Mbwana Alliy- Managing Partner, Savannah Fund @mbwana

4th September 2012 #Africavalue

Valuation for the Africa Tech Startup

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

• USA = 0.75%

• Brazil = 7.5%

• India = 8%

• South Africa = 5.5%

• Kenya = 16.5%

Central Bank Rates (Aug 2012)

With predictable (growing) Cashflow- valuation becomes easy to establish

r= cost of capital, can be inferred from interest rates

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

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 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"

How much to spend to acquire each new user?

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...

Con

nect

ions

(Milli

ons)

0M

225M

450M

675M

900M

2008 2010 2012 2014 2016

Mobile ConnectionsMobile 3G Connections

Where is Africa Tech Value?

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

ARPU

($)

0

3

6

9

12

2008 2010 2012 2014 2016

11.5

8.66 8.53 8.49 8.42

Serv

ice

Reve

nue

($ B

illion

s)

0

17.5

35

52.5

70

2008 2010 2012 2014 2016

30.96536.84

48.851

59.256

68.286

$30B+ of mobile service revenue

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

Some examples...

* Subscribers or monthly unique visitors

CPM & content sites

• 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?

"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

• 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

Content meets Commerce

$0M

$150M

$300M

$450M

$600M

2011 2012

$590M

$409M

Kenya Remittance Market size

44%

Product Market Fit!

Content meets Wifi/ISP

How to drive Valuation

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

• Focus on key metrics that drive valuation (traction)

• Build up valuable assets (team, product, IP)

• Competitive Advantage "Moat". Monopoly/Network effect business

• E.g. Build a brand (not just customers, employees too)

• Solve a real problem people are willing to pay you for!

• Proven entrepreneurs and teams. Sometimes failed teams better than first time entrepreneurs

• Negotiation Power

• Timing...

• Find Product Market Fit before going to investors

• Culture (design, data, execute)

• Find buyer(s)... (exit)

• Pick partners that can help you (advisors, investors, employees)

Direct ControlSometimes outside your control

Destroying Value

• Focusing on vanity metrics for too long

• 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

• Industry timing (market readiness)

• Scaling too fast on wrong biz model (not achieved product market fit)

• Revenue vs Growth Balance

• Patents vs Execution

• Innovators Dilemma

Lots of Evidence More Strategic

What is the Valuation Goal?

• Create wealth

• Attract investors to share in the risk and fund growth

• Attract talent and partners (equity as a currency vs salary)

• Maintain control...

• Come in at a "fair" valuation and with potential to be compensated for taking a risk.

• Traditional VCs have high return requirements- will use terms & board seats to exert influence

• 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"

For Founders For Investors

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/

Acquired for $60M

Acquired for $110M

2007

20002000

Acquires 30% Stake ($ unknown)

2011 2011

S Mobility plans to buy Mobile-Software companies in Africa. Jan 2012

Users Traction Valuation at Exit

40MAfrica's Largest

mobile social network

$60M

5M

Mobile payments in 40 countries (27 in Africa)

$110M

2 Case studies

2007Invests $5.1M

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

valuation ranges Stage Traction

expected Time (Year)

Acceleration <$0.5M Prototype Unproven <1

Seed/Series A $1-10MDominating sub region. Building

Team

Revenue vs Growth 1-3

Series B/C $10-50M Scaling across Africa Profitable 3-5

Exit Valuation $50-250M IPO/Acquisition Exit 5-7

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.