Afrigather Africa’s enterprise funding growth between 2020 and 2022 gave start to a bustling marketplace for secondary gross sales of startup shares. It made early traders, founders and workers rich as one VC agency was in a position to return its complete first fund, value $5 million, by means of a secondary sale. However as big-ticket investments gradual to a trickle, it’s getting tougher to seek out consumers.
Africa’s startup ecosystem has lengthy confronted an exit drawback. Based on The Large Deal, a complete database of startup funding in Africa, there have been 2,971 enterprise offers since 2019, however solely 143 exits (4.8%). This contains preliminary public choices (IPOs), mergers and acquisitions. Confronted with restricted alternatives to recoup their funding, traders in Africa’s tech ecosystem have turned to secondary share gross sales to gather earnings. Secondary transactions check with when workers or traders in an organization promote their present shares to a different investor.
In September 2023, an early retail investor in Flutterwave was trying to promote 50,000 shares at a $3.75 million price ticket, an individual conversant in these conversations informed TechCabal. This was barely one month after Flutterwave’s CEO, Olugbenga Agboola, informed Bloomberg that his agency would go ahead with its IPO plans.
“Angels love secondary exits,” Joe Kinvi, accomplice at Hoaq, an angel investing neighborhood, informed TechCabal, “Funds, not a lot as a result of they should return the fund and promoting out early may not return the fund.”
Nonetheless, African VC companies usually are not averse to promoting when the chance arises. One early-stage pan-African VC agency returned its first fund, a $5 million micro-fund, after it offered a part of its Moniepoint shares in a secondary transaction, three folks conversant in the sale informed TechCabal.
In just a few circumstances the place VC companies delayed collaborating in secondary transactions when the chance arose, they often misplaced all of it.
One such case is 54Gene, the now-defunct genomics startup. Buyers within the firm have been provided a chance to take part in a secondary share sale at a $100 million valuation, in keeping with three folks conversant in the matter. Two folks mentioned most traders handed up on the chance, and 54Gene would later shut down in a cloud of controversy after elevating $45 million.
Syndicates and micro-funds are huge winners
Angel investor syndicates and micro-funds have been the most important beneficiaries of secondary market transactions. The funding growth of 2021 and 2022 was a boon for these early traders who offered shares in firms that they had invested early in to newer (and sometimes) determined traders trying to get into “sizzling” startups.
Startup founders and workers have additionally benefited from promoting components of their shares in secondary market transactions.
“Workers of high-growth tech firms have, on common, reached the tip of their inventory choices vesting interval and at the moment are open to liquidity,” mentioned Jude Dike, the CEO of GetEquity, a Nigeria-based funding platform. “Ideally, these liquidity gross sales was the following time the corporate fundraises, however with the present drought, firms and workers are taking a look at different choices.”
The founders and early group members at Moniepoint made “hundreds of thousands of {dollars}” from promoting their fairness on the startup in secondary transactions, in keeping with one particular person conversant in these offers.
Dike added that workers from Flutterwave and Andela have additionally offered fairness of their respective firms. TechCabal has previously reported that Wasoko, the Tiger World-backed Kenyan e-commerce startup, allowed workers with vested shares to promote their stake 3 times over the corporate’s lifetime.
When Kuda Bank closed its $55 million funding co-led by Valar Ventures and Goal World in 2021, secondary gross sales by present early traders made up a part of the deal, one particular person with information of the matter informed TechCabal, requesting anonymity. That spherical valued the fintech at $500 million.
Secondary markets as a viable path?
Some traders see secondary markets as a significant exit path. ”We see curiosity from bigger VC funds doing Sequence A, B and C, [who] need to purchase out early-stage traders to simplify cap tables and exert higher management in company governance issues,” one early-stage VC investor informed TechCabal, requesting anonymity as a result of she was not authorised to debate personal issues. The investor, a accomplice at considered one of Africa’s most lively VC companies, mentioned her agency was actively speaking to growth-stage traders who need to purchase out their stake in some portfolio firms. “Because you make investments at pre-seed, in case you can exit at Sequence A and Sequence B with the appropriate degree of returns, it may be attention-grabbing,” the VC accomplice mentioned.
Typically traders purchase secondaries when it’s offered at a reduction to enhance their inside fee of return. Inside fee of return or IRR, is a technique traders measure the profitability of their investments. Nonetheless, promoting secondary shares “doesn’t materially enhance the corporate” since proceeds from secondary transactions are paid to shareholders as a substitute of being invested within the firm, Ik Kanu, founding accomplice at Atlantica Ventures, informed TechCabal. Kanu says his agency, a pan-African VC agency that manages a $50 million fund, prefers to spend money on offers the place their funds are invested in serving to the corporate develop.
Like Kanu, some traders, particularly improvement finance establishments, don’t additionally need the funds they make investments for use to pay earlier traders. In no less than one occasion the place a improvement financial institution is concerned, early-stage traders are already having issue closing funding rounds that embrace secondary share gross sales by present traders.
International traders with deep pockets are stepping again from writing huge cheques, leaving newly shaped native funds and improvement banks to prop up growth-stage firms. In consequence, alternatives for traders to exit with secondary share gross sales are dwindling.
Fewer secondaries imply fewer alternatives for early traders like angels to gather revenue on their investments. Uwem Uwemakpan, Head of Investments at Launch Africa Ventures, believes angels ought to plan for five to 10-year eventualities. “Angels should make investments with very long time horizons in thoughts, moderately than fast flips on secondary markets,” he mentioned.
Secondary market transactions are likely to flourish in frothy markets, Kanu mentioned. “Within the current macroenvironment the place capital isn’t flush, you gained’t see too many secondaries.”
