How startup pricing shapes investor decisions

Overvaluation sets start-ups up for disaster. It creates unrealistic expectations, painful down rounds, and diluted ownership. Investors overpay, only to realise later the business can’t justify the price tag.

The fallout? Hesitant funding, slower innovation, and a Venture Capital (VC) market that looks like a popped bubble.
“This why entrepreneurs should understand the science of valuing their own companies so that they don’t fall prey to problems like these,” says Kenneth Legesi, the chief executive officer of Ortus Africa Capital, an investment and advisory firm.

So, what is valuation?
Think of valuation like pricing a car—you would not just slap on a random number and hope for the best. Both the buyer and seller need to know its condition, market value, and accident history before shaking hands on a deal.
The same goes for start-ups. Investors need solid data before writing a cheque to fund a business.
“If you are an entrepreneur, your job is simple: lay out the facts, prove the value, and make sure everyone gets a fair deal,” Legesi notes.

Why do we do valuations?
Valuation is not just about dazzling investors—it is everywhere:
Stock trades – Every share bought or sold? That is a valuation in action.

Capital budgeting – Before buying that fancy equipment, smart entrepreneurs check if it makes financial sense.
Mergers & Acquisitions – You can’t just eyeball a business and call it a billion-dollar deal. Someone has to crunch the numbers.

Taxes & legal battles – Whether it is settling an estate or paying the taxman, valuation decides who gets what.
Startup funding –Startup valuation shapes funding by determining equity stakes and investor confidence, but different from that of public companies.

Why different?
When buying stock in a listed company, you check the market price. But for startups, that is a different game. Their value is not based on stable earnings (many have none) but on potential, risk, and optimism.

In Uganda and Africa in general, investors weigh extra factors:
Infrastructure gaps – Can the startup operate smoothly with existing roads, internet, and logistics?
Regulatory surprises – Governments shift policies, introduce taxes, and demand new licenses overnight.
Political and financial uncertainty – Investors hate unpredictability. If things seem unstable, they hesitate.
Talent shortages – Scaling is tough without enough skilled people.

Yet, Africa offers huge opportunities—rapid mobile tech growth, fintech revolutions, and game-changing innovations in agriculture and logistics.

“So, when valuing a start-up, investors balance the risks with the rewards—because at the end of the day, valuation is just a number that tells a story about the future,” says Legesi.

Going through an investor’s mind?
Imagine renting out an apartment. Tenants won’t just take your word for it—they will check the neighbourhood, plumbing, and rent prices for similar places. Start-ups are no different. Investors inspect every detail before committing their money.

One of the things they look at as they sprawl their moves is the market. Is there gold in this mine?” Is the industry growing or dying? How big is the market? Are customers actively searching for this solution?

Start-ups solving urgent problems (healthcare, fintech) get more attention than those tackling minor inconveniences, according to George Jato Otim, a senior corporate financial analyst with 12 years of experience in strategic financial reviews, due diligence, valuations, and transactions across various sectors.

The other thing is the business model. “How does this thing make money?” Where does revenue come from? Can it scale without costs ballooning? Is it sustainable long term?
Industry players know that investors don’t just back businesses that work today—they bet on those that can dominate tomorrow.

Then they look at the technology.
“What makes this start-up special?” Is the tech unique and hard to copy? Are there patents or trade secrets? Can the technology scale as the company grows?”
A strong tech moat makes a start-up harder to replicate, increasing its investment appeal.

Investors then look at the team behind it. “Can these people pull this off?” Do the founders have industry experience? Can they handle pressure and scale operations? Have they built something successful before?

A mediocre idea with a great team can succeed, but a brilliant idea with the wrong team is likely to fail.
The other thing that amuses people is the numbers – “Show me the money.” Revenue & profit margins – Is money coming in? Cash burn rate – How fast is it disappearing? Financial projections – Are they realistic or pure fantasy?”
A start-up bleeding cash with no clear path to profit? Red flag.

The other thing investors look at is the customer growth – “Are people using this?” Are users signing up and sticking around? How fast is the customer base growing? Do customers love the product?

“No matter how smart the business model is, if no one is using it, it is considered worthless,” Otim says.
Investors then focus on the competition. “Who else is in the game?” Who are the biggest players? What is the startup’s edge? If there is no clear differentiation in a crowded market, investors hesitate.

After all that, the investors then weigh in the risks: “What could go wrong?” Market risks – Could the industry collapse? Operational risks – Can the team execute? Financial risks – Will they run out of money? Tech risks – Will the innovation become obsolete?

“Smart founders don’t just acknowledge risks—they have a plan to beat them. Investors don’t just bet on start-ups. They bet on the right team, in the right market, with the right edge,” Otim notes.

Methods used at each stage
In the early stage, there are big dreams, big risks. Think of a deep-tech agri-startup using Artificial Intelligence (AI) to analyse soil health. No revenue yet, just potential. Investors play the “what-if” game, using scenario analysis and option pricing to predict the future.

At the growth stage, revenue is rolling in, but the road is still bumpy. Consider a fintech startup with growing traction but that is still burning cash. Investors here focus on revenue multiples and market expansion to gauge potential.

At late stage, profits are on the horizon. Picture an e-commerce giant like Jumia pre-listing. Investors now use classic valuation methods such as discounted cash flow and market comps.

At the end of the day, investors are not just betting on ideas; they are backing businesses that can survive the chaos and deliver serious returns. The more certainty they see, the bigger the price tag.

But what metrics do they look at? Mr Legesi notes that when investors size up a startup, they aren’t just throwing darts at a board, but following a structured playbook where they dissect market trends, business models, financials, and technology.

Think of it as scanning a used car before buying it. 
How do they put a price tag on innovation?
Valuing start-ups is not like valuing a traditional business because, well, start-ups don’t play by traditional rules. Some have zero revenue but massive potential. Some have revenue but no profits. So, how do investors put a price tag on them?

Traditional valuation methods:
Asset-Based Valuation: If the startup has physical assets, they total them up. This works for factories but not for a SaaS company running on coffee and code.

Comparable Companies Approach: Compare with similar businesses. The problem? Many startups are so innovative that there is no direct comparison.

Precedent transactions: Look at past deals in the same industry. In Africa, though, many deals are not disclosed (probably because founders fear the taxman’s knock on the door).

Discounted Cash Flow (DCF): The gold standard. Future cash flows are estimated and discounted back to present value. The flaw? Startups often have negative cash flow, making projections more art than science.
But there are other startup-friendly valuation methods:
Venture capital method: Investors calculate how much they want to make and work backward to decide what they should invest today.

Scorecard valuation method: A mix of market data, team evaluation, and traction.
Berkus method: This assigns value based on qualitative factors like the quality of the idea, the team, and execution potential. The right method depends on the startup’s stage.

Flaws with a one-size-fits-all valuation approach
Professor Aswath Damodaran, the valuation guru, argues that traditional DCF does not work well for startups because cash flows are uncertain. Earnings are often negative because there is a liquidity issue (that is, you can’t just cash out easily).

So, what is the workaround? Adjusted valuation frameworks that factor in uncertainty and market conditions. An asset is worth the cash it will generate in the future. But in startups, that cash might be far off—or never come at all.
To value a startup, identify its sector, geography, competitors, and business model, choose the right valuation method, collect relevant data and conduct scenario analysis, adjust for risk (because startups can skyrocket or crash and burn).

Real-world examples
Tugende (Asset Finance + Tech): Provides credit to informal entrepreneurs, but early-stage revenue is unpredictable. Scaling is easy, but revenue stability takes time. Investors focus on customer acquisition, loan repayment rates, and the scalability of its tech-driven lending platform.

Numida (Fintech, Asset-Light): Offers unsecured growth capital to small businesses via mobile app—valuation driven by metrics like user growth, annual recurring revenue, and customer acquisition cost.
Xeno (Wealth tech): Helps users plan and save for financial goals—valuation focuses on customer lifetime value and acquisition costs.

Agtech startups: These blend tech with agriculture but need capital for equipment, processing plants, and storage. Their valuation depends on supply chain reliability, climate risks, and agent networks.

VC method versus comparables
Comparables usually keep valuations grounded, while the VC method can get a bit too starry-eyed about a startup's future. Investors love comparables for their reality check—entrepreneurs might dream big, but market data brings them back to Earth.

In emerging markets such as Africa, risk adjustments are key. Latest information shows that US start-ups face a 15-20 percent discount. But African start-ups are looking at 20-35 percent. Uganda? Add a 7 percent risk premium.

“To calm investor nerves, entrepreneurs need to lock in long-term contracts, keep churn rates low (1 percent is solid), show minimal loan defaults (under 2 percent) and expand beyond Uganda to spread the risk,” Otim notes.

Are you struggling to find comparables? Try Bloomberg or Thomson Reuters (if you can afford it) and then adjust for local risks—political, forex, and revenue.
“But you shouldn’t forget to vet your investors like you would vet your co-founder. Past deals, recent fundraises, and style matter. Smart money comes from smart partnerships,” Otim adds.