by Eunice Ajim
After 7 years of working with startups and venture capital in Africa, here are the 7 most effective valuation models I’ve found:
1) VC Method
Most commonly used. Calculates the expected return based on exit, terminal value, and discount rate.
Factors in Africa:
– High political risk
– Currency fluctuations
– Thin volume of comparable transactions
Valuations are lower than in developed markets.
2) Scorecard Method
Used by angel investors. Compares the startup to similar companies using management, industry, and growth stage factors.
Factors in Africa:
– Early-stage risk
– Less developed startup ecosystem
– Unclear sector macro trends
More subjective than objective.
3) Berkus Method
Uses five factors to determine a pre-money valuation:
– Idea
– Prototype
– Management
– Strategic partnerships
– Market opportunity
Factors in Africa:
– Lack of access to capital
– Less developed infrastructure
– Smaller market sizes
Valuations are lower.
4) Risk Factor Summation Method
Assigns a score to various risk factors such as IP risk, management risk, etc.
Factors in Africa:
– More political risk
– Less developed legal system
– Higher regulatory risk
Valuations are adjusted accordingly.
5) First Chicago Method
Based on the amount of money needed by the company to reach cash flow breakeven.
Factors in Africa:
– More difficulty in accessing capital
– Higher cost of capital
– Longer timelines to achieve profitability
Valuations are typically lower.
6) Option Pricing Method
Used for startups with complex capital structures. Calculates the value of a company’s equity options.
Factors in Africa:
– Less developed ecosystem
– Limited investor base
– Smaller deal sizes
Valuations are adjusted for risk.
7) Comparable Transaction Analysis
Compares the startup to similar companies that have been acquired or gone public.
Factors in Africa:
– Limited number of comparables
– Less developed M&A markets
– Less developed public markets
Valuations are lower than in developed markets
Conclusion
Valuing African startups requires a nuanced approach, considering the specific risks and opportunities in the African context.
Each valuation model has its strengths and weaknesses, and it’s up to investors and entrepreneurs to choose the approach that best fits their needs.
Eunice Ajim is the Founding Partner at Ajim Capital. She is a Cameroonian-American Tech Entrepreneur and Investor. ‘Valuing African Startups’ was first published by Eunice as a Linkedin post. It has been republished on Infusion Lawyers Newsletter with the author’s permission.
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