How should I evaluate a crowdfunded investment?

There are many schools of thought on how to value private and early-stage companies. The longer a company has been operating, and the more clearly defined and consistent their revenue is, the easier it is to determine a reasonable valuation range. The younger the company is, and less consistent their revenue is (if they even have revenue yet), the more difficult it is to determine a valuation. Many early stage companies raise capital using convertible notes and future equity agreements to avoid the risk of calculating a valuation for the company that is either too high or too low. When evaluating an equity valuation, it is good practice to use several methods of determining a price and comparing them before deciding on an investment. Some good advice on different methodologies for determining private company valuations can be found in this Medium article.

Some information to consider when valuing an investment:

If the investment is an equity investment:

  • If the company has sales, what are the sales;
  • If the company has sales, what is the growth rate of the sales;
  • If the company does not have sales, how is it calculating its expectations of revenue;
  • how large is the market for the company’s products/services;

If the investment is a revenue sharing investment:

  • if the revenue sharing is calculated as a percentage of monthly revenue generated by the company for example;
  • how much revenue is currently being generated monthly by the company;
  • what is the monthly growth rate of this revenue and how consistent do you expect this revenue to be;
  • for example, if a company raises $1,000,000 using revenue sharing and agrees to share 10% of gross revenues until a multiplier of 1.5x the investment is paid;
  • if the monthly gross revenue of the company is $200,000 and revenue remains constant, this means $20,000 per month (or $240,000 per year) will be paid to investors until 1.5x the original investment ($1,500,000) is returned to investors;
  • in this example, it will take approximately 6.25 years for 1.5x the original investment to be repaid

If the investment is a debt investment:

  • how much revenue does the company make currently and how easy will it be for the company to pay the interest payments on the debt to investors;
  • for example, if a company raises $1,000,000 using debt and offers an 10% interest rate, it will need to generate enough revenue to be comfortable paying investors $100,000 annually in interest;
  • what is the company’s revenue growth rate;
  • what is the company’s customer growth rate;
  • what other financial obligations does the company have in addition to the debt you invested in

If the company has sales, a good place to start is to determine the business sector of the company in question and look at valuations of other companies in the same sector and how those other companies were priced in terms of their sales.