Crowdfunding Business Valuation: 9 One-Liners

It’s a rare day when I’m not asked a question about valuation for businesses raising investment via crowdfunding. There’s no shortage of material on this topic - and indeed here’s another piece to add to the pile - so I often suggest that one of the things our clients can do is simply trawl the web to see what they find. However, it’s pretty daunting and there are numerous perspectives and methodologies to consider when deciding how to value your business. 

Every now and again, I do see cases where the business may be selling itself too short and undervaluing the opportunity they’re presenting; however, those cases are the exception. So with that in mind, I thought I’d share my nine one-liners for you to mull over as you address this often vexing topic:

9 One-Liners

1. Over-optimistic valuation is one of the top killers of a crowdfunding campaign.
2. If it seems that the only thing preventing people from investing in your business is valuation, you need to stop and think. 
3. Selling shares in your business is not that far removed from selling your used car, ultimately the person who sets the final sale price is the buyer.
4. You need to accept that the earliest investment rounds in any business are invariably the most expensive in terms of equity cost.
5. Successfully securing investment at a higher than sensible valuation creates the very real risk of an unattractive down-round should you return to the trough for more funding in the future.
6. The practical difference between your ideal valuation and one which will work for investors is often negligible in terms of equity cost, especially for relatively modest rounds, say sub-£1million. 
7. Basing your valuation solely on speculative financial projections is of similar reliability to crystal ball gazing and casting runes. 
8. Equally, telephone-number profit predictions do contribute to demonstrating scale, drive, and ambition which is often attractive to investors, especially when backed up with sound how-it-will-be-achieved rationale. 
9. Your honest and passionately-articulated story about why you believe your business valuation is justified can be just as effective as any of the traditional valuation methodologies. 

Takeout

When applying to list your crowdfunding campaign on platforms such as Crowdcube and Seedrs, you will be asked about the intended valuation for your raise. So to avoid being sent away to think again, it’s highly recommended that you have a well-thought-through and reasonably justified explanation for how you’ve arrived at the value for which you’ll be selling shares in your business. 

Author: Richard Mojel, Commercial Director, ISQ.