In Crowd-Investing It Matters To Value Your Company Right
Valuing early stage startups is not an exact science. Angels and VC’s try to use criteria based on the strength of the management team, potential revenues, competitors, and potential exits in order to determine the valuation of their investments. But valuations can also be driven by demand from investors or fear of missing out on an opportunity.
When a company is getting funded, the starting point of its valuation is usually given by its investors. By naming a price first, founders risk giving their investors a bargain, or out-pricing them high enough to lose credibility. In crowd-investing you probably will not have professional investors driving your valuation, so we’ll take a look ways to tackle this issue yourself.
Self Valuation Steps
As you’re picking a valuation, it’s important to balance your needs against your investors’ needs. To entrepreneurs, a higher valuation means more money exchanged for less ownership of their company. But to investors, valuation is the key determinant of their investment’s return. Investors are putting money into your company based on the premise that the valuation of their shares will increase, and a higher valuation means less bang for their buck.
It may not even be great for your… Continue reading
Benefits of Standardized Startup Documents (Revised)
This is a revised edition of the original blog entry in August, 2010. At that time we set to implement the first set of standardized documents for European entrepreneurs and private investors. We worked together with Borenius&Kemppinen and the documents were released in January 2011 as Venture Bonsai Legal Framework. This blog entry is to explain our view on the importance of the standardized documents for the startup ecosystem in Europe.
Traditionally, running an investment round has meant a lot of work with the legal documents. Getting the Term Sheet and Shareholders’ Agreement into such a document that all parties agree on, can mean a lot of work and legal costs. Quite often it’s also the investors who bring the initial document on the table (as often the entrepreneurs don’t have those in the first place). It certainly makes sense to improve this process with higher quality of documents and more transparent understanding of acceptable and on the other hand, not acceptable terms.
But what is the definition of a standardized document?
For me it is a document that is acceptable for all parties (investors and entrepreneurs alike) as such, without any tough negotiation concerning the key issues. The… Continue reading
It's All About Trust
When it comes to investing in start-ups, it’s all about trust. Do you feel confident that this team, company, and product will live up to its expectations? Even if you’re investing relatively small amount of money (say, for example 5.000€) it’s still a big amount that requires trust between both parties. It’s your money, after all.
What is trust, anyway?
Wikipedia defines trust as
- the willingness of one party (trustor) to be vulnerable to the actions of another party (trustee);
- reasonable expectation (confidence) of the trustor that the trustee will behave in a way beneficial to the trustor;
- risk of harm to the trustor if the trustee will not behave accordingly; and
- the absence of trustor’s enforcement or control over actions performed by the trustee.
Within the scope of Venture Bonsai, you probably would be interested in
- as an entrepreneur, do I trust certain person enough to let him to see my Investment Round material?
- as an entrepreneur, do I trust Venture Bonsai as a platform to run my investment round ?
- as an investor, do I trust certain person enough to invest in his company?
- as an investor, do I trust Venture Bonsai as a platform to invest through… Continue reading
The Statue of Liberty was Crowdfunded
So you knew crowdfunding is not actually a new idea. It has been used, after all, for years in the music and movie industry.
But did you know that it dates way before that? Even The Statue of Liberty in New York was in a way “crowdfunded”. The statue was a gift to the United States from the people of France. They agreed that the French finance the statue and the Americans provide the pedestal and the site.
But the Americans ran out of money.
Here’s the story…
The price tag for building the pedestal and erecting the Statue topped $300,000. The American Committee raised half this sum between 1877 and 1884. Then a crisis occurred: the Statue was due to arrive, funds had run out, and work on the pedestal stopped. In March 1885, publisher Joseph Pulitzer and his newspaper, The World, came to the rescue with a highly successful six-month fund raising campaign.
As it turned out, a lot of people were willing to donate money for this project. Many of them having an emotional binding to the things the statue was to represent.
The response to Joseph Pulitzer’s campaign was overwhelming – $100,000 (the equivalent of $2.3 million today) was… Continue reading
Practical Challenges of Crowdfunding (Part 2)
Last week week we discussed the first five items of the following list, this week we cover rest of them.
- How do I find potential investors?
- Which regulations apply and what can I actually do?
- How do I get the investors’ attention?
- How to deal with all the required documents?
- How can I negotiate all the terms with so many investors?
- What about company valuation?
- What is Due Diligence and why do I need it?
- How on earth do I get all the papers signed by a large number (say, 90) of investors all over Europe?
- How can I securely communicate with all those potential investors without answering the same questions over and over again?
- How to take advantage of a large number of investors, after I got them?
6. What About Company Valuation?
Company valuation is always a tough call. There is no real truth available for this, but typically (we entrepreneurs) over-estimate the value and the potential investors under-value the company as they want to “get a good deal”. So what would be fair price for a share issue?
The easiest way to set the price is just decide a value that you think would be acceptable for… Continue reading
Practical Challenges of Crowdfunding (Part 1)
Crowdfunding is gaining some momentum as a potential investment vehicle for startups. As the traditional Angel Investors and Venture Capitalists have become more careful on the early stage investments and number of investments has dropped dramatically, there is a need for new methods.
But how do you actually run a crowdfunding investment round? There are no tools currently available for this so it may seem like a lot of work. And it is. This means it’s just another challenge to be solved.
The issues you have to consider and solve when running a crowdfunding round (or any investment round):
- How do I find potential investors?
- Which regulations apply and what can I actually do?
- How do I get the investors’ attention?
- How to deal with all the required documents?
- How can I negotiate terms with so many investors?
- What about company valuation?
- What is Due Diligence and why do I need it?
- How on earth do I get all the papers signed by a large number (say, 90) of investors all over Europe?
- How can I securely communicate with all those potential investors without answering the same questions over and over again?
- How to take advantage of a large number… Continue reading