Corporate Governance and Valuation of Venture-funded Technology Startups in Africa

Abstract

The number of venture-funded technology startups in Africa and the amount of venture capital investment have been on a steady rise in the recent past. We are now at a point in the evolution of the various startup ecosystems around the continent where we have had startups going through multiple rounds of venture funding, some increasing their valuations to unicorn status (that is, being valued at over $1 billion). Others have gone through exit and liquidation events. That said, startups and the venture capital funding model are still a relatively new phenomenon on the continent and there is scant research on startups in Africa in general, less so on how African ventures scale and how they adapt their operations and management, including their governance structures, to adapt to growth. This has all the more been highlighted by recent corporate governance failings among African technology startups resulting in crises. The study therefore to investigate the corporate governance (CG) of African technology startups, and how this might influence their valuation at successive funding rounds. The study used a correlational research design to investigate the existence, direction and strength of the relationship between the level of corporate governance implementation and valuation along the venture capital lifecycle among technology startups in Africa. Primary data was collected using a structured survey delivered via the world wide web (online). The data collected included the startup’s base country, category (tech, tech-enabled or non-tech) age, funding rounds to date and valuation through the various rounds, expressed as a multiple. Data relating to the independent variable, corporate governance implementation, included whether there was a board in place at the point of successive funding rounds, the board’s composition in terms of the number of board members, member profile and presence of independent board members, and the existence of board committees. While inconclusive on the valuation multiple specifically, VC-funded startups were on average, better governed than non-VC-funded. This was borne out by the ANOVA test result that indicated that whether a startup has raised VC has a statistically significant bearing on their level of corporate governance (p-value: 0.006). The most positively correlated to the level of corporate governance at a funding round was found to be the amount of capital being raised in the round (0.62), followed by the level of revenue generation (0.50) at the point of funding, whether the round was priced or not (0.39), which round it was (0.31) and least of all the valuation multiple (0.13).