Daniel Faloppa is busy building Equidam, a service that aims to provide some automation (and sanity) to SME valuations. We’ve previously looked at how FinTech is enabling the startup ecosystem, and here is perhaps one of the most unique and interesting examples of that in action.
We asked Daniel about some of the use-cases for Equidam, and the challenges they’ve faced.
Equidam is the leader in providing automating valuations in the equity crowdfunding market. What drove your success here?
When you are raising capital for a company, the information asymmetry between buyer and seller is extremely high. The seller knows much more about the company and the market compared to the buyer. Offline, this is moderated by several meetings and due diligence by the investor. However, this process is severely limited online.
On an equity crowdfunding platform, each user is presented with a buy/not buy decision based on the published information. Also, online behaviour dictates that people do not spend that much time in investigating or reading webpages. It is then crucial to communicate as much information as possible in little time, and that is exactly what our report does. By publishing the Equidam report, the company allows potential investors to understand straight away if the price is right. This increases trust and transparency thus leading investors to make more informed decisions and increasing liquidity for the platform. Our service was the right fit at the right time for the equity crowdfunding industry for these reasons, and I think this is what allowed us to quickly become market leaders and to keep our position to this date.
What was the biggest hurdle in providing automated and yet accurate valuations for your clients? Did it vary from early to late stage businesses?
I think the biggest hurdle is not even a technical one, it is related to perception. With all the changes and improvements that we do to our valuation algorithms, we always have to balance the way that would lead to the highest accuracy with the way that is more understandable or compliant with current practices. Sometimes they go hand in hand but sometimes we really have to make the choice of accuracy over compliance or the opposite.
In technical terms, the earlier the company stage is, the more uncertain the valuation becomes. This is inherent within the valuation process as earlier stage companies bear more risk, which in statistical terms is variance, or uncertainty.
You’re collecting a lot of data on early stage companies. Are there any insights you can share?
Pre-revenue entrepreneurs have the highest projections by far. The process of closing that first customer often requires that they re-valuate their projected performance to something more reasonable. The first dollar is real validation.
You’ve described your three main customer segments as startups, consultants and corporates. What would you say is the strongest use-case of your service for each?
Startups or early stage companies use Equidam for the whole venture. Generally they start using our solution because of a funding round or simple curiosity, and they they see the business intelligence and value tracking functionality and that is what makes them come back.
We are starting to see consultants using Equidam exactly in the way we envisioned they would, to provide a service to entrepreneurs which is quicker and maintains a good level of accuracy. They are commercialising a package of report plus consulting to entrepreneurs, and this allows them to apply their experience in checking inputs like financial projections without wasting time on worrying about layout or human error.
Corporates or later stage companies are the last segment we added and it’s becoming a very interesting one. For larger entities, it is mission critical to compute and monitor the value of divisions/departments or business units. We offer them insights into their valuation funnel and allow CFOs and management to monitor value at a very granular level.
Are there differences in how the valuation is calculated for corporates looking at innovation projects?
The way the valuation is calculated is very similar, and this is surprising for them at first. Being under a corporate umbrella, innovation projects have certain advantages that a standalone company does not have at the beginning. These usually include a pretty robust distribution channel and access to a large talent pool, lowering distribution and HR risks. These default higher bars mean a difference in the valuation outcome, but not necessarily in the way the value is calculated.
On the other side, internal innovation projects in corporates have one significant risk: being too slow to become relevant. With budgeting discussion, talent sharing and bureaucracy, projects have to rapidly grow to a size that is deemed relevant or else they will get canceled. We help to reduce this risk by showing that an early stage project has value and potential.
Have you had any issues with startups who have used the service and felt Equidam gave them an unfairly low valuation? How do you compete with the inflated valuations that come as a result of hype or trends?
We had very few people feeling the valuation was unfairly low, the reason for that was mostly that they were based on business models that would take a longer time to generate proper cash flow. We solved that now, we actually released it today, it is now possible to project future performance for an unlimited number of years on the platform.
Our mission is always to increase transparency and fairness of valuation, so the difficult part of dealing with hype and trends it is actually to distinguish between hype and trend. A trend should be incorporated into a fair estimate while a hype shouldn’t, because it is a subjective bias. In our algorithms, we are now incorporating real-time market information from various reliable sources (stock market, inflation, bankruptcy rates, etc.) and this allows us to capture the trend and hopefully not the hype. I think we are doing a good job at it, but there is still a good margin for improvement.
Have you had any feedback from full-time investors, or indeed any resistance for taking the ‘art’ out of valuations?
We actually have some investors using our platform on a regular basis. The user case is a little different however, they really appreciate the comparability of outcome and so they mostly use it for screening or comparing investment opportunities. Valuation in investments is an outcome of the negotiation, but the main feedback we got is that our reports help the negotiation process by setting a starting point for the entrepreneur and have a basis for discussion during the negotiation.
What’s been the biggest challenge for you as a founder?
I think the biggest challenge as a founder for me has been to go from an active role in building products and solutions to a managerial and inspirational role. When you are building you are completely focused and never distracted, the opposite happens when you are the backbone of the team and you have to put everybody in the condition of succeeding. It is challenging to always bring more motivation, focus, enthusiasm and energy than everybody else, but it is teaching me a lot on what are the real limits of what’s achievable in a team.