Why are African start-up exits scarce and how can founders better prepare?

While large capital has been invested in start-ups in Africa over the past decade or so, it still does not translate into moves by owners and investors to sell their ownership or stock in these companies after they’ve matured, referred to as exits in business parlance.

It is reported that over $20 billion in venture capital has been injected into the continent’s start-ups in the last decade. Of this, $14 billion has been raised since 2021, per the funding tracker Africa: The Big Deal.

Yet that does not mirror exit deals, such as mergers and acquisitions (M&A) or initial public offerings (IPOs).

Instead, the continent is recording new ‘unicorns’ – privately-held tech firms with the coveted valuation of a billion dollars or more. Last year, Nigeria-based Moniepoint and South Africa’s Tyme joined this club, bringing Africa’s unicorns to nine.

Several factors have been cited, among them the fluctuation in venture investment within Africa’s tech ecosystems, which affects exit volume and value, and the fact that the continent’s tech ecosystem is comparatively younger than, say, the U.S. or India.

Kenya alone is one of Africa’s ‘Big Four’ tech ecosystems (alongside Nigeria, South Africa and Egypt) and the continent’s top funding destination over the last two years. Even so, there has never been a start-up IPO and most of the acquisitions seen in the country have been those of start-ups on the brink of collapse.

Another reason cited as a factor in the scarcity of exits on the continents is unrealistic valuation expectations, where start-ups raise capital at high valuations which end up being lower at the time of sale, making founders reluctant to sell their businesses.

Some have also cited the relationship some founders have with their start-ups – seeing them as their ‘baby’ and being attached to them with the unicorn goal in mind, compared to the so-called serial entrepreneurs known to pursue new business ideas, launch the business, make it succeed and move on to the next venture.

That notwithstanding, industry experts are urging what they call a mindset shift by both founders and investors, where an exit strategy is in mind from the early stage of their start-ups.

They point to what they see as following venture capital models of foreign markets, which might put a lot of weight on high valuations and large funding rounds more than aligning with local economic and market size realities.

The American ride-hailing start-up Uber, for example, was still not profitable at its IPO in 2019, despite its investors valuing it at about $120 million. It was not until last year that the company reported its first net profit for 2023.

Founded in 2009, Uber had until then been a classic example of a loss-making start-up flush with venture capital (VC) funding, seemingly focused on entering new markets.

“Assuming that if you reach a certain number of customers, it will automatically mean you are profitable does not work in African markets,” Maria Cristina Torrado, a value creation specialist at the International Finance Corporation (IFC) told delegates at a workshop on exits in Africa hosted by KPMG East Africa and the VC firms Push Ventures and HAVAIC.

“You will end up burning money in the first years while working to reach more people yet it does not mean the unit economics will make sense.”

It is perhaps why the Nigerian fintech Flutterwave, the continent’s largest payments start-up, has maintained that its long-awaited IPO will only take place when the unicorn, valued at over $3 billion, becomes profitable.

Makenzi Muthusi, a partner in deal advisory at KPMG, advises that founders should focus on value creation and set realistic growth timelines based on the continent’s market dynamics.

He says successful African start-ups should be able to survive shocks, be tailored for African markets, and strive to be stable by the series C funding stage such that even if funding slows, it is still growing.

“Think through optimising your costs; you should care about unit economics from the get-go and be attuned to operational excellence. Thinking about the long-term exit strategy will also inform the number of investors you want to back your company,” said Muthusi.

“Worry about the important things such as market size; understand your competition; how smart is your technology? If it is not as smart, you won’t withstand disruptions from other players.”

In Africa, Muthusi adds, where much of the venture capital still comes from the West, few investors would be willing to stick with a struggling start-up like they would those in markets they are better familiar with like North America.

Experts also say founders should balance fundraising needs with realistic valuation expectations, set realistic growth standards and scale to new markets only when it is timely, not for so-called fundraising gimmicks.

“The U.S. has 50 states with pretty much similar regulation but in Africa, it is a different situation with all 54 markets. Governance and currency variations play a huge role,” said Benjamin Singh, a partner at Push Ventures.

They also emphasise the role of corporate governance in a start-up’s success and the need to set key performance indicators (KPIs) to measure performance internally and respond accordingly.

For the exit process, Rob Heath, a partner at HAVAIC, advises founders to communicate well with their transaction advisors.

“They are key in taking you through negotiations and due diligence. Also, remember that even if one does not eventually invest in your business, they teach you something about it,” Heath said.