When deciding to invest in a startup, the company’s valuation often plays a major role. The promise of startup investing comes from getting in early – while companies are still growing and their value is increasing. However, there is a tricky balance that startups must strike when setting their valuations in online funding rounds. A too low valuation might be attractive to investors – but it can take away significant ownership from startup founders. A too high valuation can discourage investors because there could be less opportunity for an attractive return.
We saw a few weeks ago that the highest valued startups raising online have lower valuations than the highest valued startups raising offline. In this Chart of the Week, we look at how startup valuations break down between Regulation Crowdfunding (Reg CF) and Regulation A (Reg A) rounds. We examined more than 2,700 funding rounds in total. It is worth noting that there are far fewer Reg A rounds overall, and only 123 Reg A rounds were included in the data for this chart.
Our data shows that the promise of getting in early when valuations are low is still the norm with Reg CF rounds. More than 1,500 companies (around 58% of Reg CF rounds) had valuations that were below $10 million. Almost 630 of companies using Reg CF were valued between $10 million and $20 million. The remaining 18% were spread out from $20 million to more than $100 million. Reg A rounds tell a slightly different – but unsurprising – story. Because Reg A funding rounds can have much higher investment maximums than Reg CF rounds, companies using Reg A are often more mature and more highly valued. In fact, around 50% of Reg A rounds featured companies valued at $40 million or more – 64 in total. Additionally, Reg A rounds are much more likely to have valuations of $100 million or more. While only 1% of Reg CF rounds had valuations of $100 million or more, more than 25% of Reg A rounds fell into that valuation range.
Investors looking for startups with low valuations – and thus the most potential for large returns – are well-served by the Reg CF market. Many venture capitalists (VCs) need the startups they invest in to become unicorns (companies valued at $1 billion or more) in order to see significant returns. However, investors in the online private market have an advantage over VCs. If they are investing when a company is valued at $10 million or $20 million, then an exit at $300 million (for example) means a return of 15x to 30x. And it’s much easier for companies to reach $300 million than $1 billion.
Note: all data used for the Chart of the Week comes from the KingsCrowd database and represents a snapshot of the crowdfunding market.
