Estimating Value for Crowdfunded Businesses#YouCan2
Crowdfunding can be complicated, especially for serious companies seeking funding and serious investors looking to fund tomorrow's winners. Knowing where to set funding goals and how to establish a realistic value for a company's current position is tricky business, but it's an essential step for both startups and venture capitalists who hope to use crowdfunding platforms successfully.
While there are many considerations to take into account when establishing a company's value, there is one question that should be forefront in everyone's minds when it comes to establishing the value of a company seeking crowdfunding. The answer to this question lays the foundation for further investigation, or might make funding seekers and investors think twice about starting a crowdfunding campaign at all.
How Far Has the Company Come Before Crowdfunding?
A company's value at the time of its crowdfunding effort has a great deal to do with what stage the company is. Ideally, the company has some form of proof-of-concept and proof-of-market, so investors aren't just looking at an idea.
Ideas are easy to come by, and easy to have. People in all walks of life have ideas for inventions, apps, service innovations, and more all the time. Some of those ideas are objectively terrible on the surface while some of those ideas are fantastic, but no idea is worth anything without the execution. Unless you're looking at a team of proven engineers/developers and entrepreneurs, a company looking to crowdfund their idea is a huge risk whether or not the idea is any good.
The trick is proving that the idea is not only realistic but profitable: build a demo or prototype to show that the technology works, conduct surveys to show demand in the marketplace and/or the inadequacy of current solutions, get price points for materials and manufacturing costs and compare them to expected wholesale and retail pricing, etc.
Oculus Rift, the virtual reality technology that was ultimately bought by Facebook for $2 billion, is the perfect example of a crowdfunded technology business. The young inventor of the Oculus, Palmer Luckey, spent a few years building his initial prototype before he started a Kickstarter campaign that netted him millions to continue development. The demand for his device was clear, and he had proven that he knew how to put together the technology and reach the right communities of consumers.
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Of course, Luckey's Kickstarter backers didn't get any equity in the company, and didn't get to share in the massive payout he got when he sold his company. They got other cool gifts and sneak peeks, but that was all, and that leads to the other side of the crowdfunding coin: after determining how far a company has come before they ask for crowdfunding investors, you need to determine how much equity should be traded for each dollar of investment.
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