In conversation with Dotun.
Today on Series V, we continue to discuss fundraising for startups in Africa. Catch up on the first and second parts here and here.
Last week, Kola Aina shared his thoughts on funding models. Today, Dotun addresses valuation and long-term thinking for African investors.
About Valuation
For startups with uncertain futures and no historical financials, the job of assigning a valuation is tricky. In these cases, startup valuation is more of an art than a science. There are many parameters to take into account like the market, the team, the product, and so on, but the most important of these is the market.
A lot of African founders compare their products with foreign counterparts, thinking they should raise at similar valuations, but forgetting that the market conditions are different. True, some products in Africa are unique to us, like USSD. But if your offering is Uber for x or e-commerce, and you are basing your valuation on comparables in other markets, you are going to get it wrong because the risk profile is vastly different.
How then deal should African founders approach valuation? In my opinion, by fixing the best price they can, but applying the necessary discounts to the numbers, they see on Techcrunch. Go for how much will help you get to the next milestone, and then determine how much of your company you want to give out for that amount of money. It is important to keep the next round in mind when pricing equity today. Rather than getting fixated on how much your company is worth, do a bottom-up analysis of how much your product roadmap requires, add an extra 20 %- 30% (because founders tend to underestimate how much they need), and give out a percentage you are comfortable with. Think “who is willing to give me $1.2million for X per cent of my company?”.
On long-term investors
African investors should not think of startups as a get rich quick scheme, but a commitment. Players in the African tech space should play chess and not checkers. They should be long-term in their thinking. It’s going to take time for the market to mature and they need to think beyond making money in 3 years. For instance, an investor in an African e-commerce startup should look far ahead into the future to a time where young consumers become the biggest spenders and the highest earners in the country. When that happens, most transactions will happen online. If you are betting on the technology companies that will deliver this future, you have to take a long view.
Plus, in cases where funds/investors do not have enough follow-on capital to deploy, they can provide portfolio support until the startups get to a stage where they are good enough for more money/foreign investors. They should also actively spend time building networks to secure follow-on capital for their investee companies.
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