreneurs and the early shareholders that believe in the company.
Growthdeck’s updated platform is described as employing private equity methodology to crowdfunding, through extensive due diligence of the investee businesses on offer a better assessment of their prospects long-term through to exit is rendered.
“If crowdfunders don’t start putting sensible valuations on companies then there are going to be thousands of disgruntled investors in the future – something which would be very damaging for what is really a hugely exciting concept with great potential,” warns Robins.