In the tech ecosystem, an exit is an avenue through which a venture capitalist that has invested in a startup can receive returns for their investment. Although exits are not as common in Africa as they are in established tech ecosystems such as North America and Europe, they still happen. In order to understand the concept of investor exits in the context of Africa’s tech ecosystem, I conducted a review of articles on this subject from reputable local and foreign tech blogs including Weetracker, TechCrunch, DigestAfrica, TechCabal, TechPoint and Crunchbase.
Furthermore, to gain insights on this subject matter, I collated and analysed data on investor exits in Africa from the period of 1999 to 2020. You can find the dataset and my analysis here. I hope the insights shared in this blog post can help a startup founder that has not yet thought about their exit options to begin thinking of them.
Investor exits in Africa: findings from data analysis and blog reviews
- Acquisition is the most common route for investor exit in Africa.
98 percent of exits in Africa that occurred in the period under review were mergers and acquisitions (M&A). Also, 76 percent of these acquisitions were made by bigger companies compared to 22 percent made by venture capitalists.
- Number of investor exits have continued to increase since 2018
Investor exits in Africa have increased since 2016 when only 2 percent of exits were recorded, to 38 percent in 2018 and 43 percent in 2019. So far, 2020 has accounted for 12 percent of exits. The drop can be attributed to the disruptions caused by COVID-19.
- There is a lack of information about M&A deals in Africa.
Of the 129 M&A deals done since 1999 to date, only 16 percent were disclosed. This makes startup valuation on the continent problematic. Nevertheless, investors use different methods to value a startup.
- Fintech sector has had the most exits in Africa
Fintech is the most attractive sector for acquisition in Africa and this is evident by the share of exits (11 percent) it has recorded since 1999 to date. Telecommunications (9 percent), ecommerce (8 percent) and software comprising enterprise and cloud solutions (7 percent) are other attractive sectors.
- Africa’s top tech ecosystems lead in M&A deals
Unsurprisingly, Africa’s top 4 tech ecosystems lead in the number of deals done on the continent. South Africa has recorded the highest number of investor exits (44 percent), trailed by Kenya (12 percent) and Nigeria and Egypt (9 percent).
- When it comes to startup acquisitions in Africa, the acquirer is typically a South African company and the target is typically a company based in South Africa.
The typical startup buyer in Africa is a South African company and also, the target is typically a company based in South Africa. 80 percent of startups acquired by South African companies were South African-based. Likewise, 44 percent of acquisitions made by American companies were companies based in South Africa.
- Deals happen in June more than any other month
June is the month for making M&A deals in Africa with 12 percent of the deals done in it since 1999, followed closely by the months of May, March and February.
- The length of time it takes for a startup to exit depends on their industry
According to research by Crunchbase, globally, it takes a hardware company longer (11 years) to exit than a SaaS company (9 years). However, it takes a shorter time for a payment company (4 years) and an ecommerce company (5 years) to exit.
- There is a surplus of resources on how investors can exit successfully, but only few exist for founders
Since investments in African startups predominantly come from venture capitalist (VC) funding, majority of the advice for exiting successfully tend to be directed at VCs more than they are at founders. Following this observed gap, I compiled some interesting observations from my review to help founders planning or preparing to lead an exit of their startup.
Interesting observations on how to lead a successful exit as a startup founder
- It is advisable for startup founders to have exits on their agenda from day 1
When VCs invest in startups, they hope to one day recoup and earn interest on their investment. This happens when an exit occurs either through acquisition or an IPO. Because exits rarely happen in Africa, it is advisable for founders to be intentional about exiting from the start.
- Having local investors in your startups is good
Potential buyers like to see that your early investors were from your geographical region. This signals to them that your company has built a level of trust and validity in your ecosystem and that you are solving a real problem.
- It’s better to sell to buyers that you already have a business relationship with
The acquisition process is akin to dating, hence, it is easier to sell to a company that already knows your team or has used your technology in the past. When this is the case, the process of conducting due diligence becomes seamless.
- Large organizations buy startups for different reasons
Some reasons large organizations buy startups include to expand into a new market, to gain new technology, or to kill off competition.
- Founders must ensure that their startup does not suffer during acquisition talks
Figuring out how to split your time as a CEO between running your startup and chasing acquisition deals is key. Furthermore, experts advise that during acquisition talks, founders must not stop spending to grow their startup in order to be able to show that they have money in the bank. Getting support from trusted advisors is highly recommended.
- How a startup founder positions their startup for exit depends on the type of exit that they intend to pursue
The exit path that a founder intends to pursue will determine how they position their startup to achieve their goal. For those seeking to go public, growth and user acquisition is what they must focus on. If on the other hand acquisition is the goal, then the focus would have to be on building out a killer product that your competitors would want to own.
- In a merger situation, founders must ensure that a successful alignment occurs
Founders ought to consider how post-merger integration will be done with the acquiring company to ensure that business continuity is achieved.
Are you a founder that has led their startup to a successful exit? What piece of advice would you share with founders about exits? Your insights could save a startup from making a costly mistake. Tweet at Techative @techativeng and @FortuneChuku to keep the conversation going.