Make-IT and VBAN Deal Structuring and Valuation Masterclass
On October 25th, 2018, Make-IT in Africa supported Viktoria Business Angels Network (VBAN) with delivering a deal structuring and valuation masterclass at entrepreneurs club Mettā in Nairobi, Kenya.
The session was aimed at informing and educating the Nairobi angel investing ecosystem on the best methods and practices used to ensure mutually beneficial start-up investments.
Tomi Davies, President of the Africa Business Angels Network, a pan-African non-profit association, delivered an intensive and thought-provoking session on how start-up valuation and the methods angel investors can use to go about this.
Much like the Kenyan start-up ecosystem, South Africa is home to a number of early stage start-ups which benefit from a thriving angel investor network. To introduce this network, Alexandra Fraser, Director of Fraser Consulting, discussed the various players in the South Africa angel investor network and the role they each play in ensuring sustainable support to start-ups.
In addition to valuation, deal structuring is a key element to ensuring beneficial investment. To highlight this, Stephen Gugu, founder and Director of Viktoria Ventures, presented the various methodologies and theories that can be applied when striking an investment deal with a start-up.
The key insights delivered by Tomi Davies were centred on 5 prominent considerations angel investors should make prior to investing in a start-up. These are:
- The physical assets of the start-up- What they are and how ownership over them is legally structured
- Intellectual Property- Ownership of patents add value to start-ups
- Team- The team within a start-up speaks to its ability to execute its vision
- Consumers and Contracts- It is better to invest in start-ups which have some traction in terms of existing customers
- Competition- It is important to know who the competitors of the start-up are and what they are likely to do in reaction to competition from the start-up
- Market size and growth- Sustainable market size that is growing is key when considering the value of a start-up
- Asset replacement costs- Were anything to occur to the assets owned by the start-up, what would be the cost of replacing them?
- Earnings multiple- These include various formulas used to value a company. For eg. the EBITDA multiple compares a company’s enterprise value to its (e)arnings (b)efore (i)nterests (t)axes (d)epriciation and (a)morization.
Stephen took the audience through intensive deal structuring metric’s that can be used when negociating. These include:
- Convertible Debt- This is a short-term debt which converts into equity. In essence, an investor would loan money to a start-up with the agreement that instead of repayment in the form of principal plus interest, the investor would receive a certain number of shares in the company.
- SAFE- Simple Agreement for Future Equity is an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment.
- KISS agreement- Keep It Simple Security is a deal structure that is similar to SAFE. Unlike SAFE however KISS agreements accrue interest over time and have maturity dates after which the investor may convert their investment.
To wrap up the masterclass, the informal networking session between start-ups and the angel investors took place.
The 4 start-ups present were Taimba, Mlinzi, Biztele and M-Shamba.