This article first appeared in Wealth, The Edge Malaysia Weekly on June 26, 2023 - July 2, 2023
An observation of the equity crowdfunding (ECF) platforms for start-ups is that there have been very few exits thus far. One of the reasons is that the valuations were already high in the first round of fundraising.
A venture capitalist (VC) I met during an event remarked, “VCs like us are wary of deals that come to us, on start-ups that have done ECF. Their valuations are too high. We make money based on valuations. We just can’t invest in them.”
The comment partly explains why there have been very few exits in the ECF space. If the valuations in the first round of fundraising on these platforms are already so high and their businesses aren’t growing as fast, most VCs or other investors would be very reluctant to invest in them or buy out retail investors’ stakes in the next funding round.
ECF platforms were given the licence to operate in the country by the Securities Commission Malaysia (SC) in June 2015. The industry has since grown by leaps and bounds, with a total of 10 platforms licensed by the regulator.
As at last year, 330 campaigns were launched by 305 issuers to raise RM560.34 million, according to the SC’s website.
However, in the past eight years, there have only been three successful exits on the local ECF scene. Among them is Skolafund, a platform that helps undergraduates raise funds for their university education through crowdfunded donations, bursaries, scholarships and loans, which yielded its ECF investors a 10% return in about two years, according to a report by news portal Digital News Asia.
The second exit was MyCash Online, a start-up that brings financial services to the unbanked and underserved migrant community in Asia through a mobile application. It was acquired by Silicon Valley-based venture capital firm 500 Startups, giving ECF investors a return of 44.2% after two years.
The last one was Greenlagoon, a biogas power plant company. In this case, the company offered investors a share buyback option as well as annual dividends. The 24 ECF investors who took up the share buyback saw a return of 100% after three years.
Could more meaningful exits take place if ECF valuations were more reasonable? There isn’t a clear answer, but it could potentially be yes.
One reason for high ECF valuations is the fact that there are some “gurus” in the market who act as a “one-stop centre” for start-ups that wish to raise funds through ECF.
According to an industry player, these gurus help start-up founders structure their deals, draft their term sheets and guide them on their pitching and presentation skills. Instead of doing these themselves, however, they outsource these functions to third-party service providers.
One of the things these gurus promise the start-up founders is to help them achieve high valuations for their businesses.
“Some start-up founders approach a platform and ask to raise funds with a high valuation. When they are told that it is too high, they would quote the gurus, saying that it can be done,” says the industry player.
It is hard for ECF platforms to reject these deals as the founders can just turn to their competitors that are willing to take them on. Rejecting such opportunities also means less income for the platform.
Another VC says ECF platforms are not supposed to meddle with the valuations of start-ups. “Their job does not include advising start-ups on valuations. This could be a challenge these platforms are facing,” he notes.
Meanwhile, an ECF player says there have been a few start-ups that raised funds at high valuations during their first round of fundraising and were able to do a second round of fundraising successfully at even higher valuations. That seems to suggest that ECF platform operators are not in a position to provide advice on valuations.
One thing that industry players seem to agree on is that the good times for ECF will not last long if investors don’t make money or, worse, suffer losses in the years to come. The players in the market will eventually realise that this is a problem that needs to be addressed sooner or later.
For the ECF platforms to stay vibrant and relevant in the longer term, more reasonable valuations are key.
Investors and start-up founders have the responsibility to educate themselves on valuations. There are resources available online and in the market that one can easily access.
“I think founders should reach out to the right people, such as VCs like us, to ask for our opinion instead of going to gurus. I just met up with one [start-up founder] and told him that unless you don’t have plans to raise another round of funds, you shouldn’t jack up your valuation. You should keep it reasonable. I’m willing to give them advice if they come to me,” says the VC.
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