Mergers and acquisitions have increasingly become the most common exit for all startups. In fact, founders are taught to look forward to an exit strategy comprising either a merger or acquisition for their startup in the future. Over the last seven years in the startup ecosystem in Africa, 100+ startups have been acquired with South Africa, Egypt and Nigeria taking the lead respectively.
The acquisition of Paystack by Stripe in 2020 also ignited M&A activities in the fintech space in Nigeria. Other sectors have also seen smaller yet significant mergers and acquisitions like the acquisition of Lynk by EdenLife, an acquisition by Autochek of KIFAL Auto, CoinAfrique and most recently a majority stake in AutoTager. In Q1 2023 alone, seven M&A deals took place in the African startup ecosystem worth over $710 million.
What are the causes of the M&A activities and is this the new normal in the African startup ecosystem?
The funding environment in Africa
A merger is when two startups integrate. An acquisition is when one company buys another. Unlike the first, in acquisitions, both parties are unequal and one has more strength than the other. Mergers and acquisitions for startups have slightly different approaches and reasons for their operation.
- A startup can buy/acquire another startup in another country to ease expansion to that country and explore that new market faster and simpler.
- Horizontal M&As are done to create market consolidation. This is when two companies with similar markets merge to strengthen their market position further,
- Conversely, in a vertical M&A, two businesses that had previously done business with or purchased from one another come together under a single ownership For instance, a manufacturer and a distributor of its goods may unite.
- “If you can’t beat them, buy them”. A common motive for acquiring or merging is to overtake or defeat a strong competition.
- Product development: This is a simple act of acquiring an early-stage startup to skip the process of initial product development for an idea/product.
The startup ecosystem though focused on technology and innovation is largely a business and entrepreneurial environment. This means when a business is faced with competition, they either buy to eliminate the competition or collaborate to expand their market share and be stronger together. The African ecosystem is no exception. Businesses use M&As to acquire products, intellectual property, human resources etc. Therefore as a business first, we should expect more M&A deals in Africa.
With a different climate than the West, the African startup ecosystem fosters togetherness and a collaborative mission to improve our continent. This fuel to build successful businesses and a unicorn possibly is at the forefront of an emerging M&A climate.
What to expect
It is largely said that it is still day one for Africa in terms of innovation and building cutting-edge solutions. Founders, investors and startup employees are faced with a dynamic and changing environment. In this unpredictable climate, investors must get back their returns. As funding stifles across the world, M&As are a guarantee of revenue whether it is a bigger company acquiring a smaller one or two startups operating in the same market merging to expand market share and introduce new revenue models.
In recent times, Nigerian-based crypto company Fluidcoins was 100% acquired by Blockfinex, a UAE crypto exchange after its (fluidcoins) inability to raise funding. We have also seen many startups that have recently shut down due to a harsh funding climate. A successful acquisition, or even merger, could have been explored even though the said companies are/were too early for such activities. It’s a way of saving the day while still giving investors back their money and achieving creating a new way to grow. This is the power of M&A and the cause of increasing M&A activity in Africa. It is worth noting that not all M&As result in a full cash payment. The financial payment differs according to the agreement but most common include payment based on performance, instalment payments or payments in cash and shares.
The African market is huge and we see founders in various sectors building for the African markets. Each builder contributes to the ecosystem and creates a better chance of success for the entire ecosystem. This is also matched with government, investors and other ecosystem builders rising up to the occasion and placing their bet on Africa. With this obvious huge potential, we have seen a surge of collaborations, initiatives and investments (financial and human) from foreign companies interested in this market. As it stands, in many boardrooms of large companies in the West, there are conversations on how to expand to Africa and tap into the massive market. In recent times, we have seen many initiatives from Fortune 500 companies, the MAMAA and even banks or established companies, creating an arm, a product, a foundation, or a venture capital initiative to contribute to the market. Though a means of contributing to the growth of Africa, it is primarily a value proposition for the business with the aim to establish herself in the innovation and startup space in Africa. Soon, many of these companies will acquire and merge with the African companies they have contributed to or better still invest for the purpose of returns.
Ultimately, mergers and acquisitions are a form of funding and venture investing. Capital, as it is, gives power to the funder/person/organisation, the market and the ecosystem at large.
M&As will soon become a norm as the ecosystem expands. It is meant to increase market share and access talents and resources. Although these M&A are focused primarily between startups to startups, we see subtle ways established companies are creating initiatives to acquire African startups in the future. It is important for startup founders to weigh their options closely before committing to any M&A translation and seek the help of lawyers who not just understand these kinds of transitions but have a deep understanding of startups, the African ecosystem and their market.
Global startup awards at Gitex Africa Morocco
Considered the largest, independent startup ecosystem competition on the continent, GSA Africa is a platform dedicated to showcasing and scaling Africa’s most promising startups. The 2022/2023 year attracted 8,272 entries from all 54 African states. The winners were announced at GITEX Africa 2023, the biggest gathering of innovation stakeholders on the continent, bringing together global leaders in the public, private and civil sectors to spur the adoption of next-gen technology in Africa. They were 74 startups all over Nigeria named regional winners.
Vesti as headline sponsor for Lagos startup week.
Oftentimes, we see startups and organisations sponsor events for purposes best known to the team. This week it was announced that Vesti is the headline sponsor for Lagos startup week taking place from July 10th to July 15th, 2023, uniting entrepreneurs, investors, and industry leaders to have conversations and create solutions borne from innovation.
This is impressive and commendable and as innovators and ecosystem builders, we encourage more people to take the mantle to support events, gatherings and conversation keepers. We might have a conversation on this trend and the power it gives to the sponsors in question. We can see and recognise the effort and can create a conversation on this form of marketing for startup founders and the effects it gives whether powerful or a waste of time.
More information here:
Nubia capital is dedicated to enriching Africa through its investments and creating conversations that can foster the right knowledge and create a forward-thinking mindset in the minds of Africans.
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