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Explained: How startups are valued – Part 2



co-founder, startup

Depending on who you ask, there are a number of ways to value your startup. I will however categorise them into 2 broad segments: “Intrinsic Valuation” and “Relative Valuation”.

Read part 1 of this article here

Intrinsic Valuation

The intrinsic valuation tends to value the startup solely based on the perception of its true value. This perception is usually based on the startup’s financial performance and potentials. Most times, the intrinsic valuation is based on the free cashflow of the business. It is calculated as the net present value of the future cashflow of the business. I will however not get into the details of this because it is mostly not applicable for early stage businesses.  This is because you are required to project the future cashflows of the business based on its historical performance and future strategy. However, since we do not have sufficient historical context, justifying the forecast will be extremely difficult.

This method is best suited for more mature companies.

Relative Valuation

The relative valuation on the other hand is an attempt to value the business based on the valuation of a comparable business. This is less technical and more applicable to most startups.

Let me explain this in a really basic term. Imagine you want to value PrepClass, for instance. Relative valuation suggests that the valuation multiple of PrepClass will be similar to that of Tuteria or other Edtech businesses operating with a similar model in Nigeria.

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When identifying the comparable company, you need to find businesses operating in similar markets –say emerging markets. Then you find businesses at a similar stage as your startup. You will be comparing apples with agbalumo if you compare the valuation multiple of PayPal with Paystack; the markets are different, so also are the stages of both businesses.

I believe that the most difficult part of relative valuation is identifying the comparable companies as well as finding the applicable multiple. This is difficult because most private companies do not disclose their valuation information publicly.

Due to the difficulty in finding a perfect comparable in a market like ours, POOTA is important (I explained POOTA in my previous post). In a situation where you are confined to using a semi-perfect comparable, there are adjustments that can be made to reflect the stage or the market of the target startup. It is also best practice to use more than 3 comparable companies and weed out outliers. This will give a more robust valuation picture.

There are 2 major valuation methods that we will discuss – “Precedent Transaction Method” and “Comparable Trading Multiple”.

The precedent transaction method suggests that the price paid for similar companies in the past is considered an indicator of a company’s value. While comparable trading multiple is similar to the precedent, but here, the comparable companies are trading in the public market. Like you must have suspected, we won’t be able to use the comparable trading multiple because of the stage of our startups.

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I will explain this in practical terms using a hypothetical scenario. Our hypothetical startup is “” an online travel agent operating in Nigeria. BookNow is looking to raise $4.5m in Series A capital to expand to (you know the usual suspects) Ghana and Kenya after starting operations 3 years ago. So, we will use the relative valuation method to value the business.

Traditionally, an E-commerce business is valued based on its GMV – Gross Merchandise Volume. This refers to the total volume (USD being the currency of measure) of sales over a given period (Say 1 year).

To explain this, imagine you booked a hotel on for a night at N50k. The N50k represents BookNow’s GMV. BookNow can then charge the hotel 10% of the transaction value – N5k. The N5k is then the net revenue for BookNow.

Getting into it, imagine that BookNow generated a total GMV of $20m in FY (full year) 2017. In determining the valuation, we will look for comparable companies operating as online travel agents. An online hotel booking platform should not be considered as a comparable. This is because the online travel agent’s GMV can be skewed based on the addition of airline bookings, which is typically more than hotel room bookings. These comparable companies should also be operating in similar markets. See below the list of hypothetical comparable companies:

CompTerritoryGMV Multiple


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Now that we have our comparable (comps) companies, we will then apply our multiple to the GMV of our target company – BookNow. There are a few tricks you can use here to get a higher valuation, but those are discussions for another time. Just to drop a hint, you can manipulate your comps by excluding the low multiple comps and leaving only the ones with higher multiples.

For this analysis, I will be using the median value. The average value will not be used because it has been skewed by the outliers – SafariTrip especially. So, the median actually represents the true picture of the comps.

BookNow Valuation Analysis
GMV         20,000,000
Valuation         24,300,000


Then you apply your selected multiple on the GMV of your startup to get your ideal valuation number. This number can then be sensitized, but leave that to financial analysts to figure out. The idea about sensitivity is to understand how any change in certain variables (Multiple, GMV) would affect your valuation number.



The other thing to understand is the dilution impacts. Now that we have got our ideal valuation number, this suggests that it is the valuation of the company before any capital injection (pre-money). But don’t forget that BookNow is raising $4.5m. What we are trying to get is how much stake the new investors will get at this $24.3m valuation.

BookNow Dilution Analysis
ItemValueImplied Stake
Existing Investors                       24,300,00084.4%
New Investors                          4,500,00015.6%
Total                       28,800,000100.0%


This implies that new investors will get 15.6% stake in the business, while existing investors will maintain 84.4% stake in the business.

Capitalization Table

Cap table, as we like to call it, provides an analysis of a company’s percentage ownership, equity dilution and value of equity in each round of investment by founders, investors and other shareholders. Also, note that BookNow raised a previous seed round of $1.5m before the current Series A round. It also has 2 co-founders who work as the CEO and CTO.

3 investors participated in the previous Seed Round, while 2 investors participated in the current round. The seed round was concluded at a $7m pre-money valuation. So the cap table will capture the shareholding of the business since inception till date.

The table shows the dilution impact of each capital raising round on the existing shareholders. Though the founders’ stake has been diluted from 45% each at pre-seed stage to 31.27% each at Series A, the value of their shares is now worth $9m each against the $9k each at pre-seed stage.

I hope you find this post useful.

Happy entrepreneuring!



Business News

TLG Capital and Fidelity Bank to invest $20 million on Nigerian SMEs

TLG Capital announced that it would be investing with Fidelity Bank Plc amount to the tune of $20 million on SMEs in Nigeria



Entrepreneur, Multiple businesses, Nigeria partners UAE to boost SMEs , US technology company deploys software to ease business process in Nigeria, Experts outline what SMEs must do to attract funding, investors in 2020 , Simple ways to prioritize customer service for your small business, What was SMEs must do to survive the coronavirus outbreak , What was SMEs must do to survive the coronavirus outbreak, FG rolls out N2.3 trillion survival funds for MSMEs; see criteria 

Private Equity firm, TLG Capital has announced that it would be investing together with Fidelity Bank Plc, an amount to the tune of $20 million on SMEs in Nigeria.

The funds will be channelled through TLG’s Africa Growth Impact Fund (ADIF), towards the development of SMEs in the country. Notably, the fund will be directed to SMEs that are focused on healthcare, education, consumer sectors, amongst others.

This new investment is in line with the bank’s move to provide innovative funding options and other forms of relevant support to entrepreneurs in the country.

READ: Investors react to Fidelity’s bond listing, as it gains N1.74 billion

What you need to know

  • Fidelity Bank Plc is a commercial bank in Nigeria with over 5 million customers, serviced across its 250 business offices and other digital banking channels.
  • According to information from the website of TLG Capital, a total of $303 million loans was still outstanding to SMEs and the unbanked through its portfolio companies.

READ: Bank sell-off triggers bearish move in the S&P 500 index 

Why this matters

This new investment will come as good news to SMEs and other entrepreneurs in the country, especially those seeking to obtain loans in the listed sectors.

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FG to set up micro, small and medium enterprises in 774 LGAs

The FG has disclosed plans to establish micro-enterprises in the 774 Local Government Areas (LGA) across the country.



George Akume

The Federal Government has said that it plans to establish micro-enterprises in the 774 Local Government Areas (LGAs) across the country to help create jobs and ensure improvement in the well-being of the local populace.

This disclosure was made by the Minister of Special Duties and Inter-Governmental Affairs, Dr George Akume, at the Association of Local Governments of Nigeria (ALGON) General Assembly with the Theme: Strategic Positioning for the Future: A New Era, on Wednesday in Abuja.

Akume, who was represented by the Deputy Director, Office of the Minister, Mr Simon Tyungu, said that the establishment of the micro-enterprises was conceived to cushion the effect of the current economic situation.

READ: Why e-commerce platforms are struggling to capture Nigerian population

What the Minister for Special Duties and Inter-Governmental Affairs is saying

Akume said, “As a ministry, we have proposed the establishment of Micro, Small and Medium enterprises in the 774 local governments in Nigeria based on economic corridors. We believe that this will create jobs and ensure improvement in the well-being of the local populace.’

Akume also applauded the role played by ALGON during the COVID-19 pandemic in bringing relief to the people at the grassroots despite their limited resources.

The Minister said, “The administration of President Muhammadu Buhari has taken some bold steps to reposition the local government administration such as granting of local government autonomy and enforcement of democratically-elected local government councils by the states.”

READ: EdTech startup Kabakoo receives funding from Zoom, launches first no-code training in Africa

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“This is a clear demonstration of political will by Mr President. The COVID-19 pandemic that has ravaged the entire country in 2020 was felt more in our local communities. The leadership of ALGON contributed in no small measure, particularly on stimulus packages and advocacy, notwithstanding your financial limitations,’’ he said.

The minister said the Federal Government recognized the fact that people could be reached through the local government area councils and then put some measures in place.

Going further he said, “The Federal Government in its wisdom then realised that the local government area councils are the veritable vessels through which the dividend of democracy will reach the vulnerable indigent citizens.

“Mr President (of ALGON), I urge you to take advantage of this initiative and key into President Muhammadu Buhari’s resolve to lead 100 million Nigerians out of poverty in the next 10 years. The Federal Government is favourably disposed to attaining this developmental goal.’’

READ: FG earns N28.6 trillion from VAT, others 

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Speaking at the occasion, the ALGON National President, Dr Kolade Alabi, said that ALGON’s general assembly seeks devolution of powers, both financial and administrative, with concomitant fiscal devolution. He said that this is in addition to the request for complete autonomy for local government area councils for effective administration and service delivery to the people noting that such would require the review of the 1999 constitution as relates to local government administration and uniform tenure of the 4-year term for local government administration among others.

What this means

The establishment of such micro-enterprises by the Federal Government will create jobs especially among the unemployed youths and help to boost the economy. This is as the nation tries to recover from the impact of the coronavirus pandemic on the economy, businesses and households.

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