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What will be the pros and cons of equity crowdfunding? Will crowdfunding give a startup a higher valuation? How will valuations be determined?

Specifically, for a seed stage startup. More specifically, one that is a web based platform that uses a freemium business model.

Filed under: Crowdfunding: Valuation, Equities

3 answers • 12 years ago

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Paul Niederer, Experience and tools from 300 Capital raises answered:

After shepherding 300 equity crowdfunding raises through our platform I'd say all of them have a higher valuation. Reason is it is the entrepreneur that is calling the shots. It is the entrepreneurs offer on their terms on an equity crowdfunding platform.

Once you get outside investors involved shaping the deal the valuation will most certainly go down. Agreed it may then be more realistic as everyone believes their company is more valuable than it is.

My advice? Treat early investors fairly. Money is the lubricant to get your idea into reality. Give them a fair share of the business and they will reinvest when need be.

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Sang Lee, CEO & Founder of Return on Change answered:

Definitely agree with the points that Paul made.

Having been an investment banker structuring was a primary component of my job as well as determining the appropriate routes of capital.

Equity crowdfunding brings both the capital and the crowd but along with that potential huge upside. Investors are not only your funders, but also marketers and potential consumers. An increasingly powerful and sustainable model, it's something that startups should definitely look toward.

Given that it is a freemium model there maybe more convincing required, as compared to institutional investors because new angels have less experience. This onece again can be viewed in a positive light which forces many startups to place a focus on profitability and sustainability.

Happy to schedule a call should you have anything further you would like to discuss.

Many Thanks,
Sang

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Nick Harriss, Corporate & International Finance Adviser answered:

OK, first a general observation. I believe we are still in such an early stage of equity crowdfunding, that is difficult to know how things will even out. VCs and stock exchanges have had plenty of time to work out pricing norms and models. At the current time I believe you are just as likely to get a high valuation as a low one, or none at all due to a failed raise. The lessons from the internet industry to date is that it takes a relatively short time (2-5 years) for a dominant platform to take route; think eBay and Amazon. To date, a dominant platform has not yet taken hold, but it will come.

Now in relation to your specific scenario. The advantages of equity crowdfunding is primarily that of availability. If you have a seed stage business the options for external capital raising are generally thin on the ground, and if you do find a VC to fund it, you will probably get a very tough deal. Crowdfunding, like any public market equity (and let's face it, equity crowdfunding is just a variation of public market equity within a new online context), provides a way to access capital while existing management retain control and have no dominant external party.

Will you get a good valuation? No idea, but the you will probably get a higher valuation that a VC will give. the question is probably more one of whether either Crowdfunding or a VC will fund at all.

Once you have a successful crowdfunding round, the key is to communicate with your shareholders. This is not a fire and forget exercise, and they will not wish to be treated like a parent you just go back to for money.

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