🚀 The Art of an African Exit

Examining the path to liquidity for African startups

Editor’s notes: An earlier version of this article said that Swvl listed via an IPO on the Egyptian Stock Exchange. It has been corrected to reflect that it listed on NASDAQ via a SPAC acquisition.

“A way out, or the act of leaving a place.”

In case you’re wondering, that’s the dictionary definition of ‘exit’. It’s a simple word with a clear enough meaning, but in the startup world, it’s not always so, and as a result, exits don’t happen as often as frequently as they’re talked about.

For startups, it’s rarely a question of whether to exit, but how?

An exit is a liquidity event that allows founders or investors to terminate their position in a business and hopefully reap significant returns. Exits are the primary means by which investors recoup their investment; also, the more exits happen on the continent, the more these investors understand how to value African startups.

Exits are as important to founders as they are to investors. While one school of thought thinks that exits, particularly acquisitions and mergers, stifle competition, others believe that the consolidation that results from an exit, particularly in the case of M&As shows that an ecosystem is not only healthy, but also has reached a certain level of maturity. As such, founders are encouraged to build with exits in mind, including an exit strategy as early as possible in business plans and pitch decks.

“We need very big companies to acquire smaller companies as the exits keep the ecosystems alive. People will keep producing as long as there are buyers.”

- Victor Asemota, investor and entrepreneur

Exits are rewarding for the ecosystem not only in terms of consolidation, but in the fact that exits ‘free’ entrepreneurs to pursue other interests within the ecosystem — build new companies or take up other roles within the ecosystem — leveraging the skillset and experience they have gained in the course of building their previous company(ies). It also doesn’t hurt that they can be quite financially rewarding.

⏳The History of Exits in Africa

Exits on the continent have happened from as far back as 1999 when Verisign, an internet infrastructure service provider based in the USA acquired Thawte Consulting, a four-year-old digital certification company based in South Africa. The deal was a stock purchase worth $575 million (the equivalent of ~$1 billion today).

The earliest acquisitions in African tech were of South African companies

It took at least a decade for the continent to record another exit. This time, it was also in South Africa as Yeigo Communications sold a majority stake to Telfree Group, a Swiss telecommunications company.

This was followed almost two years later by the acquisition of Fundamo, a mobile financial services company also based in South Africa by payment technology giant Visa in 2011. This all-cash deal was worth $110 million. After both events, acquisitions still continued to happen at a snail’s pace — one in 2013, two in 2014, and three in 2015. Growth was evident, only slow. From 2018, however, growth started to pick up dramatically.

Startup exits on the African continent have picked up in the last five years

In 2019, Jumia would become the first startup in Africa to list on a major global exchange. The IPO was met with much excitement within the ecosystem and signified a new wave for African startups.

Juliet Anammah, Chairperson of Jumia Nigeria, and other stakeholders celebrate Jumia’s listing on the NYSE Source: Courtney Crow | NYSE

🌍 What Exits Look Like in Africa Today

Although in 2022, there was an 8% drop in the total number of M&A deals globally, the reverse was the case in Africa. Forty-eight deals* were recorded on the continent, a 33% increase from the previous year. Significant among the deals the ecosystem has seen in recent years are Paystack’s $200m+ acquisition by Stripe, touted as the largest acquisition in the Nigerian fintech industry and Sendwave’s $500 million acquisition by global cross-border payments company, WorldRemit.

More recently in January, Africa saw its biggest acquisition yet when BioNTech, a German biotechnology company acquired InstaDeep, a Tunisian AI startup for $689 million. After a season of drought, exits on the continent have picked up pace, spurring excitement among stakeholders.

In an industry where exits are the S.I. unit for success, Africa would certainly get a pass mark for its performance judging by the landmark exits the continent has seen in recent years, especially as it is an ecosystem that is still very much in its early days.

Between 2012 and 2022, there were at least 190 acquisitions in African tech

Comparably, the market for exits on the continent differs significantly from that in more developed markets and as such these ecosystems have seen more exits and generated more wealth than African markets.

Despite the 8% drop in M&A deals (CB Insights) in 2022, 10,037 events were still recorded. In light of this, the volume of exits that Africa is seeing is only a flash in the pan. However, focusing entirely on these statistics would mean we’re ignoring the growth that the ecosystem has witnessed over the years, as well as the differences in context, environment and maturity that influence this disparity.

🔍 Important observations about exits in Africa

• Fintech, the most funded sector on the continent has retained this position with exits. Between 2020 and 2022, fintech accounted for 34 out of 100 exit deals. However, sectors like logistics, clean tech, and digital infrastructure are gradually gaining ground.
• Although larger, landmark exits receive more press, the industry is seeing smaller exits (<$100 million), a sign that the ecosystem is evolving in and of itself.
• Funding activity is not directly proportional to exit activity. Although Nigeria leads the continent in funding deals, it lags South Africa and Egypt in exits.
• Exit deals are where smaller markets come to play. Although countries like Morocco and Zambia are easy to miss when tracking funding activity on the continent, they’re garnering more attention these days with exits.

🎡 The Determinants Of An African Exit

Across the world, whether or not a startup exits is determined primarily by three factors — the Terms, the Timing, and the Track.

Terms — What An Exit Entails

There is little detail on the financial terms of startup acquisitions in Africa. This is because most deals are undisclosed and the number of disclosed deals is insufficient to draw a confident analysis. However, there is no doubt that apart from knowing when and how to exit, it is also important that the terms of an exit are favourable. For all parties involved, the value and how that value is transferred is perhaps the most important term.

The value of disclosed deals ranges from as low as $1.7 million (the acquisition of Kenya’s Weza Tele by AFB in 2015) to as high as $682 million (InstaDeep’s acquisition by BioNTech in H1 2023). Not only do deal sizes differ, but the deal structure does also. For disclosed deals, the most common structures are all-cash (like with MainOne and Baxi) and cash & stock (like with InstaDeep).

Timing — When A Startup Exits

For African startups looking to exit, age has proven to be nothing but a number. An average startup takes between 4–7 years before it gets acquired.

Exits in African tech typically occur at the growth stage

For instance, Thawte Consulting as earlier mentioned was only four years in the game when it got acquired. Morrocan-based Kifal Auto was also acquired by Autochek Africa only three years after its inception. One of the youngest startups to exit on the continent is MooveBeta, a Kenyan fintech which within one year of operations, merged with ImpalaPayz a ten-year-old fintech also based in Kenya.

The age factor is also present on the buy side. In 2022 for instance, Chari, a two-year-old B2B e-commerce startup based in Morocco acquired Axa Credit, the loans division of Axa Assurance Maroc for $22 million. Six months before that, it had similarly acquired Karny, a local fintech serving SMEs. Of the 27 African startups that acquired other companies in 2022, 17 were no more than four years old.

In spite of these trends, there is no prescribed length of time for an African startup to exit. Although early exits and celebrated across board, there are some thoughts around early exits sometimes being too early, especially in regions like South Africa, widely considered the exit capital of the continent. Some opine that these seemingly premature exits present a false view of the ecosystem’s growth and maturity.

There is some truth to this; given that the need for growth capital often outweighs availability, startups seeking to raise growth capital may embrace an opportunity to get acquired, should they find it. Experts say that while some of these concerns are warranted, the trend is not necessarily bad because it allows for smaller exits in the ecosystem.

“Late-stage venture capital has always been hard to come by in South Africa. For most founders, if you are unable to raise, it might be better to sell before you run out of runway. You get to keep some wealth for founders and investors, plus you get to keep the company alive.”

- Clive Butkow, CEO, Kalon Ventures

Track — How A Startup Exits

Startups mostly choose to exit either through acquisitions and mergers, or by listing on exchanges. The most common pathway for African startups so far however has been through acquisitions.

Between 2012 and 2022, there were at least 190 African tech acquisitions

.

“Of all the successful exits that the continent has seen, 90% have been acquisitions.”

- Victor Basta, CEO, DAI Magister

Although IPOs get a lot more press, they are few and far between; since 1999, there have only been a handful of IPOs on the continent (both on local and international exchanges).

IPOs in African tech are few and far between

Because of this, it is recommended for CEOs and investors to point businesses towards M&A exits and prepare accordingly. An African startup would prioritize a merger or an acquisition over a listing for a variety of reasons.

Cost and regulatory requirements: IPOs are expensive and cumbersome, and not many startups can afford them. It takes rigorous measures surrounding compliance, disclosures, financial controls, and corporate governance. IPOs are also unpredictable as the market can be volatile.

“If you’re trying to do an IPO, you have no idea whether you’ll be successful until 11:59 pm the night before. There are plenty of companies who prepare for an IPO for six months, and then the market shifts on the day they’re meant to go public.”

- Victor Basta, CEO, DAI Magister

Another consideration when it comes to IPOs for African startups is that a lot of startups are not properly structured. Without proper structure and good governance, listing on an exchange would be a tough nut to crack.

This is not to say that acquisitions don’t require due diligence or structure. On the contrary, M&A deals also require a solid understanding of business models, structure, operations and performance. However, because IPOs are more in the public eye, their requirements are often considered more stringent.

Mixed feelings regarding foreign listings: For events that are as rare as IPOs, they don’t exactly have a lot of good press at the moment, particularly when it comes to foreign listings. Two of Africa’s most significant public listings are Jumia’s and Swvl’s. They especially draw attention because of the subsequent decline in both companies following their listing events, introducing a new level of caution to foreign listings.

In 2022, Swvl had its Nasdaq debut via a SPAC acquisition and even had its eye on the Egyptian Stock Exchange (EGX). Since then, however, the company’s shares have dropped by 99%, with its valuation sinking from $1.5 billion to ~$6 million. Jumia on the other hand listed on the New York Stock Exchange in 2019, however, it has similarly recorded huge losses since then.

To be clear, this does not mean that listing on a foreign exchange is automatically the problem; rather, listing on a foreign exchange gives more visibility to existing or future problems within a business, versus listing on a local exchange or not listing at all.

Take Jumia, for instance. Although the company had an impressive early run in its first month of listing on the NYSE, this euphoria was soon cut short when fraud accusations were levelled against the company, followed by the infamous short-sell by Citron Research which stemmed from an alleged incomplete disclosure. Jumia has not quite recovered from these accusations, as its share prices continue to reveal. It is likely that the same thing would have happened if the company had listed locally, perhaps with less impact.

For Swvl, on the other hand, its problems are not necessarily from listing on a foreign exchange as they are from its business model struggles. The company, for a while, operated a high cash-burn model, which led to it financing expansions and acquisitions, while being cash-flow negative.

Would local listings be the solution then? Not unless foreign listings are the problem, which isn’t revealed by the cases above. Startups like Fawry and Cassava Smartech that have listed on local exchanges without such tough fortunes are just two occurrences, as Jumia’s and Swvl’s are too. If there’s any advantage to be had with local listings, it’s hard to tell, especially if founders are not as excited by the idea of listing locally as they are about listing internationally.

The benefits of consolidation: African markets are small and constrained. Although the continent has a sizeable population, it doesn’t quite have wealthy consumers and there are smaller total market sizes across Africa for most non-staple products and services.

While the African continent currently has a population of ~1.5 billion people, GDP per capita in sub-Saharan Africa was only ~$1,600 in 2021, compared to ~$68,000 for North America and ~$38,000 for the European Union, according to the World Bank. As if this were not enough, African markets are quite fragmented, which reduces the market size in any given country even further.

In order to compete effectively, even more so in sectors where companies have to compete with overlapping products, startups adopt sophisticated approaches, for example, an M&A. Startups would much rather exit through M&A as these deals offer a clearer pathway to gaining market share through consolidation.

Mergers and acquisitions are a common pathway for exits in Africa

M&As on the continent are typically product-driven, expansion-driven, talent-driven, or consolidation-driven:

• Product-driven: In 2022, Float, a Ghanaian cash-flow management startup acquired Accounteer, a Nigerian cloud-based accounting service. This acquisition was, according to Float’s co-founder Jesse Ghansah, primarily to help business clients solve their accounting problems. “Most business owners are conflating their personal transactions with their business transactions. They don’t have proper accounting practices and proper bookkeeping practices in place. We wanted to fix this at scale,” said Ghansah. This reason is also why West African startup Gozem acquired Togo-based Delivroum in 2020; the acquisition was to help it broaden its offerings, adding a core service that Delivroum offered at the time.
• Expansion-driven: A common reason behind most M&As on the continent is for companies to expand their footprint or accelerate their growth, especially in neighbouring regions. It’s why TradeDepot acquired GreenLion in 2022, and why Autochek acquired Kifal and CoinAfrique in the same year.
• Talent-driven: Sometimes, smaller competitors are acquired by bigger players because of the quality of their talent. This was the driving force behind the 2021 acquisition of Savi, a Nigerian wealth management platform by Piggyvest, a bigger player operating in the same space. According to Piggyvest’s co-founder Joshua Chibueze, it was more of a “team acquisition” as the Savi team had solid financial expertise.
• Consolidation-driven: Consolidation can result from acquisitions as much as from mergers. A good example is Beyonic, a last-mile digital payments company based in Uganda getting acquired by MFS Africa, a pan-African mobile payment hub in 2020. In this case, both companies had ambitions that they realised could be better achieved through an acquisition. “We thought why not look for someone who’s already solving for this and has got it right in a few markets, then we can use our platform to take a pan-African position and expand it across Africa — and Beyonic is exactly that,” said Dare Okoudjou, founder and CEO of MFS Africa.

Dare Okoudjou, founder and CEO of MFS Africa, and Luke Kyohere, co-founder and CTO of Beyonic

IPOs are great for startups that have achieved local market fit and are looking to gain entry to new international markets and boost brand recognition. However, for a startup looking to scale in its local and regional markets, they do little to serve this purpose compared to M&As.

As this local and regional scale is crucial for startups that are looking to succeed, it’s clear why M&As are a preferred exit pathway.

“Most markets in Africa are sub-scale. So winners will need to be multi-market to get to something that is sizeable and matters in the long run.”

- Dare Okoudjou, founder and CEO, MFS Africa

🔩 What Makes M&As difficult

If M&As are such a vital and proven tool for startup growth, and so many African startups are either acquiring or getting acquired these days, does that make M&As a walk in the park? Certainly not. There are many considerations when undergoing an M&A deal on the continent, whether between two local startups or involving an international player, that make the process challenging and laborious.

Perhaps the foremost of these considerations is integration. The most experienced players know that what happens after a merger or acquisition is just as important, if not more so, than what happens during. Integration encompasses areas such as technology stack, staff and culture, processes and products, to name a few.

It is therefore important for startups to understand and clearly map out at the very beginning of the process what their integration strategy is. An integration strategy includes but is not limited to an overview of the inherent risks of the acquisition, a plan for mitigating each risk, and the role of the other party. It is crucial to understand that this strategy will evolve with time as companies are living organisms that will reveal new patterns and possibilities as they grow.

Regulation is another critical consideration, particularly in inter-market deals. When founders do not fully understand the regulatory approvals and restrictions characteristic of a deal like theirs, it can create unnecessary complications and hurt them in the future. Status should also have a regulatory liaison, especially in a heavily regulated field like financial technology. Such a person would help facilitate the free flow of information and the alignment of interests between regulators and the buying/selling parties.

➕What’s Missing In The African Exit Landscape

Investors have varying perspectives on what is required for exits in Africa to further take off. Some investors believe that Africa needs smaller exits and some of the attention that is focused on big-money deals needs to be diverted towards illuminating and encouraging smaller deals like Chaka’s acquisition by Risevest, both Nigerian companies. This is because smaller exits provide liquidity, and this liquidity is what will eventually pull more investors in and sustain the ecosystem in the long run.

The implication of this is that founders would need to accept lower valuations, particularly at the seed stage. It would be much easier for a startup that raised $500k at a $1m valuation to exit at $30m than for a startup that raised $500k at a $10m valuation to exit at $30m because, at the latter valuation, the startup cannot achieve the target venture-scale returns that investors look for. This is especially true if the investment timeline is long, for instance, if startups take the entire length of the fund before such an acquisition happens.

Founders must also accept that they cannot relentlessly chase several funding rounds, because these small exits become harder when startups have raised a number of times. However, in an ecosystem where entrepreneurs dream of building companies that will one day be unicorns, this may be a daunting task.

Sellers aside, smaller exits also need buyers who are able to not only recognise the potential of a company early on, but also to acquire them. The good thing about exits is that they have a ripple effect as we are already seeing in different quarters with fundraises. Entrepreneurs who sell their companies today will eventually buy tomorrow’s companies, thus perpetuating a cycle.

Smaller startups looking to exit can also increase their chances by seeking partnerships with bigger companies, as strategic partnerships and investments can pave the way to acquisitions. In 2018, for instance, Stripe led an $8 million investment in Paystack; two years later, Paystack was acquired by Stripe. Earlier this year, Nigerian fintech powerhouse Moniepoint invested in Payday, a deal rumoured to be precedent to an acquisition.

Furthermore, to keep the wheels running and create an ecosystem that allows more deals to thrive, there’s a lot of work to be done in facilitating connectivity between African startups and large, international buyers. There are potential buyers outside of the continent that know next to nothing about some of the most innovative startups in Africa, or the people building them.

For a long time, fundraises have been the biggest focus within the African ecosystem. However, as the ecosystem grows, it’s important to outgrow that focus and embrace the reality that exits, not fundraises, have been and will continue to be the lifeblood of Africa’s technology industry and the most significant indicator of success in any ecosystem.

As such, more entrepreneurs need to immerse themselves in the art and science of exits. It is not enough to build profitable businesses, but these businesses must more importantly be built with a clear and actionable exit strategy in mind.

Writer’s notes

*-This refers to both acquisitions of African startups and acquisitions by African startups. Hence, it’s a larger number than what is observable in the chart. Also, all numbers referring to deal count refer only to disclosed deals.

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