In the Nigerian startup scene, I have been seeing massive valuations, from founders that reached out for my insights on their works. Simply, I tell these young people: your valuation does not make sense. It does not work that way; you cannot just put $10 million valuation because you like the idea. Yes, you will crush Amazon, Facebook and Google at the same time; we get that, and clearly. But the money you need is other people’s money. Be real, people, as you plan to take down every unicorn standing.
Valuation is a critical element of building startups. In short, it is one of the first decisions founders have to make. If you believe that you are on a big mission, in the world, the valuation should naturally be high. But it is also important to be terrestrial, because the way you see it, is not always the way everyone does.
Generally, I like to see people go for capital, only when needed. You do not raise money just to feel good because perhaps the press will write about it. You should raise money only when the business needs it. And before you begin the process of raising that capital, explore if your customers can fund you. You may be lucky, in some cases, to pitch ideas where the main customer pays for the product. Think of prepaid contracting where a customer prepaid order can be used to jump-start a key part of the business. But where there is no alternative and you have to hit the market, you need to learn simple things about valuation in order to get that term paper executed. In other words, to get the capital you need for your business.
My suggestion to Nigerian founders and by extension African founders is this: stay humble and do not be greedy so that you can get the capital you need to build your business. Do not compare yourself with other founders in U.S. Things are really different between you and them in some key ways:
- Country GDP Sizes: They are in U.S. with GDP in excess of $18.4 trillion. That means, they have a bigger market than Nigeria’s $0.450 trillion. If they get $10 million funding for a similar idea like yours, theoretically, you should be aiming for $250,000 owing to the size of your country economy. This is not necessarily fair since you can serve U.S. from Nigeria, in this age of Internet. The implication is that the location should not matter. However, at that early stage, what matters is the market where you are working to validate your business hypothesis. So, unfortunately, the investors are thinking market size opportunities in their minds, in this case, between Nigerian and U.S. economies.
- History of Performance: Nigeria is not Israel with the history of generating great returns for venture capitalists or other early stage investors. So, we are not there and we have to prove we can do it. Until someone has done it, and another entrepreneur follows up, most investors will see putting money in Nigerian startups as huge gamble. That makes them very fearful and masks your excitement before them. The result? They see low value before them. And if you push very hard, they are gone
- IP Locations Matter: Sure every laptop and mobile device uses IP address to get online. But in some cases, investors look at specific locations where those IPs are coming. If the IPs are coming from Nigeria, there is a discount, compared to U.S., depending on the business. So, you may have 1,000 visitors from Nigeria while another entrepreneur doing similar thing, has 800 from U.S. users, some investors will prefer the latter, especially if your business will be ad-driven. It is assumed that advertisers will likely prefer the U.S. users, owing to U.S. higher per capita income which can affect spending and consumption.
- Nigerian Risk: With the corruptions, yes Nigerian corruption is legendary, you are a victim of perception even before you pitch.Why will any human being believe you will be different? Most will not trust you, and if they do, they will likely not open their wallets to that huge valuation. Our national image depresses our value and that affects not just our startups but our businesses.
So, do not be too greedy. Understand that you are in Nigeria and be smart how you compute that valuation. I explain, using Facebook and IROKO Partners, to demonstrate that stratospheric valuation may not be what you need. What you need is capital.
- The Facebook Valuation: Peter Thiel invested $500,000 in Facebook for 10% of the company. It means that Facebook was worth, pre-money, $5 million. By then, Facebook was in growth phase with good press, demonstrated traction with Ivy League students, and more. Facebook was not an idea, it was a business with a product. Yet, Mark Zuckerberg did not say $100 million. He set a mere valuation of $5 million. You should learn something from that.
While the value of [Peter] Thiel’s stake has been nearly halved since the company’s IPO, Facebook’s first professional investor still realizes a handsome return on investment. In 2004, he invested $500,000 for more than 10% in the budding social networking company, then still known as Thefacebook.
- iROKO Partners: Jason Njoku was growing his video business and needed cash. Bastian Gotter invested $150,000 for 50% of the company at pre-money valuation of $300,000. That could sound ridiculous but Jason needed that money to build the business. Had he rejected it, there might not be iROKO today. According to Forbes, “[Bastan] Gotter’s initial seed investment of $150,000 for a 50% stake of Iroko” was done in 2010.
I do hope you are getting something from these two cases. It makes sense to be in this world when running those valuations.
The funding of iROKO Partners, owner of iROKOtv, teaches us a lesson
The valuation that matters is the one that helps you get the funding you need. You can put anything there: it means nothing, if none invests based, partly, on it. As an entrepreneur, you must be realistic and come down to earth with your valuation. Jason Njoku’s strategy, while really illuminating, is what you may need, when there is no other way, to get that capital. This does not mean you will give away your business: the balance on that decision, receiving capital and equity to part in exchange for it, is part of being a founder.