Since 2015, greater than one-third of acquisitions within the African tech area have concerned South African corporations. Does the speculation that a few of the exit offers are untimely legit?

South Africa is and has, for some time now, been the undisputed king of mergers and acquisitions within the African tech startup ecosystem. In response to Disrupt Africa’s 2022 South Africa Startup Ecosystem Report, the nation’s startup ecosystem leads the way in which in exit mergers and acquisitions (M&As). 

Refinitiv Data says that within the first half of 2021 M&A offers involving tech corporations elevated by $160 million, an virtually 2,000% improve in comparison with the identical interval in 2020. 

A number of causes have been attributed to South Africa’s spectacular M&A dominance. These embody lively capital markets and banking methods, mature corporations that may snatch up startups, and others.  Nonetheless, along with the appreciation of exit alternatives within the ecosystem, there are some issues, albeit not that consistently had, that South African startups is perhaps exiting too early, giving maybe a warped image of the nation’s M&An area.

TechCabal talked to some consultants within the nation to attempt to see if the speculation holds any weight.

Why do SA startups exit?

M&As are usually valuable exit avenues for all concerned. Acquirees get a really good payday for founders, staff, and buyers and entry to a broader pool of markets, sources, and capital. Acquirers profit from product diversification, expertise acquisition, and market enlargement. 

In response to Chris Loker, managing associate of the company advisory agency Moksha, the primary motivators for tech startup acquisition offers are exits for worldwide progress, procuring capital required to scale, or entry to a wider consumer base. However these offers come significantly when the idea is confirmed. 

“Banks have even arrange incubators to check new improvements, realizing {that a} company is commonly the place innovation goes to die and their new product lead instances will be a few years. The travesty is that we don’t usually get repeat entrepreneurs as failure is seen with disdain or exits are wealthy sufficient – within the latter case, the pattern of profitable entrepreneurs turning into angel buyers will hopefully develop,” Loker defined. 

For extra established corporations—and a few startups too—the primary cause is product diversification. Buying a startup that already has a product and traction makes extra enterprise sense as a substitute of constructing the mentioned product from scratch. 

A South African funding banker who has overseen quite a few acquisitions and needs to stay nameless for employment causes defined: 

“I’ll give an instance of when many retailers had been caught off guard when the [COVID-19] pandemic hit. A variety of their on-line shops weren’t nicely established to service their prospects when the lockdown occurred. This drove a lot of them to both consider whether or not they may develop or enhance their on-line mediums rapidly sufficient. The quickest route out of this predicament can be to make an acquisition, and an instance is MassMart acquiring OneCart to help them with their on-line service providing.” 

Quite a lot of acquisitions which have occurred within the South African tech area do appear to be majorly pushed by product diversification. Weaver Fintech acquired PayJustNow to develop into buy-now-pay-later. TymeBank acquired Retail Capital to develop into providing on-line banking providers for SMEs. inq. acquired Syrex to diversify its product providing into hyper-converged cloud know-how. Imperial Logistics acquired ParcelNinja to develop into e-commerce and last-mile distribution and Vodacom acquired iot.nxt to develop into Web of Issues (IoT). 

Market enlargement and expertise acquisition are two different vital causes for acquisitions in South Africa. 

A market-expansion-driven acquisition instance is Africa Trend Worldwide acquiring on-line artwork market Wezart with the intention of utilizing the platform to develop its product providing globally and supply a stronger consumer base for artists.

Expertise acquisition offers are additionally getting extra fashionable as a result of because the ecosystem grows, competitors for tech expertise is getting harder within the continent. For startups with capital, buying a smaller startup to combine its expertise usually saves money and time as a substitute of poaching it. This is called an acqui-hire.

For instance, after raising an $83 million Sequence C spherical in July 2021, fintech startup Yoco acquired web3 software program growth company Nona Digital in March 2022 to speed up its roadmap by bringing a group of highly-specialised fintech product and know-how professionals into the Yoco group.

Are the issues about early exits warranted?

In response to Keet van Zyl, co-founder and associate at enterprise capital agency Knife Capital, there’s some legitimacy to the hypotheses. Van Zyl states that in some cases, there’s a disconnection between the expansion capital wanted by startups and what’s obtainable, so it is sensible to promote as a substitute of making an attempt to embark on extra fundraising. On common, in accordance with van Zyl, South African startups exit after three to 4 rounds of funding.

“Regardless of the rising availability of deal-flow, there stays a big follow-on financing hole for high-growth native startups with confirmed traction. Relating to South African entrepreneurs, we’ve a big mismatch between the scale of the alternatives and the quantity of capital required to entry them. In comparison with peer economies, the enterprise capital and progress fairness funding market in SA is drastically under-serviced with obtainable funding capital. Due to this fact typically when startups attempt to increase progress capital, they flip to strategic buyers who seize the chance and make a full acquisition supply,” van Zyl tells TechCabal.

Nonetheless, in accordance with van Zyl, this pattern is just not essentially unhealthy because it permits for an elevated variety of smaller exits – which then recycles capital into the ecosystem – as a substitute of an extended street to unicorn constructing and a scarcity of liquidity for buyers.

Clive Butkow, CEO of Johannesburg-based enterprise capital agency Kalon Ventures, shares the identical sentiments with van Zyl concerning why startups exit too early.  In response to Butkow, if a startup is just not clocking round 200% to 300% progress and a suggestion presents itself, it must be very nicely thought-about by the founding group and buyers.  “Late-stage enterprise capital has at all times been arduous to come back by in South Africa. For many founders, in case you are unable to lift, it is perhaps higher to promote earlier than you run out of runway. You get to create some wealth for founders and buyers, plus you get to maintain the corporate alive,” he tells TechCabal.

The artwork of promoting

With the enterprise capital business presently experiencing a downturn, the M&A market is just about within the fingers of consumers, however this could not imply that founders must be pressured to accept any deal that comes their approach.

“It’s [a buyer’s market], and consumers know this and typically benefit from that state of affairs by dragging out due diligence. It helps optics to have VCs in your cap desk because the Startup can at all times make the case to potential consumers that in the event that they don’t purchase – the VC will proceed funding the Startup into the following spherical. This creates a way of urgency. Ideally get forward of the sport by working with an M&A advisor that can instil self-discipline within the course of and generate curiosity from a number of potential acquirers,” van Zyl says.

Other than holding their fort, van Zyl advises startups to hunt out alternatives for late-stage funding as a substitute of taking no matter is given to them due to desperation.

“There are just a few follow-on and later stage funds which have raised or are being finalised just like the $50m Knife Capital Fund III, the SA SME Fund, new VC Fund-of-Funds and native institutional buyers are lastly waking as much as the chance, so there’s constructive momentum,” he added.

Tshepo Magagane, an funding banker, advises startups to be reasonable and method deal-making with out feelings. Moreover, Magagane advises the engagement of an skilled who has finished each promote and buy-side deal-making.

“Have open and sincere discussions [with the expert]  in regards to the panorama. Undergo all of the valuation strategies, e.g. how a lot cash have you ever put in? What’s the alternative value of the property? What IP have you ever created? What income strains do you presently have? What’s the profitability? What money flows are you producing? How rather more capital do you have to put in to get to the following stage? What does the corporate appear to be stand-alone?,” Magagane tells TechCabal.

As financial situations present no indicators of simmering down, for many founders with a good product however unable to lift additional capital for progress, a merger or acquisition is commonly the following plan of motion.

Having the ability to command a good valuation, as Magagane places it, is extra of an artwork than a science. For founders, due to this fact, it’s crucial to strike a stability between not solely having the ability to exit however doing so for a value which is able to appease all these involved.