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A typical startup Seedrs is valued between GBP 2 million and GBP 30 million on its first round of investment. Of course there are exceptions with lower or higher ratings.

If the company valuation requested is disproportionately high or overpriced, it will take longer for investors to realize a further, sustainable increase in company value. Investors who don't care about waiting a few extra years can simply invest at inflated valuations, provided the business model is convincing. If the company continues to develop successfully, a sustainable increase in value can be expected within 10 years, for example. Ultimately, however, it is about achieving the highest possible return/interest on the capital employed. Accordingly, the initial valuation of the startup is of crucial importance for the return.

Especially in the case of excessive initial valuations in early investment rounds, setbacks later occur if the startup develops more slowly than assumed in the business plan. Then, sometimes years later, follow-up rounds take place, which the startup (must) carry out at lower valuations in order to obtain fresh capital. The share price can also collapse in a subsequent round. I myself have experienced subsequent rounds where the share price was 50% or 85% lower than the previous round. In an emergency, founders who value their startup too highly come down to earth after a few years when follow-up capital is urgently needed so that the company can continue to exist. On the other hand, VCs also take advantage of being the only option for financing and in such a case they specify and enforce the rating.

What indicators are there to determine whether the review called up for a startup is appropriate?

The following catalog of questions is intended to help you get a general overview of the startup. Ultimately, you have to judge whether you think the overall setup looks positive or not.

Measure startups against each other
Within the same industry, you can compare different startups and their development status and thus determine over- and undervaluations. Of course, this requires empirical values, which you can assess after some time and with some experience. In doing so, also take into account that completely different ratings are called up in different industries due to different risks and earnings prospects.

Measure startups over time and check share price development against progress
It is advisable to request and activate all documents in every investment round. These can be used later, in round 3 or 4, to look back at the startup's original plans and to compare the planning with the reality that has occurred. Were KPIs and set goals achieved? Has the share price developed as the startup might have predicted? Has the share price developed positively at all over the last few rounds or has the share price from the previous round had to be offered again several times because too little progress has been made. Or is the new round actually an opportunity to invest again at an unusually low valuation?

Evaluate companies based on future sales and earnings (EBIT) multiples
If the business plan is considered realistic, one can compare the expected sales or profits at a future point in time with the current valuation. For example, if a company is now valued at 6MM GBP and expects annual sales to be around 1.5MM 12 months from now, then the expected sales multiple in a year is 4 (6MM valuation divided by 1.5MM sales expectation). . The same can be done with valuation vs. profit expectation to get an EBIT multiple. Which multiple is appropriate depends heavily on the industry and also on further future growth. A higher multiple is acceptable for a company that expects to double annual sales (100% growth) over many years than for a company that is only growing at 10% per year. A low multiple therefore speaks more for a favorable valuation.

Funding requirements and business plan – Is the business plan coherent and are the assumptions made in it reasonable? Does the startup have a clear plan of how much capital to raise? Is the funding threshold set appropriately high so that the startup also has the necessary capital cover when it is reached? Or is the funding threshold set so low that the startup is "overfunded" by 500% afterwards? If so, did the founders have so little confidence in their own campaign that the threshold had to be set so low? Are assumptions about sales development and costs and the preliminary loss disclosed in the business plan? Will missing figures be submitted later on request?

Business angel and lead investors/ participation of venture capital companies
Are there investors who invest large sums, for example well over 100k or even millions? If so, can the startup share details on the background of these investors, if any? Were they previously invested and are they involved repeatedly, or are they new investors? With large investments, it can be assumed that the respective investor has more information than you do yourself. Those who invest very large amounts often receive (almost) complete disclosure of the books in order to be able to get a better impression. Large sums of money from individual investors are at least one indicator that the evaluation called up is appropriate and they validate the business case of the startup. Of course, such startups can also fail, but it's just a single, strongly positive clue that I would always appreciate as such.

Communication and updates from the founders during and after the campaign – Are critical questions also answered confidently and are the answers convincing? Are questions raised in the forum answered promptly and does the startup confirm that it will provide meaningful reports on a quarterly basis in the future?

Team size and expertise, past achievements of team members in the same field
Is the team size appropriate for the project? I've seen failures in both directions in this regard. Both teams that are too large so that the costs explode and that, despite the team size, do not manage to get the project off the ground. In the same way, I have seen founding teams that are a one- or two-man company and do not manage to get the necessary staff with the right expertise on board in good time in order to scale successfully. In the rarest of cases, a one-man company becomes a successful 100-man company within a short period of time. Very small one- or two-man businesses sometimes lack the scaling to generate the desired millions in sales.

For subsequent rounds: Were the goals of the past achieved, exceeded or far from achieved? If missed, does the startup explain why? If targets and adjusted targets are repeatedly missed: Can it still be assumed that the necessary competence is available to lead the company to success? Does the startup keep coming back, in extreme cases every few months, begging for more capital and bridging rounds to keep the company alive without clearly showing any positive developments? Were promised company updates delivered (on time) and did they have meaningful content?

Suggestions, future topics, feedback
Are there specific topics related to crowd investing, startups and Seedrs, which should I address in future posts? Should certain areas be revised and better explained? What is possibly unclear to you? I look forward to your topic requests! Write me an email or comment here under this blog post.