The Cost of Overvaluation: Why Getting Valuation Right Matters in Equity Crowdfunding

In Australia’s fast-growing startup ecosystem, equity crowdfunding has emerged as a powerful capital-raising tool allowing retail investors to back emerging brands and giving founders access to a broad pool of supporters, including loyal customers of the brand to investment minded individuals. In FY24, crowdfunding volumes in Australia reached $64.5 million from 35,000 investments and the industry saw a 16% uptick in companies raising equity through equity crowdfunding. Further, 28% of all crowdfunding deals in FY24 were follow-on raises from previous periods, highlighting the success of these campaigns in raising meaningful capital.

With this democratisation of investment comes a critical consideration that all founders must get right:

Valuation.

In contrast to more traditional forms of capital, in an equity crowdfunding campaign, the valuation is fixed before launch. Founders decide on a valuation upfront, and all investors participate under the same terms. This provides clarity, transparency, and control for founders, reducing friction with investors by avoiding prolonged back-and-forth negotiation.

Venture capital funding, on the other hand, involves a negotiated valuation, where investors often exert significant influence over the final price and deal terms. This negotiation process can stretch out over months and frequently comes with unfavourable terms that involve existing shareholders giving up greater control at an early stage. This might include board seats, liquidation preferences, or performance-based targets to reach the total investment amount.

For founders who want predictability and founder-friendly terms, equity crowdfunding offers a structured and efficient alternative to traditional capital raising. As such, setting a compelling valuation is essential to campaign success, long-term investor trust, and sustainable business growth.

While aiming high can be tempting, especially in the early stages, overvaluation can carry significant long-term costs for both founders and investors.

What is Overvaluation and Why Does It Happen?

Overvaluation occurs when a company sets its valuation higher than what its business fundamentals justify. This can stem from overly ambitious projections, early hype, or a desire to attract greater amounts of investment.

In equity crowdfunding, founders often set their own valuation before the raise begins. While this offers flexibility, it also places responsibility on founders to ground that valuation in realistic assumptions and robust analysis. When valuations are too lofty, the risks go beyond just a missed raise and can shape the trajectory of the business long after the campaign ends.

The Hidden Costs of Overvaluation

Investor Pushback

Experienced investors, retail and wholesale alike are cautious of inflated valuations. If the valuation doesn’t align with key metrics like revenue, growth rates, or comparable company data, the campaign can struggle to gain traction. Savvy investors are investing in future value, and an unrealistic valuation can undermine their confidence.

Future Fundraising Challenges

A high valuation may close the current round, but it can make future ones harder. If performance lags behind valuation expectations, future rounds may require companies to raise capital at a lower valuation than previous rounds (down rounds). This not only dilutes existing shareholders more than expected, but it also sends negative signals to the market[IN3]  and attract negative press, turning off new investors, suggesting a downward trajectory and ruining your relationship with current investors and customers.

Operational Pressure

With a high valuation comes high expectations. Founders may feel forced to chase aggressive growth metrics to justify their raise. This can lead to rushed decisions, poor capital allocation, or even mission drift. When high valuation businesses are not meeting operational goals, this can also lead to greater amounts of time and costs managing investor queries, expending resources that could be used for business growth. All of these factors can threaten the long-term health of the business[IN4] .

Risks of Undervaluation

With the costs that come with overvaluation, there also exist risks associated with undervaluing a company. It is vital that founders find a “sweet spot” in their valuation, with the value of the company being reflective of your traction, strategy, and market size. Valuation is not just a number, it is your narrative.

Excessive Dilution

You may give away a larger share of your business than necessary. This can limit your control or reduce your personal upside as the business grows.

Signalling Weakness

Some investors may see a low valuation as a red flag, suggesting a lack confidence in the business or hidden risks.

Future Constraints

Raising your next round at a significantly higher valuation might be difficult if the jump from your last valuation isn’t backed by clear milestones or growth.

How OnMarket Support Founders to Get Valuation Right

OnMarket works closely with companies to ensure valuations reflect a considered and fair view, not just ambition. OnMarket encourages and assists founders to:

1. Benchmark Against Peers: OnMarket helps companies assess recent raises across similar sectors and stages to inform reasonable expectations while minimising dilution.

2. Be Transparent with Investors: Communicating openly about growth assumptions, risks, and milestones builds trust, especially when paired with a thoughtful valuation.

3. Focus on Long-Term Growth: OnMarket supports founders who prioritise building a strong business over chasing a high valuation.

A fair valuation undertaken with sufficient research and analysis will always render the greatest success, particularly in equity crowdfunding raises. Presenting a reliable and considered value of your company attracts aligned investors, reduces pressure on founders, and builds a strong foundation between investors and the company for the company to continue its growth journey.

To learn more about the process behind crowd-sourced funding, access our library of resources, and review success stories from others who have successfully raised via crowd-sourced funding, click here. 

Contact Josh Chan, at Josh@OnMarket.com.au to learn more about OnMarket’s valuation support and corporate advisory services in accelerating your business’ next phase of growth.