Valuation for the African Startup

7/25/2019 Valuation for the African Startup

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Mbwana Alliy- Managing Partner, Savannah Fund@mbwana

4th September 2012#Africavalue

Valuation for the Africa Tech Startup


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Why are ValuationsImportant?

Key Tenants of Valuations

How to drive or destroyvaluation

Examples

Financing/VC method

Valuations are perceived until

actually realized


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Asset Based

Discounted Cashflow

Market Based

Comparables/Multiples/Metrics

All these are signals that translate intosome sort of tractionfor a startup andleads to valuation


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Equipment/Inventory...

Brand

Patents

Engineers

"When valuing a startup, add $500k for every engineer, andsubtract $250k for every MBA."- Aaron Patzer, Founder Mint


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USA = 0.75%

Brazil = 7.5%

India = 8%

South Africa = 5.5%

Kenya = 16.5%

Central Bank Rates (Aug 2012)

With predictable (growing) Cashflow- valuation becomeseasy to establish

r= cost of capital, can be inferredfrom interest rates


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Average Revenue Per User (ARPU):Subscription like businesses (stableCashflows)

MAU/DAU:Social Gaming

Asset Utilizatione.g. (hotel or airlineoccupancy)

CPM(advertising based businesses)

Conversation Rate & Average order size(e-commerce)

Inventory Turns:eCommerce/Retail


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M This is the margin per customer. If we sell awidget for $10 and it cost $4 to make, this value isequal to $6

c

The cost of marketing to each customer;

r Retention rateis the survival rate of customers onan annual basis. 75% for instance; then 3 out of every 4customers repeat purchase the following year

AC This is the cost to acquire a new customer.

Acquisition cost can vary depending on the industryand company.

i The discount rate adjusts for the time value ofmoneyand is typically the rate of inflation or thealternative to investing the money used to operate thebusiness.

"5% increase in customerretention = 25- 95%increase in profits"

How much to spend toacquire each new user?


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P/E ratio:How much to pay for currentearnings

Price/Revenue...

Price/Book value

.....

Goal is to compare apples with apples and identify a goodbuying or selling opportunity


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Supply & Demand of investors &startups

Market forecast and growth ofIndustry

Business Cycle

Exit market...

Talent market...


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Connections

(Millions)

0M

225M

450M

675M

900M

2008 2010 2012 2014 2016

Mobile ConnectionsMobile 3G Connections

Source:http://www.mobilemonday.net/reports/MobileAfrica_2012.pdf

ARP

U

($)

0

3

6

9

12

2008 2010 2012 2014 2016

ServiceRevenue($Billions)

0

17.5

35

52.5

70

2008 2010 2012 2014 2016

$30B+ of mobile service revenue


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Users*ARPU

(monthly)P/E Valuation

19M$5.71

$1.20 (M-PESA)10.7 $2B

240M$6.50 (Africa)

$3.40 (India)15 $17B

1,000M+ $1.97 16 $224B

115M $0.93 275 $112B

900M $0.40 90 $60-80B

* Subscribers or monthly unique visitors


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But how much of this is online?

What % of East Africa population is online? mobile? How muchtime spent?

Are the online ad networkmarkets efficient? (Buyers and Sellers)

Africa CPMs = $0.33 -> 100M pageviews/month = $500,000revenue a year...

But are there enough advertisers to fill your inventory?

DoAd agencies and brandsunderstand the benefits ofinteractive/online advertising? Can they help you sell?

"The arrival of global advertising agencies has raised the stakes inEast Africa's $1 billion market, with new players hoping to wrestlea piece of the action from the Kenyan company Scangroup, theregional leader." By Kevin Mwanza

REUTERSNAIROBI, June 29 2012


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Kenya Remittance Market is HUGEand GROWING

Online + Offline commerce has hugepotential.

30% cheaper than other services

DTBmay have found a costeffective way to acquire newcustomers!

Nation mediacan monetizediaspora readers

Craft Siliconcan tap diasporapayments market

$0M

$150M

$300M

$450M

$600M

2011 2012

Kenya Remittance Marketsize

44%

Product Market Fit!


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Pick a hot industry area (high growth, huge market)

Focus on key metrics that drive valuation (traction)

Build up valuable assets (team, product, IP)

Competitive Advantage "Moat". Monopoly/Networkeffect business

E.g. Build a brand (not just customers, employeestoo)

Solve a real problem people are willing to pay youfor!

Proven entrepreneurs and teams. Sometimes failedteams better than first time entrepreneurs

Negotiation Power

Timing...

Find Product Market Fitbeforegoing to investors

Culture (design, data, execute)

Find buyer(s)... (exit)

Pick partners that can help you(advisors, investors, employees)

Direct ControlSometimes outsideyour control


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Focusing on vanity metrics for too long

Your competitor is bought by the onlybuyer (e.g. Instagram)

Wrong hires (e.g. MBAs)

Industries with low barriers to entry/Copying

No talent retention plan

Not solving a problem

Industry timing (market readiness)

Scaling too fast on wrong biz model(not achieved product market fit)

Revenue vs Growth Balance

Patents vs Execution

Innovators Dilemma

Lots of Evidence More Strategic


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Create wealth

Attract investors to share in the riskand fund growth

Attract talent and partners (equityas a currency vs salary)

Maintain control...

Come in at a "fair" valuation and withpotential to be compensated for taking arisk.

Traditional VCs have high returnrequirements- will use terms & board seatsto exert influence

Impact investors (even angels) may trade

off returns for other goals.Key is to align all interests and be transparent

Not all funding has equal value

Build a bigger pie but share it. "smaller slice of a bigger pie vs big slice of asmall pie"

For Founders For Investors


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Technology Risk decreasing

Market traction increasinglyimportant (product marketfit)

Expertise is valuable

http://www.bothsidesofthetable.com/2012/05/23/its-morning-in-venture-capital/


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Acquired for$60M

Acquired for$110M

2007

20002000

Acquires 30% Stake($ unknown)

2011 2011

S Mobility plans to buy Mobile-Software

companies in Africa. Jan 2012

Users TractionValuation

at Exit

40M

Africa's

Largestmobile socialnetwork

$60M

5M

Mobilepayments in40 countries

(27 in Africa)

$110M

2007 Invests $5.1M


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Pre money valuation:Valuation before investment

Post money valuation:Valuation after investment.

The key is to watch the share price in each subsequent roundof investment. it should be going up!

Dilution is natural(remember, smaller slice of a bigger pie)

A "downround" occurs when investment happens at lower

valuation then prior round. Dilution + lower price per share!


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http://www.savannah.vc/resources/


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valuationranges

Stage Tractionexpected

Time (Year)

Acceleration


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Metrics, data & transparency matter- start measuring early

Team, Strategy and Execution and business modelalso important

Choose your investor partners wisely & understand their motivations to invest

Valuation is one measureof success, but often subjective at early stage

Exit markets matter (for companies, talent etc...): investors can get their money back

Real value (via exit realization) is created when company can scale to multiple African

countries + world.

What happens when there are no exits in Africa?

Comes down to doing the hard work of building a business.

Valuation will follow

Valuation for the African Startup

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