Recent equity crowdfunding investment opportunities have brought valuations to the spotlight. Companies are raising finance from the crowd at record valuations. Professional investors are taking note, unsure of what this means for them and wondering how the crowd expects to make a profit. A recent report shows just how clear this trend is. With valuations easily influenced by hype and marketing, is the crowd overpaying for their investments?
The disparity in valuation is just one of the key differences I’ve highlighted in the past regarding company-led crowdfunding platforms Vs investor-led platforms. However valuations are such a hot topic at the moment that I decided to look at it in more detail.
Firstly the hard data. A report published by data company Beauhurst (published in May 2015) shows that 65% of companies raising less than £500,000 investment via crowdfunding platforms give less than 20% of the company, compared to 44% of those companies raising from private equity and just 28% of angel funded rounds. This suggests that the price paid by the crowd tends to be considerably higher than that paid by private equity and angel investors.
Secondly I compared Brewdog and Camden Town Brewery with a reasonably well-known brewery that is listed on ISDX and has not raised finance from the crowd; Adnam’s Brewery, based in Southwold. Established in 1872, it has a track record and its accounts on ISDX show that in 2014 Adnam’s’ revenues were over £66m with an operating profit of £3.8m. Yet its market cap is £32m.
| 2014 values | Revenue | Operating Profit | Valuation |
| BrewDog | £29.6m | £3.8m | £305m |
| Camden Brewery | £9m | Unknown | £75m (reduced to £50m during fund raise) |
| Adnam’s Brewery | £66m | £3.8m | £32m |
When companies come up with their own investment terms they will naturally try to get away with as much as possible. The table above shows the difference between how much the crowd is paying (BrewDog and Camden Town Brewery) compared with the professionals (Adnam’s Brewery). All of the above financial indicators lack something that is arguably one of the most important metrics; what is the outlook in terms of future growth?
Regardless of the outlook for the above companies, we need to remember that when phenomenal British success story Innocent Smoothies was bought out by
And finally the three pieces of evidence that the crowd is in for a hangover when investing without the professionals:
1. BrewDog didn’t even bother including its valuation in their Prospectus, suggesting that they anticipated a highly unsophisticated crowd. And to prove that they were right, they have already raised over £5m!
2. Camden Town Brewery first raised finance from the crowd at a valuation of £75m. Shortly after, it raised money from the professionals at £50m. Camden Town Brewery not only reduced its valuation for the professionals but also, and more worryingly, the professionals got preference shares with downside protections whereas the crowd got shares without any of the downside protections.
3. Some platforms have been treating their own crowd as second class citizens, giving them far worse investment terms than what the professionals get. B class shares, no pre-emption rights, no voting rights. The list goes on. Yet the crowd doesn’t seem to mind, which can only mean doesn’t seem to understand.
This means the crowd is not even asking the most basic questions before investing. And there can only be one result: the professionals will have the last laugh when the party ends. That is why I am such a fan of the investor-led model that platforms such as SyndicateRoom and AngelList use; professionals validate the investment opportunity by leading the funding round and investing their money and online investors join in under the same economic terms. The crowd invests with the professionals.
All in all, if you are thinking investing through a crowdfunding platform, make sure you know the differences between the platforms and their respective models. You can read about the top 5 things you should know about equity crowdfunding platforms here.
If you are interested in learning how to invest like the professionals, I recommend you browse the Investors’ Academy which provides information for online investors to make informed decisions. If you are looking for a practical example of how different valuations can impact your financial returns as an investor, read “9 reasons you must invest at the right valuation for awesome returns”.
