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Getting valuation right for African startups

Every now and then a founder will take to Twitter to ask about valuation resources for African startups. The concern is that the market considerations for Africa are so specific that methods which may be standard elsewhere may not be suitable. 


Dan Gray from Equidam

July 13, 2022

Every now and then a founder will take to Twitter to ask about valuation resources for African startups. The concern is that the market considerations for Africa are so specific that methods which may be standard elsewhere may not be suitable. 

It’s easy to see where this comes from. The Africa startup ecosystem is fairly unique, as evidenced by its robust Q1 fundraising results, being the only region to maintain 3-digit year-on-year growth. Valuations for the H1 2022 do not appear to be significantly impacted by the downturn, if anything the trend is slightly higher than during H2 2021. Similarly, while COVID uncertainty seemed to slow down fundraising activity for western startups (at least in the beginning), Africa was unphased.

So how does this factor into valuation? Or should it? How do you appropriately value startups across Africa to account for this - and other local factors? 

Standardized methods produce reliable, justifiable results 

As an early-stage founder, especially in a younger market, you might have bumped into investors with an eccentric approach to valuation. Maybe it was their absolute faith in revenue multiples, or a belief that comparables rule. These encounters shouldn’t influence how you approach valuation; any investor will appreciate a thorough and transparent approach, regardless of the exact methodology.  

The truth is that no single method is ideal for valuing startups, and like all truths that is universal. Whether you are from Lagos or London, a solid valuation looks at the company from a combination of perspectives to give the most complete picture of the risk and the opportunity. 

Measuring the immeasurable

So how do we account for regional startup trends and local factors in a valuation? Where do they figure into the calculation?

They appear in a few places. A thorough valuation will consider data which is local to the startup, such as survival rates and average/max valuations. On one hand, this data reflects issues such as political stability, infrastructure reliability, and currency volatility, which may be a more significant concern to investors in Africa. On the other hand, that data is also influenced by the entrepreneurial success stories in that region, which are indicative of talent availability, access to capital, support for founders, etc. In that sense, the success of the startup’s ecosystem is also measured to reassure investors that it is fertile ground for entrepreneurship. 

These local trends will also appear in your financial projections, for reasons that are not immediately obvious. How can you account for something so vague in your forecasted revenue? 

The first step is to understand where the trend originates. To consider the resilience factor as an example: 

It is a logical assumption that African fundraising has been more resistant to the downturn because African startups are typically providing solutions to ‘primary problems’. Access to banking, energy, healthcare. Meanwhile, startup trends in the west have significantly leaned towards convenience. Electric scooters, rapid grocery delivery, slicker financial products… These are not needs which persist in an economic crisis, and investors know it. 

If you are forecasting growth for the provision of affordable medical insurance, in a market where it is currently non-existent, you can fairly reliably assume (once you are confident that your product and distribution channels are solid) that growth will go about as fast as you can afford to power it. 

If you are forecasting growth for the third rapid delivery startup operating in a particular market, your forecasts are now impacted by further uncertainty. Firstly, by the relative success of your competitors who are competing for a slice of the same pie. Secondly, by consumer temperament, particularly when inflation is rising and the economic narrative is negative. This will raise concern from investors and ultimately impact valuation. 

Financial projections are where a lot of the ‘intangible’ factors on a startup’s success are accounted for. Brand strength is another common example, where a loyal customer base and a recognisable product can have a significant influence on revenue growth. 

Coherency and storytelling

The final step of this process is to make sure you are telling a coherent and consistent story about your startup’s journey. What is the opportunity you are chasing? What is the strategy you are following to get there? How is that reflected in your projections?

One of the most overlooked aspects of startup pitches is the connection between ambition and financial projections. There is a tendency to apply hockey-stick growth patterns because they look appealing, regardless of whether they make sense in that market. There’s also the common mistake of projecting huge growth into a market, and not properly considering what that means in terms of costs. How many agents will you need? How many managers? What’s the technology budget going to be at that stage?

Consider the importance of continuity in movies. You’re an hour and a half into Braveheart, and Mel Gibson is giving his goosebump-inducing speech to the brave Scots… then you notice one of the people in the shot is wearing a Casio. It pulls you out of the experience immediately, and suddenly your focus is on spotting other mistakes. It’s obviously a disaster if an investor starts looking at your pitch through that kind of lens, which is why consistency and coherence is key.

Raise & Equidam will be hosting a joint twitter space on the 27th of July, 2022 to discuss Fundraising in Africa. We'd be exploring the steps that founders need to take to improve the quality of data on startups in the continent. Follow @GetRaise on Twitter & Set a reminder here to join the space.