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‘The Elephant in the Room’

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As Crowdfunding Matures, is Valuation the Critical Issue that People Ignore?

Crowdfunding  join the increasingly respectable alternative finance (‘AltFi)

Recently, when it had just become legal in a few enlightened jurisdictions to raise equity directly from the public through online platforms, valuation wasn’t much of a problem. Fund raises were small, a novelty afforded to the few souls brave enough to ‘lay it out on the line’ in such a brazen way.

However, with some early successes, ‘serious’ money started to become interested, and crowdfunding has recently stepped up to join the increasingly respectable alternative finance (‘AltFi) universe.

UK equity crowdfunding

The UK was the trail-blazer for the equity crowdfunding movement, with amounts raised reaching over £120,000,000 in 2015. Even allowing for the fact that some of this didn’t come directly from the public, this is still impressive. This is driven by the fact that commission rates on funds raised are low, and regulations strictly limit the advisory role of the platforms themselves; so a lot is still taken on trust.

As reported in the latest Beauhurst newsletter: Jimmy McLoughlin, Deputy Head of Policy at the Institute of Directors, noted: ‘Equity crowdfunding’s success will depend on how we deal with coming business failures’. But while he makes a valid point, the number of UK equity-crowdfunded seed-stage companies failing is actually at an all-time low.

Crowdfunding is far less risky than predicted

Joe Gardiner of Beauhurst continues: ……’Companies crowdfunded in 2012 and 2013 are showing a much higher trouble rate than those that were seed-funded through other sources. However, companies that were crowdfunded in 2014 currently show comparable trouble rates with their non-crowdfunded counterparts. Those funded in 2015, are actually less likely to be in trouble than their non-crowdfunded counterparts’.

This is pretty remarkable.; the ‘wild-west’ world of equity crowdfunding seems to have turned on its head. –According to the data at least, crowdfunding may be turning into a form of fundraising far less risky than anyone predicted.

So why are we seeing this trend? The short answer is that we don’t exactly know. Arguably, it captures crowdfunding’s teething process. After its early years of finding its feet, it seems the industry has righted the wrongs of its initial practices, and essentially has grown up.

Another reason could be due to a growing reputability among platforms; attracting seed-stage companies that would never have considered crowdfunding several years ago. Beauhurt’s Head of Research, Pedro Madeira, says: “Launching an equity crowdfunding campaign has, in the space of five years, gone from carrying a significant level of risk to being a highly professionalized way for companies to receive publicity alongside funding.”

Crowdfunding and the FinTech industry

The question is, can we really expect the general public to do better than professional VCs? Even when these VCs often rely on a few super-outperformers to make up for all the outright failures?

What is clear is that the fast developing FinTech industry has risen to the challenge, with a wide range of automated low cost due diligence and investment management tools geared to the sector.

As professional participants such as angel syndicates and family firms begin to participate, they are ‘raising the ante’ in ensuring a better deal for investors, especially as a few crowdfunding frauds and casualties among crowdfunded companies has brought the FCA’s attention to shortcomings in investor protection.

AlgoValue’s new tool for small investors 

This brings us to AlgoValue, who up until now provided a rigorous valuation based on proven methodology used by accountants and valuators – but hasn’t yet been available to the small investor. Even a trained accountant or valuator lack the time to prepare EXCEL spreadsheets for each of the many crowdfunding investments they get to choose from, and in any case existing models are not suited for pre-revenue companies.

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AlgoValue is game-changing. AlgoValue was formed after the founders spent many years toiling over complex spreadsheets as valuation experts at a ‘Big 4’ accountancy firm. The solution has now been distilled into a low cost, easy-to-use cloud-based platform, well within the reach of individual investors, the supporting community, and startups themselves..

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