The role of valuation in equity crowdfunding

Abstract

The subject of this Master of Science thesis is valuation in the context of equity crowdfunding. This includes both the formation of valuation by the entrepreneurs or the company in preparation for an equity crowdfunding campaign and the implications that valuation and the valuation multiples derived from it have for the success of the equity crowdfunding campaign. The dataset used for the present study from Invesdor Oy consists of 103 equity crowdfunding campaigns conducted through the Invesdor.com platform between May 2012 and January 2016. The subset used for the valuation multiple study consisted of 55 campaigns for which the required EBITDA and Sales forecasts as well as Balance Sheet data for the calculation of Enterprise Value, were available. A separate subset of the data was selected for which telephone interviews were conducted to shed light on the basis for the valuation decision.

This study establishes that the forecast values of Enterprise Value/EBITDA (EV/EBITDA) and Enterprise Value /Sales (EV/S) can be used in predicting the extent of campaign success in equity crowdfunding. The correlations that were found are generally positive, which was initially counterintuitive as high valuation multiples are typically a sign of overvaluation. The proposed explanation for this is the investors' preference for more realistic (and thus maybe lower) EBITDA and Sales forecasts leading to higher valuation multiples for a given enterprise value. An unexpected result of the present study was that the stage or the industry of the company having the crowdfunding campaign does not significantly add to the valuation multiples as a predictor of campaign success.

The limitations of these correlations are also recognized as the explanatory value of the valuation multiples are not high and subsequently, the standard errors are considerable.

Several factors were proposed on which the companies preparing for an equity crowdfunding campaign base their valuation decisions. The proposed factors of (i) expected profits, (ii) estimate sunk/project cost, and (iii) benchmarking were all found to have been used to varying degree and differences between industries in their valuation decision making were found.