Valuation for the Africa Tech Startup Mbwana Alliy- Managing Partner, Savannah Fund @mbwana 4th September 2012 #Africavalue
Overview• Why are Valuations Important?• Key Tenants of Valuations• How to drive or destroy valuation• Examples• Financing/VC method Valuations are perceived until actually realized
Valuation Theory• Asset Based• Discounted Cashﬂow• Market Based• Comparables/Multiples/MetricsAll these are signals that translate intosome sort of traction for a startup andleads to valuation
Asset Based • Equipment/Inventory...• Brand• Patents• Engineers "When valuing a startup, add $500k for every engineer, and subtract $250k for every MBA."- Aaron Patzer, Founder Mint
Function of Future Cashﬂow Central Bank Rates (Aug 2012) • USA = 0.75% • Brazil = 7.5% • India = 8% • South Africa = 5.5% • Kenya = 16.5%r= cost of capital, can be inferredfrom interest ratesWith predictable (growing) Cashﬂow- valuation becomeseasy to establish
Metrics that drive valuation• Average Revenue Per User (ARPU): Subscription like businesses (stable Cashﬂows)• MAU/DAU: Social Gaming• Asset Utilization e.g. (hotel or airline occupancy)• CPM (advertising based businesses)• Conversation Rate & Average order size (e-commerce)• Inventory Turns: eCommerce/Retail
How much to spend to acquire each new user?ARPU to Customer Lifetime Value M This is the margin per customer. If we sell a widget for $10 and it cost $4 to make, this value is equal to $6 c The cost of marketing to each customer; r Retention rate is the survival rate of customers on "5% increase in customer an annual basis. 75% for instance; then 3 out of every 4 customers repeat purchase the following year retention = 25- 95% increase in proﬁts" AC This is the cost to acquire a new customer. Acquisition cost can vary depending on the industry and company. i The discount rate adjusts for the time value of money and is typically the rate of inﬂation – or the alternative to investing the money used to operate the business.
Multiple/Comparables • P/E ratio: How much to pay for current earnings • Price/Revenue... • Price/Book value • ..... Goal is to compare apples with apples and identify a good buying or selling opportunity
The Market...• Supply & Demand of investors & startups• Market forecast and growth of Industry• Business Cycle• Exit market...• Talent market...
12 11.5 Where is Africa Tech Value? 9 8.66 ARPU ($) 8.53 8.49 8.42 900M 6 3 675MConnections (Millions) 0 2008 2010 2012 2014 2016 450M 70 Service Revenue ($ Billions) Mobile 3G Connections 68.286 Mobile Connections 52.5 59.256 225M 48.851 35 36.84 0M 30.965 2008 2010 2012 2014 2016 $30B+ of mobile service revenue 17.5 0 2008 2010 2012 2014 2016 Source: http://www.mobilemonday.net/reports/MobileAfrica_2012.pdf
CPM & content sites"The arrival of global advertising agencies has raised the stakes inEast Africas $1 billion market, with new players hoping to wrestlea piece of the action from the Kenyan company Scangroup, theregional leader." By Kevin Mwanza REUTERS NAIROBI, June 29 2012• But how much of this is online?• What % of East Africa population is online? mobile? How much time spent?• Are the online ad network markets efﬁcient? (Buyers and Sellers)• Africa CPMs = $0.33 -> 100M pageviews/month = $500,000 revenue a year...• But are there enough advertisers to ﬁll your inventory?• Do Ad agencies and brands understand the beneﬁts of interactive/online advertising? Can they help you sell?
Kenya Remittance Market size Content meets Commerce $600M $590M 44%• Kenya Remittance Market is HUGE $450M and GROWING $409M $300M• Online + Ofﬂine commerce has huge potential. $150M Product Market Fit!• 30% cheaper than other services $0M 2011 2012• DTB may have found a cost effective way to acquire new customers!• Nation media can monetize diaspora readers • Craft Silicon can tap diaspora payments market
How to drive Valuation Sometimes outside Direct Control your control• Pick a hot industry area (high growth, huge market) • Negotiation Power• Focus on key metrics that drive valuation (traction) • Timing...• Build up valuable assets (team, product, IP)• Competitive Advantage "Moat". Monopoly/Network • Find Product Market Fit before effect business going to investors• E.g. Build a brand (not just customers, employees too) • Culture (design, data, execute)• Solve a real problem people are willing to pay you for! • Find buyer(s)... (exit)• Proven entrepreneurs and teams. Sometimes failed teams better than ﬁrst time entrepreneurs • Pick partners that can help you (advisors, investors, employees)
Destroying Value Lots of Evidence More Strategic• Focusing on vanity metrics for too long • Industry timing (market readiness)• Your competitor is bought by the only buyer (e.g. Instagram) • Scaling too fast on wrong biz model• Wrong hires (e.g. MBAs) (not achieved product market ﬁt)• Industries with low barriers to entry/ • Revenue vs Growth Balance Copying• No talent retention plan • Patents vs Execution• Not solving a problem • Innovators Dilemma
What is the Valuation Goal? For Founders For Investors• Create wealth • Come in at a "fair" valuation and with potential to be compensated for taking a• Attract investors to share in the risk risk. and fund growth • Traditional VCs have high return requirements- will use terms & board seats• Attract talent and partners (equity to exert inﬂuence as a currency vs salary) • Impact investors (even angels) may trade• Maintain control... 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 a small pie"
Internet Startup Capital efﬁciency • Technology Risk decreasing • Market traction increasingly important (product market ﬁt) • Expertise is valuable http://www.bothsidesofthetable.com/2012/05/23/its-morning-in-venture-capital/
2 Case studies 2000 2000 Valuation Users Traction at Exit Africas Largest 40M mobile social $60M 2007 2007 Acquires 30% Stake Invests $5.1M network ($ unknown) Mobile payments in 2011 2011 5M $110M 40 countries Acquired for Acquired for (27 in Africa) $60M $110M S Mobility plans to buy Mobile-Software companies in Africa. Jan 2012
Venture Capital Method• Pre money valuation: Valuation before investment• Post money valuation: Valuation after investment.• The key is to watch the share price in each subsequent round of 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!
Valuation & Africa valuation Traction Stage Time (Year) ranges expected Acceleration <$0.5M Prototype Unproven <1 Dominating sub Revenue vs Seed/Series A $1-10M region. Building 1-3 Team Growth Scaling across Series B/C $10-50M Africa Proﬁtable 3-5 Exit Valuation $50-250M IPO/Acquisition 5-7 ExitCapital efﬁciency and speed of growth + hitting milestones ischanging this dynamic all the time. Also depends on industry.
Summary & Takeaway• Metrics, data & transparency matter- start measuring early• Team, Strategy and Execution and business model also important• Choose your investor partners wisely & understand their motivations to invest• Valuation is one measure of 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.
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