So you’re about to invest in a start-up business that says it’s worth £5m quid?
Did you know that recent research has revealed that entrepreneurs raising funds through equity crowdfunding, are only giving away on average 12.4% equity to early-stage investors?
Now what does that mean? Well it’s not exactly generous for a company that more than likely hasn’t generated any revenue, let alone even proved its concept.
Start up evaluation
But what it really means is that the companies are valuing themselves too high.
Before you hit that invest button, you need to ask the question… am I really getting value for my investment? Is this company really worth the £5m they say it’s worth?
For an investor, the maths is simple – if you buy in at a £5m valuation, the company must find a buyer for more than £5m if you’re going to just break even… and perhaps make a small return. Is that really feasible? Is that worth your risk?
Ask yourself, what sort of return am I looking for from such a high risk investment?
If the answer is 100%, or double your money, then that company needs to sell for £10m.
Is it really worth £5 million?
Now ask yourself, if that’s really feasible?
To develop a sustainable marketplace, crowdfunding platforms should do all they can to allow companies to fund at a sensible valuation.
This is very important.
Ultimately, everyone in the crowdfunding space has a role to play.
Entrepreneurs need to be sensible and realistic, and not be swept away in a valuation bubble; crowdfunding companies need to question entrepreneurs over and over, to ensure valuations are realistic and investors are offered a fair amount of equity; and investors need to be vigilant and ask themselves if 12.4% equity is really enough?