This article first appeared in Wealth, The Edge Malaysia Weekly on June 23, 2025 - June 29, 2025

Valuation remains a contentious issue in equity crowdfunding (ECF). It is a contributing factor to the small number of exits and unsatisfactory investment returns. Regulators and industry players are working together to address this challenge, but the jury is still out on the industry’s future.

Ng Zhu Hann, founder and CEO of Tradeview Capital, says many ECF deals are often too expensive or overvalued in the eyes of professional fund managers, including private equity (PE) and venture capital industry players.

“If you look at the industry, I can say 90% of the companies that go through ECF fundraising exercises are not able to secure subsequent funding from venture capitalists (VCs),” he points out. This means many ECF investors have to hold on to those private companies’ shares for a long time, often without returns or suffering losses.

Tradeview Capital is a boutique fund house that deploys most of its funds into the public market, but is licensed to also invest in the private market and it concluded a US$1.5 million (RM6.4 million) deal in January. The firm recently received a venture capital management company licence from the Securities Commission Malaysia (SC) and aims to invest up to RM100 million in micro, small and medium enterprises (MSMEs) and non-unicorn start-ups through its fully-owned subsidiary Hartamodal Sdn Bhd.

“We often look at deals that come to us from start-up accelerators, of which about 20% raised funds through ECF. We tend to immediately filter them out as their [valuation] expectation is about 60% to 70% higher than that of their peers,” says Zhu Hann.

Several factors contribute to ECF start-ups being seen as overvalued by professional investors. One is that many of them are relatively new businesses that are still loss-making. They cannot be valued based on earnings, but on revenue and future growth, which can be subjective and hard to predict.

Zhu Hann says valuing start-ups using revenue multiples is common in the VC space and is acceptable if backed by a solid business plan and proposal.

One of the most successful ECF deals the world has seen is Revolut, a UK-based digital bank. According to start-up news and analysis website Sifted, those who had invested in the company via crowdfunding platforms in 2016 saw the value of their stake increase by 40,000% after the company confirmed its US$45 billion valuation in August 2024.

Revolut wasn’t profitable back then, says Zhu Hann, but it was supported by a novel idea and technology, and did not have many competitors in the market. It was also working towards getting a licence for its business with a good business plan to expand globally at that time.

“It clearly spelt out its path to profitability with a scalable business model,” he adds.

Ng Sai Kit, founder of venture capital firm Artem Ventures, says in the case of ECF, nobody is actively negotiating on behalf of retail investors for a better price. Companies’ valuations are generated largely based on projected revenue and earnings provided by business owners before being presented to the public.

“Once it’s announced to the public, retail investors have to decide whether to take the deal or not. If you don’t like it, don’t participate. So, there’s no price discovery exercise. It’s a willing seller, willing buyer situation,” he explains.

However, Sai Kit says how much a company is valued and how it is valued is not a straightforward matter, subject to one’s views and assumptions. Professional investors tend to focus on the company’s future earnings growth, among others, while retail or individual investors are more easily convinced by a company’s product, branding or the founder’s charisma.

“Retail investors could also invest in a company due to friendship or the opportunity to be involved in a sector they are passionate about,” he points out.

Gordon Low, founder and managing director of PiValue Strategy — an execution strategy and organisation development coaching firm for start-ups and small and medium enterprises (SMEs) — concurs that valuation is a tug of war between the issuers or business owners and investors.

Issuers or business owners would always want to sell their shares at a higher valuation while for investors, it is the opposite, says the former chief operating officer of one of the licensed ECF platforms.

Low says valuations of ECF companies appear high to professional investors as issuers take into account projection of future growth, which tends to involve aggressive business expansion plans with fresh capital injection. On top of that, their valuations can be made based on revenue multiples as many aren’t profitable yet.

“Start-ups and companies raise funds when they are planning to scale their business. And it is not necessarily unreasonable to see exponential growth in the coming years. However, as an investor, you need to listen to their strategy and assess whether it makes sense. Do they have an experienced team to execute it? When the funds come in, do they have the sales and marketing expertise to scale their business?”

One might argue that valuation is subjective and it is the return on investment that matters. Yet, industry players generally agree that not many investors have made money on ECF deals in the past decade, from the time it became regulated. There have not been enough exits — and even when there were, the returns were not good enough. A key reason is that such deals tend to be overpriced.

“I would like to say that valuations didn’t affect some individual [ECF] fundraising campaigns. But when the market starts talking about those deals being too expensive, and VCs are not interested in them, the overall industry is impacted,” says Low.

Industry players point out that ECF fundraising activities have obviously slowed down in recent years.

Based on data from the SC’s website, the ECF industry raised RM97.57 million in 2024 through 35 campaigns, representing a 56.3% drop from 2021 when the industry raised RM223.3 million through 107 campaigns.

A deeper look reveals other issues surrounding expensive ECF deals, which involve ECF platforms, financial consulting firms and private companies aiming to raise funds from the public.

An industry player says some financial consultancy firms engaged by ECF start-ups for valuation services tend to consent to the high valuation demanded by their clients for commercial reasons. Even so, there have been some cases where the valuation was so high, they were not signed off.

Alvin Foong, managing partner of Greenwish Capital, agrees that it can be challenging to convince business owners that the valuation they are asking for is too high. He would sometimes ask the ECF platforms to help convey such a message to the issuers.

“Nine out of 10 times, the [revenue] projection provided by the business owners would be higher than what we thought it should be, as founders are very passionate about their business and get carried away by temporary success. So, there’s this process of trying to convince them to lower their numbers. We would also share some market data with them. It is an education process,” he says.

Foong adds that start-ups and businesses that intend to raise funds via ECF are not mandated under the existing regulations to engage a licensed corporate financing firm for valuation services. It remains an industry best practice at the moment.

Many SME business owners are also unwilling to pay a more reasonable price for valuation services, which could affect their quality, he continues.

Greenwish Capital is a licensed corporate financing firm that derives most of its income from advising corporations on matters such as financing, disposal of assets and mergers and acquisitions, which often involve valuation works. Thus, the firm decided to reach out to ECF platforms to collaborate with them in providing valuation services.

So far, Greenwish Capital has provided valuation services to over 40 companies for ECF, charging them a base rate of RM5,000, says Foong. “We thought it was pretty reasonable but many business owners did not think so. They were asking for about RM1,000. We had to put things in context by telling them that they were raising RM5 million, for instance, and RM5,000 was not too much to ask for. You should be questioning my capability if I were to charge you RM1,000.”

Foong says the regulator and industry players are aware of the situation and have been constantly looking for measures to address the challenges. For instance, industry stakeholders are looking to form an independent and self-governing organisation, which functions similarly to the International Valuation Standards Council in Singapore, tasked with developing and promoting international technical and ethical standards for valuations, he adds.

“There are at least two benefits from this. The first one is to uphold professionalism and industry standards,” explains Foong. The second, he says, is that stakeholders and the investing community would feel more confident in ECF fundraising exercises. “Such an idea is still being discussed.”

For it to be sustainable, the ECF industry needs to attract more quality deals and produce a success story. For Low, that means an exit that yields investors at least three times the returns based on their initial investment amount, which has yet to be seen in the industry.

One of the earliest ECF platforms, which once commanded a 75% market share, has seen at least eight exit deals take place since it was licensed in 2015. However, these exits were not satisfactory for professional private market investors.  

At end-2024, those deals yielded investors 10% to 123% returns over a period of one to four years. They were mostly partial exits through secondary transactions.

Having a better business and fundraising plan could help the ECF industry achieve sustainability. Low says this means ECF start-ups and companies should raise funds with reasonable valuations, backed by a solid and achievable growth plan. When those goals are achieved, they can raise the next round of funding at higher valuations.

Low points out that most quality deals are going to reputable VCs. Only those that do not meet the criteria of VCs, mostly non-tech companies in traditional industries, would approach ECF platforms for fundraising.

“These companies [that raise funds via ECF] tend to have lower success rates in growing really big, not to mention their lack of valuation planning. After raising the first round of funds at such a high price, it is very challenging for them to raise the next round,” he explains.

The paradox is that while overly expensive ECF deals are impacting the industry over the long term, they are also sustaining the industry at the moment.

“Start-ups and private companies still approach ECF platforms for funding precisely because they can sell their shares at a high valuation,” says an industry player.

Zhu Hann believes the ECF industry plays an important role in the start-up ecosystem as it is an important avenue to fund and grow innovative early stage companies that do not meet the mandate of VCs.

Sai Kit agrees that there is a need for ECF. “It is very important, especially for SMEs that are not VC-investible. VCs like us look for high risk, high return deals. Our funds’ mandate is also restrictive. So, companies that fall beyond these areas can get funding from ECF.

“SMEs’ access to capital is important, especially in some sectors that the VCs and PEs don’t look at, unless they are of a certain size or are profitable. ECF provides them with an avenue to raise funds to grow their businesses,” he says.

“For instance, if you’re running an ice cream business and still growing it, you aren’t likely to get investments from the VCs and PEs. But we have a successful local ice cream brand that was acquired by a public listed company.”

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