For entrepreneurs looking to raise capital for their startup or investors seeking to make an investment in a startup, a valuation is normally a key negotiating factor. How then do you arrive at a valuation for a venture that is pre or slightly post revenue, with a business model that is not properly defined, has very few assets in a market with limited peers and even more limited data. What is valuable about such a startup and how do you price this. As the saying goes, “Price is what you pay, while value is what you get”, it is important that price and value are aligned as much as possible, even for startups.
To arrive at a value, broadly there are three (3) methods of company valuation are commonly applied: an Asset approach; an Income approach; and a Comparables approach. Any other specialist methods of valuation are usually a variation on one of these methods.
Asset approach: focuses on a company’s net asset value (NAV), or the fair-market value of its total assets minus its total liabilities, to determine what it would cost to recreate the business.
Income approach: focuses on value of a company based on the amount of income (cash flow) the company is expected to generate in the future.
Comparables approach: focuses on value of a company based on similar companies recently bought and sold.
In Sub-Saharan Africa in general and Uganda specifically, applying any one of these methods of valuation poses challenges and uncertainty because: i) startups do not possess much in way of assets, they are just building out their assets; ii) any projections of income or cash flow may over or under estimate the business outcomes; iii) with a small and nascent startup ecosystem with limited exits, void of meaningful comparable transactions and with information closely/privately held, comparables are few and far in between; iv) startups are small and illiquid, any valuation would need to take this into account; v) startups are evolving and transient not mature and steady going concerns.
How then should one value a startup in Uganda? The methods identified above, while insightful and instructive, would need to be adjusted to take into account the limitations identified for startups. In addition, the industry in which the startup plays, stage in the lifecycle and the reason for the valuation will also influence the method and approach to valuation used. One cannot overstate the importance of seeking and imputing records and data in helping to support any valuation.