AAA in partnership with UK’s International Tech Hub Network is running cohort 7 for emerging angels from South Africa, Kenya, Nigeria and the UK. Module 5 of the programme explores different models and processes for conducting valuations. In this post, we’ll give you five key insights from the experts at a recent masterclass.
1. Use multiple valuations methods. It isn’t an exact science but ensures you don’t overpay
“[VC Valuation] will not give you an exact number, but you [use this method] so you don’t overpay.”
– Stephen Gugu from Viktoria Ventures
The VC valuation method, is a great tool to gauge the value of the investment and whether it fulfills your financial targets, explained Stephen. This is just one valuation method which the AAA programme detailed during the valuation model. Other approaches touched on include the multiples approach, DCF approach, Berkus method, and scorecard valuation method.
Stephen advises using a range of valuation methods to gain some insight into whether the investment makes financial sense for you. He states that, though not an exact science, valuation tools help prospective angels determine whether they will be overpaying for the investment.
2. The right valuation is the valuation that allows you and the company to succeed
“The right valuation is the valuation which allows you and the company to succeed as much as possible.”
– Daniel Faloopa from Equidam
Currently, the global market for venture capital is in a downturn. This may make some investors eager to jump in while prices are low. Daniel suggests not giving too much weight to the 10-year cycle when evaluating a business, and rather to focus on the intrinsic value of the business. “Is this the bottom or not?” he asks, implying that we can never know how low the market will go, and therefore over-focusing on the cycle can hinder investing.
Additionally, Daniel advises to avoid a situation where your investee company feels that the valuation is unfair, or that you as an investor are being predatory. An unfair valuation damages not only your relationship, but gives the business a disadvantage in the long term. The point of an investor-investee relationship is that both succeed, and thus fairness is key.
3. The right person is just (if not more) important than the right price
“If you talk to a founder and are left with more question marks, then maybe that’s not the right founder for you to work with.”
– Lucretia Chopera from Knife Capital
According to Lucretia, your relationship with your investee is just as important as the financial side of valuations. She recommends picking investees who are ‘coachable’, meaning a person who is willing to learn and adapt. Furthermore, having a strong relationship built on trust and respect increases the durability of the agreement. Lucretia states that, when the market is in an upswing, then a taut relationship may not hinder the business’s success. However, when there is a downturn in the market, this is when existing fractures in the relationship can become debilitating.
Lucretia is not alone in this recommendation. Investors have long advised to place emphasis on the relationship between yourself and a potential investee. Check out Yuki Kawamura’s blog post to see some tips on how best to leverage your relationship with investees.
4. Don’t do it alone
“People may say ‘there’s all these membership fees’ [for an angel syndicate]… yes, you can find your own deals, but what you find is you don’t have the nudging from your co-investors, the follow-up emails… things fall through the cracks.”
– Biola Alabi from Lagos Angels and Acasia Ventures
Angel investors may be tempted to ‘go it alone’ and do all the sourcing,screening and deal structuring without other angels. Biola advises against this. Angel groups, networks, and syndicates provide two key benefits. Firstly, she points out that they help pool knowledge, skills, and expertise. This means that due diligence and valuation can be done more thoroughly, whilst also requiring less of your own time and energy. Secondly, working with others with the plan to co-invest allows you to be each other’s source of motivation and invest in more deals. Thus, you will be more likely to actually invest.
5. Valuations and models are sector specific
“Different sectors have very different routes to market and times to exit.”
– Alexandra Fraser from Viridian
Alex notes that investors need to set expectations, for both themselves and entrepreneurs according to the sector they operate in. For example, highly regulated sectors such as biotech tend to take a long time to see real returns, as their products cannot go to market without meeting regulatory requirements.This means that these startups may be very difficult to value as they have very little financial data and no cash flows. Different approaches to valuations and deal structuring may be needed e.g. using a SAFE or Convertible Note to get the transaction done. Angels need to gain a good grasp on what the sector they plan on investing in, so that they can gauge what the normal pathways to market and exit look like as well as whether they have the appetite for a longer investment cycle.
Want to learn more about valuations and the entire angel investing process? If you’re based in Uganda, Rwanda, Ghana, Tanzania and Uganda – you can apply for AAA’s cohort 8, starting in July. Or you can start learning right away and at your own pace, by purchasing the AAA online course
- Further reading:
Venture Capital Valuation. Wall Street Prep. Available: https://www.wallstreetprep.com/knowledge/vc-valuation-6-steps-to-valuing-early-stage-firms-excel-template/
- Types of Valuation Multiples. Corporate FInance Institute. Available: https://corporatefinanceinstitute.com/resources/valuation/types-of-valuation-multiples/
- DCF Valuation. Forage. Available: https://www.theforage.com/blog/skills/dcf-valuation#:~:text=Discounted%20cash%20flow%20(DCF)%20valuation%20is%20a%20type%20of%20financial,its%20investors%20in%20the%20future
- Early-Stage Startup Valuation: The Berkus Method. Venionaire Capital. Available: https://www.venionaire.com/early-stage-startup-valuation-part-2-the-berkus-method/
- Scorecard Valuation Method. Eqvista. Available: https://eqvista.com/scorecard-valuation-method-explained/
- Startup Ecosystem: The New Age Doctrine for Investor-Investee Relationships. Yuki Kawamura. Available: https://www.entrepreneur.com/en-in/entrepreneurs/this-kind-of-relationship-between-an-investor-and-investee/339167