A reasonable valuation?

Recent high valuations for companies listing on crowdfunding platforms have added to fears that investors won’t make the returns they expect
Duncan Cheatle, The Supper Club founder, explains how companies can make sure that they’ve got a sensible valuation when listing on a crowdfunding platform

ONE OF the most valuable things that someone seeking funding can do is put themselves in their investors’ shoes. Until recently, I had always been on the money side of the table; I’m an investor myself and I also run The Supper Club, a club for high-growth founders and chief executives, many of whom are active investors.

But I’ve swapped sides, seeking investment for the first time, for my new venture Rise To. Rise-To.com is a career education and recruitment platform that overhauls the traditional jobs board market and aims to redefine how young people learn about, prepare for and connect with the world of work. By creating digital CVs and using scoring algorithms and data analysis, it auto-matches young people with employers and opportunities, whether that’s open days, work experience, internships, or permanent employment.

THE BUSINESS PERSPECTIVE
We’re now live, but to get to this point, we needed a small round of seed investment, which was secured through The Supper Club network itself. We did this under the Seed Enterprise Investment Scheme (SEIS), which is designed to help early-stage firms raise equity finance by offering tax reliefs to investors.

But since interest among members has been so high, we thought “what better way to engage them in our journey than to involve them as investors as well as employers?”. Our plan is to run our own crowdfunding seed round under the Enterprise Investment Scheme – the big brother of SEIS, designed for larger small companies.

While we considered managing the second round ourselves, we have chosen to launch the campaign through crowdfunding platform Seedrs for two reasons. First, our initial seed round highlighted interest from a number of entrepreneurs who wanted to invest smaller amounts. By using Seedrs’s nominee structure, we will be able to manage these shareholders more easily. Second, using a platform increases visibility to the investor community at large.

This exciting industry has been criticised, particularly recently, for some of the valuations coming out. And of course, as a funding business, the valuation you choose for your company is one of the biggest questions. Some platforms – Seedrs is one of them – make efforts to limit the risk to investors. And many are now investing heavily in due diligence processes, using them as a key competitive advantage. But my experience to date has also influenced the process. I am asking myself the same questions I would ask as an investor: what do I think is a fair valuation? Am I communicating my company’s potential to warrant that valuation?

TIPS FOR INVESTORS
Yet as well as applying the usual rules, there are, I believe, a few additional things to consider if you are investing through a crowdfunding platform: what checks has the platform done on the validity of what has been financially reported? To what extent can you validate the figures yourself? Have you personally checked out the founders and management team? Who has invested so far?

The last question is perhaps the most interesting in respect of valuation. If well-known angel investors have led the round, you can usually be reassured that the valuation is fair – this is the logic applied by fast-growing crowdfunding platform Syndicate Room. Likewise, if people who have invested in earlier rounds all “follow on” in the new round, that should give some comfort – unless, of course, there is something else that might have persuaded them to invest at that price. With the occasionally outlandish valuation, it’s hard not to wonder.

Duncan Cheatle is chief executive and founder of Rise To, founder of The Supper Club, and co-founder of StartUp Britain.


CityAMCrowdwatch.com

City A.M. has partnered with Crowdnetic for the launch of its suite of UK crowd finance data. It features real-time information on private, UK-based companies publicly raising capital online through securities-based crowdfunding portals.