Crowdfunding valuations 2016 – Did the crowd start to punish companies with too high valuations?

Two years ago I decided it was time to add a bit of rationale to the equity crowdfunding market in the Netherlands. Do the crowdfunding valuations make sense or are the so-called friends, family and fools really just friends, family and – literally – fools?

This is the third (and final) year in a row that I analyzed the crowdfunding valuations in the Netherlands based on data of the main crowdfunding platform Symbid. In the previous blogposts (2014a, 2014b and 2015) I concluded that the valuations have gone up in 2015, that I considered the average pre-revenue valuation high and that (too) high valuations could lead to funding issues later on.

But then again, what’s the value of a promise and who am I to decide if a startup priced too high? Only time can tell. Let’s look at some data first.

Data: Symbid
To find out what the crowdfunding valuation are, I looked at publicly accessible data from Symbid, the major equity crowdfunding platform in the Netherlands. Just like last edition, I collected Symbid data manually by browsing its website and searching its newsletter emails with upcoming crowdfunding campaigns. I excluded pledge, convertibles and one-off projects such as the movie ‘De Surprise’ from our sample. For 7 projects I did not have the data to calculate the valuation, resulting in a total research sample of 200 projects.

Crowdfunding valuations have again increased over the past year
The post-money valuation is – unlike previous years – not provided anymore by Symbid (why?) but the calculations are simple: post-money valuation = investment amount/ % of equity. The average investment amount and valuation of all Symbid projects are presented in the figure below.

overall-pie

The average project on Symbid raises, or tries to raise, €113k in return for 6.6% equity. This corresponds to a total (post-money) company value of €1.7 million (median: €1.1M). How does this compare to previous years?

The valuations have gone up. The figure below shows that the average valuation of the projects per year increased from €1.4 million before 2015 to €1.8 million 2015 to €2.1 million in 2016 (and across all years €1.7M as mentioned). This corresponds to an increase per year of 23%. The average investment amount also increased, from €101k to €128k, but less equity was provided in return (7.3% vs. 6.1%).

valuation-period

Interestingly, the valuations of the projects that were successful on Symbid (i.e. they raised 100% or more of their funding need) remained stable around €1.7 million in the last years. The average valuation of the projects that were not successful has on the other hand increased from €800k to €2.3M:

raising-status-periods

 Did the crowd start to ‘punish’ companies with too high valuations by not investing in them?

What I find interesting here as well is that the average valuation of unsuccessful projects with revenue is €2.5 million – higher than the €1.8 million of successful projects with revenue – and the valuation of unsuccessful projects without revenue yet is €920k – lower than the €1.5 million of successful pre-revenue companies. Perhaps, but I’m just speculating based on some projects I saw, companies with revenue that do not succeed on Symbid are too arrogant (“let’s see if we could raise the money for this price”) and the companies without revenue do not succeed because they are too cautious (“it would be cool if we could raise the money to start our business, let’s try”).

Companies with revenues have higher valuations
Within the Symbid sample, I made a distinction between pre-revenue companies (N = 75) and companies that generate revenues already (N = 91) (the revenue status of the remaining 41 is unknown). The result is presented in the figure below.

rev-status

As expected, the companies that generate revenue have a higher valuation than pre-revenue companies: €2.1M and €1.4M respectively. These numbers haven’t changed much compared to last year. The investment amount is this year slightly higher for revenue companies compared to pre-revenue (€131k vs. €95k). Again, I am surprised by the high valuation (in my opinion) of the pre-revenue companies. The nature of these companies is very diverse, but they have one thing in common: no paying customers. Yet they value their promise at €1.4 million and get away with it in many cases.

This year I also found some data to put the valuations of companies with revenue in perspective. Constantijn Lurvink, a business economics student, studied the valuation techniques of the companies on Symbid by comparing the valuation of the successful campaigns with the outcomes of different valuation methods that they applied (e.g. DCF, venture capital method and scorecard method) to see which technique provided the valuation closest to the deal valuation. (His findings: a combination of techniques with certain weight factors provides most often the value closest to the deal value). Using his data and looking at the companies with revenue and a successful campaign (N = 40, so a subset of my dataset), and compare their projected revenue for the year following the campaign (to make it easier to find comparable data) with their valuation, we find that on average the multiple equity value/sales is 12.4x. Not bad.

Valuations are skewed around €750.000
In order to see what valuations are most popular, I made a histogram containing the frequencies of the valuations of the crowdfunding projects. 48% of the crowdfunding projects have a valuation of €1 million or less, 91.5% have a valuation of maximum €3.5 million. Most of the projects (17%) raise funding at a valuation of €750k to €1 million. The highest valuation, a little over €15 million, is from Solarus. The most extreme pre-revenue valuation is Only Once (4th round): a little below €8 million.

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Concluding remarks and thoughts
Compared to previous analyses, the valuations of equity-based crowdfunding projects have gone up. Companies with revenue raise on average at a valuation 12.4x their projected revenue. Companies without any revenue yet are raising or have raised (successfully) at an average valuation of €1.4 million. This sounds pretty optimistic to me and could have consequences in any follow-on rounds (i.e. no deal or downround, like I explained last two times). Obviously, the current equity stake of on average 6.6% will further dilute with every new equity round the company raises, resulting in a smaller slice of the pie for crowd investors than they might expect. But apparently there are enough friends, family and ‘fools’ that are willing to pay this price, so I guess these valuations are ‘market conform’.

This year we are probably going to see some crowdfunded companies that will cease operations. Not necessarily because their intrinsic business idea is bad but because that it just what happens with startups a lot. Aside from the crowd investors that will lose most or all of their investment, I can image that a larger number of crowd investors will get disappointed financially when the realized returns and/or their eventual ‘slice of the pie’, after sequential funding rounds, are below expectations. High valuations tend to lead to high expectations.

Like last year, I do hope crowd investors will sustain, even when some of their investments fail or disappoint. Therefore, I encourage investors to keep investing, not shy away from a rational approach (as well) if you aim for financial returns, and do challenge the crowdfunding valuation when you think they are too optimistic. Unfortunately, I noticed that both the explicit valuation and the challenge valuation button have been removed from Symbid. This doesn’t really contribute to the transparency I believe.

I also encourage entrepreneurs to really think through the next business steps, funding strategy (i.e. next financing rounds and dilution) and business risks, and be very clear and explicit about this in the project description. This especially holds for pre-revenue companies as they don’t have much to fall back on (yet) except for a well thought through plan backed by sound (financial and non-financials) assumptions.

This post also appeared on StartupJunctureGolden Egg Check’s blog. Header image is from Alejandro Alvarez.

 

Crowdfunding valuations in the Netherlands, what’s the value of a promise?

The crowdfunding market in the Netherlands has again doubled in size over the past year. According to last week’s press release of crowdfunding research company Douw&Koren, the amount of money raised with crowdfunding has grown from €63 to €128 million. At the same time, Douw&Koren says that 2016 will be the “moment of truth” for crowdfunding, as the growth rate seems to be stagnating.

Last year, I wrote a sequel of two blog posts about the valuations of equity-based crowdfunding projects in the Netherlands (read them here and here). My conclusion was that I though that the valuations seem to be high and therefore hold a certain risk with regard to follow-on investments. But since investors were willing to invest, I guess the valuations were as close to market value as they could get.

When I published the first edition of my analysis about crowdfunding valuations last year, the comments it got were pretty binary. Most of the responses – I reckon – were positive (“thanks for researching this”, “interesting results”, etc.) and some were (very) negative (“malicious”, “terribly researched”, etc.). Interestingly, the hostile responses all came from anonymous people or people with a clear interest in this topic. At forehand, I underestimated the level of explosiveness of this topic.

It didn’t stop me from doing the analysis about the crowdfunding valuations again, a bit over a year later. What are the crowdfunding valuations these days? In addition, I analyzed the most frequently offered valuations, which can be useful for startups thinking about raising equity investments by crowdfunding.

Data: Symbid
To find out what the crowdfunding valuations are, I looked at publicly accessible data from Symbid, the major equity crowdfunding platform in the Netherlands. Just like last edition, I collected Symbid data manually by browsing its website and searching its newsletter emails with upcoming crowdfunding campaigns. I excluded pledge and one-off projects such as the movie ‘De Surprise’ from my sample. This resulted a total research sample of 145 projects.

Crowdfunding valuations have increased over the past year
The post-money valuation is already provided by Symbid but the calculations are simple: post-money valuation = investment amount/ % of equity. The average investment amount and valuation of all Symbid projects are presented in the figure below.

Overall valuation

Projects on Symbid (excluding one-off projects) raise, or try to raise, on average €109k for a total company value of €1.6 million, which represents an average equity stake of 6.6%. How does this compare to last edition?

Continue reading “Crowdfunding valuations in the Netherlands, what’s the value of a promise?”

Crowdfunding Valuations in the Netherlands: Are We Crazy? Part 2

This post originally ran on StartupJuncture. Check out the lively discussion there, too.

How foolish are the friends, family and fools?
In the first post on crowdfunding valuations, I found that the average project on the Dutch crowdfunding platform Symbid raises €104k for a total company value of €1.4M, which represents an average equity stake of 7.5%. Moreover I described that it seems that the valuation is not a critical success criterion for raising crowdfunding money, concluding that maybe crowd investors don’t look at the valuation or don’t bother about it. The personal connection to a project might be a better reason to invest than investing to actually make money.

So, the average post-money valuation of all projects on Symbid is €1.4M (pre-money: €1.3M). How does this number compare to other valuations? Angellist, a website where ‘angels investors’ and startups can meet, says that in the Netherlands the average pre-money valuation is $2.9M (~€2.3M). This valuation is based on done deals but includes companies that raised second, third or even fourth rounds. In that sense, the sample of Angellist is not really comparable to the one of Symbid, as most projects on Symbid raise their first round.

Within the Symbid sample, I made a distinction between pre-revenue companies (N = 39) and companies that generate revenues already (N = 19). This ‘monetization status’ was not always explicitly provided by the company, so I made a rough estimate based on the description of the project and, if available, financial statements. The result is presented in the figure below.

Monetizing Status

As expected, the companies that generate revenue have a higher valuation than pre-revenue companies (€2.0M and €1.3M respectively). Interestingly, the investment amount is approximately the same for pre-revenue and revenue companies (around €100k).

Nota bene: the average valuation of pre-revenue companies that raise money via Symbid is €1.3M. €1.3 million! These companies barely made any money yet and still think they’re worth more than a million euros. Wow, that sounds almost like a bubble, doesn’t it?

Continue reading “Crowdfunding Valuations in the Netherlands: Are We Crazy? Part 2”

Crowdfunding Valuations in the Netherlands: Are We Crazy?

This post originally ran on StartupJuncture (with a lot of discussion).

How foolish are the friends, family and fools?

Friends, family and fools. That’s how we refer to the group of investors that is willing to put money in your startup business when the risks are high. How foolish are they? I analyzed the equity crowdfunding deals in the Netherlands to see if the valuations people are willing to pay are rationally explainable or emotionally nuts.

My hypothesis was that crowd investors are less sophisticated (i.e. less rational, calculated and in for the profit) and more willing to pay a premium price if they like the product or the vision of the entrepreneur, than professional investors. In other words, valuations of crowdfunding projects are expected to be higher compared to valuations of startups that are engaged with professional equity investors (such as business angels and venture capitalists).

To find out what the crowdfunding valuation are, I looked at publicly accessible data from Symbid, an equity crowdfunding platform in the Netherlands. (CrowdAboutNow, another platform that provides crowdfunding for equity, is not really transparent about the (implied) valuations of the projects so I didn’t include them in my research sample). I collected Symbid data manually, by browsing their website and searching their newsletter emails with upcoming crowdfunding campaigns. I excluded pledge and one-off projects such as the movie ‘Wiplala‘ from our sample. This resulted a total research sample of 70 projects.

Crowdfunding valuations are high
The post-money valuation is already provided by Symbid but the calculations are simple: post-money valuation = investment amount/ % of equity. The average investment amount and valuation of all Symbid projects are presented in the figure below.

Symbid Valuations

Concluding: the average project on Symbid (excluding one-off projects) raises €104k for a total company value of €1.4M, which represents an average equity stake of 7.5%.

Continue reading “Crowdfunding Valuations in the Netherlands: Are We Crazy?”