It is virtually impossible to correctly assess the value of a company. A good valuation to one person might be seen as hideous by another. FundedByMe will never judge the valuation of any of the companies seeking capital through its system and we are not financial advisors. With that being said, we try to educate our entrepreneurs to help them make smarter decisions.
Rule No 1
The correct market price is what the market is willing to pay. This does not mean that the market is correct in its assumption regarding future returns or growth in asset values. The well-known US investor Warren Buffett put it correctly when he stated: “Price is what you pay. Value is what you get.”
So, it is hard to judge at the time of investment whether or not you will see your fortune melt away or grow at a tremendous rate.
Rule No 2
Remember that the offerings on FundedByMe have been priced by the seller, not through a market-driven process.
Rule No 3
Always remember why you invest. At FundedByMe we like to talk about Value From Investment (VFI), which is all those things you get out of your investment. Financial returns can be one, but it might also be the potential to be part of the next big thing in business. For others it's the joy of supporting an individual you like, a context to exist in, a good story to tell your friends, products you like, possible discounts, etc.
Rule No 4
You are solely responsible for any investment decisions. It is risky to invest in unlisted stock. You might never see your money again and it can be hard – not to say impossible – to sell stock in such companies. That said, some will make it big and pay back handsomely. Imagine if you were one of the first to join Facebook on its journey...
Rule No 5
Be prepared to lose everything.
The question remains how to correctly assess the value the entrepreneur says his or her company has. Rest assured that entrepreneurs are optimistic – that is why they became entrepreneurs in the first place – but sometimes their expectations seem sky-high.
Bear in mind that many of the companies on FundedByMe seek funds in order to grow, sometimes very aggressively. High growth affects the future value of a company very positively.
Other factors, besides growth, you should look for are:
- Cash flow
- Strategic position and potential in their sector
- The existence of patents or trademarks (can be very important)
- The team (most early stage investors would say that this the only thing they are looking for)
- Realistic expansion plans
- Risks they are facing
- Traction (high growth in user base, increasing sales, press reports, etc.)
Also, consider what you as an individual can bring to the table. Crowdfunding is only partly about the funds a company can raise. It is also about the networks the companies can amass and as an investor you are part of that network.
Your individual experience from a sector or a specific type of investment might guide you but please also be an active information seeker, for instance through the Internet, but also by asking other FundedByMe investors. Crowdfunding is, after all, all about the crowd.
If you want to drill down into specific valuation models, there is a vast territory to cover and we at FundedByMe will not recommend a specific one. Rather, read books, blogs and news reports. One good book to start with is The Financial Times Guide to Valuation by David Frykman, himself an Internet entrepreneur and investor.
Also note that valuations differ enormously from sector to sector and from time to time. To get a hunch of what the situation is like right now you can always try and compare key numbers with those of listed companies in the same sector.
We recommend Equidam as a valuation service for entrepreneurs in order to bring a well-evaluated offering to the crowdfunding table.