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/Metrics

All these are signals that translate into

some sort of traction for a startup and
leads 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 inferred

from interest rates
With predictable (growing) Cashflow- valuation becomes
easy 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

ARPU to Customer Lifetime Value

How much to spend to

acquire each new user?

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

The cost of marketing to each customer;

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

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.

"5% increase in customer

retention = 25- 95%
increase in profits"

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?

ARPU ($)

900M

8.66

8.53

8.49

8.42

2010

2012

2014

2016

675M
0
2008
450M
Mobile 3G Connections
Mobile Connections
225M

0M
2008

2010

2012

2014

2016

Service Revenue ($ Billions)

Connections (Millions)

70
68.286
59.256

52.5
48.851

35
30.965

17.5
0
2008

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

36.84

$30B+ of mobile service revenue

2010

2012

2014

2016

Some examples...
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

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
By Kevin Mwanza
regional leader."
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?

Content meets Commerce

Kenya Remittance Market is HUGE
and GROWING
Online + Offline commerce has huge
potential.
30% cheaper than other services
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

Kenya Remittance Market

size
$600M

44%

$450M

$590M

$409M

$300M
$150M

Product Market Fit!

$0M
2011

2012

Content meets Wifi/ISP

How to drive Valuation

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

Sometimes outside
your control
Negotiation Power

Focus on key metrics that drive valuation (traction)

Build up valuable assets (team, product, IP)

Timing...

Competitive Advantage "Moat". Monopoly/Network

effect business

Find Product Market Fit before

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)
Wrong hires (e.g. MBAs)
Industries with low barriers to entry/
Copying
No talent retention plan
Not solving a problem

Scaling too fast on wrong biz model

(not achieved product market fit)
Revenue vs Growth Balance
Patents vs Execution
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)

Maintain control...

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 a
small pie"

3 Rs (Control vs Maximizing Wealth)

Hard to value without Info

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
Users

Traction

Valuation
at Exit

40M

Africa's
Largest
mobile social
network

$60M

5M

Mobile
payments in
40 countries
(27 in Africa)

2000

2000

2007

2007
Acquires 30% Stake
($ unknown)

2011

Invests $5.1M

2011

$110M

Acquired for
$60M

Acquired for
$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!

Capitalization Table Effect

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

Valuation & Africa

Acceleration
Seed/Series A
Series B/C
Exit Valuation

valuation
ranges

Stage

Traction
expected

Time (Year)

<$0.5M

Prototype

Unproven

<1

$1-10M

Dominating sub
region. Building
Team

Revenue vs
Growth

1-3

$10-50M

Scaling across
Africa

Profitable

3-5

IPO/Acquisition

Exit

5-7

$50-250M

Capital efficiency and speed of growth + hitting milestones is

changing 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.