The current fundraise environment encourages African founders to consider the tradeoff between further fundraising and the option of strategic exits via M&A.
While African growth companies received a record $3.5 billion in the first half of 2021, more than double the amount in the same period a year earlier, the current funding downturn is global, and already affecting fundraisings everywhere including Africa.
According to Victor Basta, Co-Head at DAI Magister, funding rounds are of course essential for scaling a startup, but repeated dilution can dent in a founder’s overall ownership stake when the time comes to sell a company for ‘real money’. The current funding climate encourages African businesses to begin focusing on potential M&A exits, which require positioning, relationship building with key buyers and visibility as a strategically-valuable ‘winner’ to attract the highest-value M&A interest.
Basta said: “The African market is a young ecosystem that is beginning to mature, and the overall focus is transitioning from raising cash through funding rounds to looking for the real money, which comes from M&A exits.
“Over the past 20 years 90% of successful market exits happen through M&A, not IPOs, so positioning for a successful M&A exit is mission-critical for any African growth business. However, it is understanding when and how best to sell that sets up business owners to receive the absolutely highest valuations.
“When founders go through multiple funding rounds, inevitably founder ownership reduces significantly. For a founder, it’s simply better to sell a company for $100 million when you have a 25% share than $250 million when this has been diluted to 10%. Now in the current climate, before committing to further fundraising efforts, founders should always consider whether raising more money or exploring the possibilities of an M&A deal will yield a better return for them personally, and position their companies even more competitively with the additional resources to win in the market.”
If M&A transactions in Africa are to truly reflect the value of the business involved, it is vital that founders increase their company visibility particularly international buyers.
Basta continued: “Strategic buyers buy who they know or at least who they have head of. But large buyers in the US, Europe and beyond currently know very little about the most interesting African businesses and what they could offer.
“In general, African companies excel at solving difficult problems and scaling across borders, but they are far less strong at corporate marketing particularly marketing towards the largest buyers. To attract serious interest, it is crucial that African startups promote themselves effectively toward strategics .”
Basta concluded: “Its also important that founders ensure their businesses are an attractive proposition when it comes to M&A, which means putting financial controls in place, adhering to compliance and regulations in their sectors, and having a international-class board structure in place.
In today’s market founders need to navigate a more challenging equity market, which makes M&A exits an even more valuable option to consider seriously. While preparation for a successful exit takes time and focus, the payoff for founders is very clear: the opportunity to maximize the value of what they have built. ”
