An overview of Valuation for Startups as it relates to African context at the ihub on September 4th 2012

1. Valuation for the Africa Tech Startup
Mbwana Alliy- Managing Partner, Savannah Fund
@mbwana
4th September 2012
#Africavalue

2. 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

3. Valuation Theory
• Asset Based
• Discounted Cashflow
• Market Based
• Comparables/Multiples/Metrics
All these are signals that translate into
some sort of traction for a startup and
leads to valuation

4. 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

5. 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 inferred
from interest rates
With predictable (growing) Cashflow- valuation becomes
easy to establish

6. 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

7. 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.

8. 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

9. The Market...
• Supply & Demand of investors &
startups
• Market forecast and growth of
Industry
• Business Cycle
• Exit market...
• Talent market...

10. 12
11.5
Where is Africa Tech Value? 9
8.66
ARPU ($)
8.53 8.49 8.42
900M 6
3
675M
Connections (Millions)
0
2008 2010 2012 2014 2016
450M
70
Service Revenue ($ 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

11. Some examples...
ARPU
Users* P/E Valuation
(monthly)
$5.71
19M 10.7 $2B
$1.20 (M-PESA)
$6.50 (Africa)
240M 15 $17B
$3.40 (India)
1,000M+ $1.97 16 $224B
115M $0.93 275 $112B
900M $0.40 90 $60-80B
* Subscribers or monthly unique visitors

12. CPM & content sites
"The arrival of global advertising agencies has raised the stakes in
East Africa's $1 billion market, with new players hoping to wrestle
a piece of the action from the Kenyan company Scangroup, the
regional 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?

13. 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

14. Content meets Wifi/ISP

15. 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)

16. 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

17. 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"

18. 3 Rs (Control vs Maximizing Wealth)

19. Hard to value without Info

20. 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/

21. 2 Case studies
2000 2000
Valuation
Users Traction
at Exit
Africa's
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

22. 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!

23. Capitalization Table Effect
http://www.savannah.vc/resources/

24. 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
Exit
Capital efficiency and speed of growth + hitting milestones is
changing this dynamic all the time. Also depends on industry.

25. 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.