A Guide to Valuations for Early-Stage African Startups
October 25, 2023
Across Africa, building and scaling a startup is not an easy feat. African founders are on an extraordinary journey, driven by innovation and a deep commitment to solving local and global challenges. Since early 2010, the African startup ecosystem has been attracting foreign investments across the globe. Due to the dynamic setting of the continent, understanding the concept of valuation is not just an option; it's a necessity.
Building a valuation especially for early stage African companies can be a little complex but highly essential to influence the success of fundraising efforts and to shape the future of the business. Early stage African companies face unique challenges and opportunities and it’s important to understand this context to do a proper valuation. In addition, adhering to global benchmark standards also helps ensure that valuations are done accurately.
What Is Valuation?
Valuation is the process of determining the economic value of a company or asset. For African startups, it's the art of putting a price tag on your dream, reflecting both your startup's current standing and its potential to reshape industries and create impact.
For early-stage startups, read about pre-money valuations.
Why does valuation matter & What are the benefits?
Valuation is more than just a number; it's a strategic tool with tangible implications:
Attracting Investment: In a landscape teeming with potential, investors look to your startup's valuation as a signpost. A well-defined valuation can be a magnet for those looking to bet on the future of African markets. It can also make your startup irresistible to investors seeking opportunities in Africa's growing markets.
Equity Negotiation: Valuation determines how much of your company you must part with in exchange for investment. It's a pivotal factor in equity negotiations, affecting your ownership and control. With a clear understanding of valuation, you can raise capital while safeguarding your equity, a precious resource for startups at their early stages.
Strategic Decision-Making: Valuation guides critical strategic decisions, such as fundraising targets, equity allocation to employees, and partnership opportunities, enabling you to steer your startup in the right direction. It provides a solid foundation for making strategic decisions, ensuring that resources are allocated judiciously to reach your goals effectively.
Tracking Progress: Valuation serves as a yardstick for measuring your startup's growth over time. It provides a clear benchmark for setting milestones and monitoring your entrepreneurial journey. An accurately evaluated startup can assert itself more strongly in the market, influencing how customers and partners perceive your business.
Team Alignment: Transparent valuation fosters a sense of collective purpose among your team. It helps align their expectations and motivation, making them more invested in your startup's success. It serves as a powerful motivational tool that allows your team to see the tangible value they contribute to the company, boosting morale and productivity.
Read about best practises for startup valuation for successful outcomes.
Methods of Valuation
At Raise, we use specific valuation methods that are tailored to the unique African startup landscape. In this video, our CEO: Marvin Coleby, our Commercial Director, Lisa Illingworth and Caleb Maru of Tech Safari explored the methods below in more details.
A. Qualitative Aspects
Scorecard Method: This approach involves scoring your startup against similar regional companies, providing a comparative score and pre-money valuation.
Checklist Method: This fixed valuation method, based on specific criteria, determines your startup's pre-money valuation.
B. Future Cash Flows
DCF with Long Term Growth: By discounting future cash flows, factoring in risk, and analyzing discount and survival rates, this method gauges your startup's value.
DCF with Multiple: Combining DCF with terminal value measurement using EBITDA, Industry Multiples, and Survival Rates offers a comprehensive valuation.
C. Investors Returns
Venture Capital Method: This method focuses on the returns investors anticipate upon exit, using a specialized formula to construct a profitable investment portfolio.
D. African Benchmarking
Comparative African Analysis: By comparing your startup to similar African companies in terms of sector, funding rounds, financials, and market conditions, this method determines a valuation aligned with the regional landscape.
To conclude, understanding valuation is not just a financial exercise; it's a strategic imperative for African startup founders at the pre-seed and seed stages. Armed with the right valuation methods and insights tailored to the African context, you can find out the true potential of your startup and drive it toward success in this dynamic and exciting entrepreneurial landscape.
To learn more about our valuation services, visit here or you can book a call here to speak direcly with our consultant.