Why many early-stage startups dem misprice valuation
Founders carry wrong signals
Many founders set valuation from hope, not numbers. They pick figures base on gut or what social media dey show. The result: pre-money go high pass reality, or dem accept too-low offers because dem dey rush. This pattern dey cause premature dilution or failed raises.
Investors dey use short-cuts
Investors sometimes dey rely on bias or quick heuristics — brand founder, previous startup exit, or trend in fintech. That method fit work small time, but e ignore unit economics, retention metrics, and real runway. So dem either lowball or overpay for hype.
Market signals and structural factors
Local dynamics change price: currency risk (naira fluctuation), CAC registration status, and regulatory signals from SEC or CBN. For example, fintech with payment license go command premium. Without those, valuation must reflect extra risk.
Five practical valuation methods and when dem fit use am
1. Scorecard / Berkus method
Scorecard and Berkus methods work well for pre-revenue startups. Dem break company into factors: founder, prototype, market size, partnerships, and product. Assign weight and score. This method quick, transparent, and easy to justify to investors.
2. Comparable (comps) approach
Comps look for similar local deals. For Lagos-based consumer apps, compare recent rounds for Paystack, Kuda, or smaller seed deals. Use multiples like valuation per monthly active user (MAU) or revenue multiple if data available. Comps need local deal data — entrepreneurs fit collect this from angel networks and online databases.
3. Risk Factor Summation
Start with base valuation, then add/subtract points for risk factors: market risk, technology risk, team risk, legal/regulatory risk. Each factor adjust valuation by a percentage. This method helps show how regulatory approvals or traction can increase price.
4. Discounted cash flow (DCF) for early revenue
DCF fit for startups with some revenue. Forecast cashflows for 3–5 years, discount with appropriate rate (high for early-stage). Use conservative assumptions: 10–20% monthly growth for first year depending on niche. DCF explain value to sophisticated investors.
5. Convertible instruments and SAFEs (pricing later)
If valuation consensus no reach, dem use convertible note or SAFE. That defer pricing to next round with conversion discounts or valuation caps. Important: cap and discount must reflect present risk — too generous cap dilute founders later.
Step-by-step fixes founders fit use before they raise
Step 1 — Produce three realistic scenarios
They must build base, best, and worst-case financial scenarios for 12–24 months. Each scenario get clear traction assumptions: CAC, LTV, churn, conversion rate. Use measurables: MAU, weekly active users, monthly revenue in ₦. Investors respect numbers over vagueness.
Step 2 — Choose the right valuation method and instrument
Pick method based on stage: scorecard for idea-stage; comps or DCF for early-revenue. Decide instrument: equity, convertible note, or SAFE. Align instrument with milestone timelines — example: SAFE with 20% discount and ₦200M cap if founder expects Series A in 9–12 months.
Step 3 — Harden the cap table and milestones
Prepare clean cap table showing founders, advisors, and previous investors. Show how raise impacts ownership. Add 12–18 month milestone list tied to valuation uplift: CAC drop to ₦500, revenue to ₦5M/month, or partnership with bank. Milestones sell confidence.
Step 4 — Negotiate with credible comparators
When negotiation start, bring 2–3 local comparables and explain adjustments. Use risk factor sheet to justify price. If investor offer low valuation, propose split: partial equity + milestone-linked tranche. That keeps founder upside while sharing execution risk.
Local case examples with practical numbers
Example 1 — Fintech seed raise
Startup A dey Lagos. Them build payment integration and get ₦1.2M monthly revenue. Founders want seed. Using comps, similar seed deals closed at ₦50M–₦150M pre-money. Scorecard give ₦70M. Negotiation plan: ask for ₦100M pre-money but accept ₦70M + milestone tranche (₦30M when revenue hit ₦4M/month). That structure protect founder and investor.
Example 2 — Consumer e-commerce pre-revenue
Startup B no get revenue but get MVP and pilot with 3 local stores. Berkus method assign ₦10M base, +₦5M for prototype, +₦10M for founder experience. Total pre-money ₦25M. Founder accept convertible note with ₦30M cap and 25% discount — reasonable because pilot still unproven.
Regulatory and practical checks
Before sign, make sure CAC records correct, tax PIN available, and any fintech startups check CBN/SEC guidance. If the product touches payments, consult a lawyer on licensing. This small check reduce legal risk and can raise valuation by 10–20% in investor eyes.
Practical negotiation checklist and closing tactics
Simple checklist founders fit follow
- Traction sheet: MAU, revenue, CAC, churn, unit economics.
- Cap table: clean, show post-money dilution.
- Valuation method: state method and assumptions.
- Instrument terms: cap, discount, liquidation preference.
- Milestones: timebound, measurable, and linked to tranche.
Closing tactics that work
- Offer a short exclusivity window to investor (7–14 days) after term sheet.
- Bring 2 competing term sheets — even small interest help negotiation.
- Use milestone tranches to bridge valuation gap without losing control.
- Document every assumption; put data on a single slide deck for clarity.
Final practical note
Valuation no be magic. It be tool to align incentives. When founders and investors adopt clear method, back figures with local comps and milestones, and respect regulatory checks, deals close faster and both party fit win. They go avoid common mistakes: emotional pricing, dirty cap table, and wrong instrument choice.
Quick resources: angel networks like Lagos Angel Network, VC reports from Ventures Platform, and SEC Nigeria publications for crowdfunding rules. These resources give local comps and regulatory pointers founders and investors need.
