African exits. How and when?
Africa has seen exits since 1999 (Verisign buying Thawte). The ecosystem has also seen big-name IPO exits like Jumia (listed in 2019) and Paystack (acquired by Stripe). Whilst the continent has completed a healthy number of M&A deals, Africa's venture ecosystem exhibits a 50% lower exit rate than counterparts in the United States, Europe, and India. Most African countries now display a new-to-exit deal ratio of 20:1.
African early-stage investor Abdul-Karim Mohamed notes the efficiency of Africa’s venture ecosystem in creating value also warrants scrutiny. In more efficient ecosystems, exits (i.e., outputs) yield returns of $0.9 to $3.1 annually for every dollar in new venture deals. By this measure, from 2015-2023, Africa’s venture ecosystem should have generated approximately $20.5 billion in exits between 2015-2023. Africa's most notable and disclosed exits total $2-3 billion to date, or less than 10% of the expected exit value.
General observations on African exits to date
Of all the successful exits the continent has seen, 90% have been acquisitions.
While fintech remains the most funded sector in Africa and has maintained this dominance in exits, representing 34% of the 100 exit deals between 2020 and 2022, other sectors, such as logistics, clean tech, and digital infrastructure, are steadily emerging as viable contenders.
While major, high-profile exits garner significant media attention, the increasing prevalence of smaller exits (valued under $100 million) strongly indicates the evolving and maturing nature of the industry ecosystem.
The correlation between funding activity and exit activity is not directly proportional. Despite leading the continent in securing funding deals, Nigeria falls behind South Africa and Egypt regarding successful exits.
M&As on the continent are typically product-driven (Float acquiring Accounteer), expansion-driven (TradeDeot acquiring GreenLion), talent-driven (Savi acquiring Piggyvest), or consolidation-driven (Beyonic being acquired by MFS).
African exits – looking forward
We believe the market will grow in attractiveness for financially driven investors (particularly secondary market investors) when the market sees a higher volume of smaller exits. There is a risk that founders/VCs chase several funding rounds and hold on as long as possible within 12-year fund lives (which can be extended well beyond this).
In practice, “unlocking” the ecosystem likely means many early-stage investors will need to accept lower valuations, which can be problematic for those who have underwritten early-stage companies at a high valuation (a systematic problem we see across emerging markets, not just in Africa). A VC’s drive to maximise DPI can significantly negatively affect overall fund-life IRRs, even if the target exit valuation is achieved – but at a later date.
A higher volume of smaller exits and the recycling of liquidity will act as a healthy valve and improve confidence in the ecosystem. It will be exits, not fundraises, that will drive new financially-/strategically driven inflows to the continent. This fact is reflected in recent AVCA research that found 76% of LPs consider “limited exit opportunities” to be the biggest challenge to investing in the region.
The African VC ecosystem reset may be painful for some, but it will be a healthy development for a region with immense promise. In the meantime, whilst investors in Africa’s secondary markets can find real gems, they should proceed cautiously.
Read more about the Indian exit environment here.