For all All African startups mergers and acquisitions are now more often used as a way to exit. In fact, founders are instructed to plan for a future exit plan for their firm that includes either a merger or purchase. More than 100 firms have been bought into Africa’s startup scene during the past seven years, with South Africa, Egypt, and Nigeria claiming the top three spots, etc.

How African Startups Can Leverage Mergers And Acquisitions
How African Startups Can Leverage Mergers And Acquisitions

An ex-African tech founder over a call to Benade said “If we didn’t sell at the time, we would have closed shop”. Further said, “We had run out of resources and we were unable to raise funding. Getting an acquisition offer at that time, was a miracle.”

The Stripe sale of Pay stack in 2020 also sparked M&A activity in Nigeria’s fintech sector. Smaller but still serious mergers and acquisitions have also occurred in other industries. Such as EdenLife’s purchase of Lynk, Autochek’s purchase of KIFAL Auto, CoinAfrique, and most recently, a majority share in AutoTager. Seven M&A transactions totaling more than $710 million occurred in the African startup sector in Q1 2023 alone.

Are M&A activities the new standard in the African startup ecosystem? What are their causes?

The Impact Of The Global Funding Reset On African Startups

The world’s fund reset, which started in the second half of 2022, is a result of investors’ increasing care and decreased appetite for risk. It became more difficult for early-stage firms to find finance, as they mainly relied on angel investors and venture capital funds.

Further limiting funding opportunities is the fact that the global economic downturns have reduced foreign investment in African markets.

To survive and thrive within the afterwards environment, companies have to review their growth strategy and look into alternate funding options. As the landscape of investing changes, mergers, and acquisitions have become a desirable alternative for startups. The ecosystem witnessed M&A transactions valued at over $100 billion between 2021 and 2023, which served as a warning to entrepreneurs of all sizes.

Gerald Black developed Parkit, which was purchased by Fixit45, a Cars45 subsidiary, in 2021. According to Black, “the acquisition made opportunities and resources available to propel not just the business, but also our personal careers.” He continued by saying that the merger combined the greatest knowledge and products of the two businesses, opening doors to new markets, a wider client base, and greater capacity.

Why Mergers and Acquisitions?

The opportunity to leave a mark on the business and alter how people view the automobile sector existed since I was a part of the broader organization, Gerald claimed.

As unicorns like Chipper and Flutterwave buy smaller companies to grow their market share, mergers and acquisitions will drastically increase. More M&A will be a fantastic trend since it will provide investors with more exit opportunities, according to Zachariah George, managing partner at Launch Africa Ventures, who spoke to Bendada.com about the trend.

Here are a few reasons why entrepreneurs ought to take M&A into consideration: As more M&A activity develops, players in the sector eagerly anticipate how these strategic alliances would mold the future environment of African digital startups.

Access To Capital And Resources

Startups can obtain more funds and resources through buying and selling, which can be difficult to do through conventional finance channels in uncertain economic times. Startups can make use of their benefits by partnering with a bigger, more established business to spur growth and creativity.

One example is Fluidcoins, a Nigerian cryptocurrency payment gateway that was acquired by Nigerian-led Blockfinex in the UAE after it was unable to secure more finance. The agreement was an acqui-hire, guaranteeing that the product’s founding staff would continue to be involved. Danny Oyekan, the CEO and founder of Blockfinex, stated at the time that no management or personnel changes will be made.

Market Expansion And Diversification

For small businesses that have limits in new areas they want to enter, merging with or buying other companies can be a way to grow. This helps them go into different places and have more types of customers. When they join forces with a company that does something else, they can discover new chances to make money. This also means they don’t have to rely only on their original market.

Ismael Belkhayat, the CEO of Chari, a business that sells things online to small shops in Morocco, said they didn’t buy another company because they needed more customers. Chari already has 5,000 stores in Morocco, but that’s only a tiny part of all the stores in the country. He said, “We’re lucky because our business will keep growing on its own.”

However, these purchases will help Chari enter new markets faster. They want to go to more countries where people speak French in Africa. They also want to do new things like lending money to store owners and their customers. Belkhayat said, “In African countries, it’s really hard to get permission to lend money if you’re a small business. So, the only way to do it is by joining with or buying other companies.”

When things in the economy are uncertain, joining with or buying other companies can help startups grow faster. This lets them get bigger in the market more quickly. When different companies work together well, they can save money and work better, which makes them stronger than other startups.

Talent and Expertise

Hiring through acquisition, also known as “acquihire,” is a smart move for big tech companies in Africa. They want to find experts and very skilled people in the industry. Instead of buying a small startup for its products or technology, these big companies buy it to get its talented workers. This way, they get a group of people who are really good at a specific thing. These experts bring new ideas and the latest knowledge to the big company. This helps the big company come up with new things and grow.

What’s more, acquihire lets the big company quickly make their teams bigger with experienced people. Finding talented workers is tough in the competitive tech world. When the big company buys a whole startup, they get a bunch of talented people who already know how to build and grow a successful business. This saves time and money on finding new workers. It also helps the big company start strong with a skilled group of workers who can help with current and future projects. Overall, the acquihire strategy helps big tech companies in Africa do better. It adds talented people to their team and makes them stronger in the ever-changing tech world.

Bloc, a company, bought Orchestrate completely. They paid with money and a share of the company. The leader of Orchestrate, Jerry Enebeli, is now in charge of Bloc’s engineering work. The CEO of Bloc, Edmund Olotu, said they bought Orchestrate because they had a great platform that matched what they wanted to offer. Instead of making their platform, they got Orchestrate’s skills.

Both companies are happy about this. They want to grow and make more things that help African tech businesses. They think this will be a good change for both of them.

Strategic Diversification

Kristin Wilson, a Venture Partner at Oui Capital, says that startups can take a risky but potentially rewarding path by diversifying through acquisitions or mergers.

When startups are in industries hurt by the pandemic or facing growth challenges, merging with or buying other companies can help them move into stronger areas. If they look for companies to join in sectors that are growing more, startups can change their plans to fit the new situation. For example, Konga and Yudala merged in 2018. This change helped Konga, an online store, become a mix of online and offline selling called Konga retail.

Challenges and Considerations

Although mergers and acquisitions (M&A) can bring great advantages, they also come with difficulties. African startups need to think carefully and do thorough research before choosing this path:

Cultural compatibility

Cultural conflicts can result from mergers of startups and established businesses. A successful merger depends on the business culture remaining unified and aligned.

Negotiating values

This can be difficult for startups because their financial performance and expectations may be scrutinized more closely. Engaging seasoned consultants can assist in negotiating a reasonable agreement that is consistent with the startup’s development prospects.

Regulatory compliance

Different countries in Africa have different regulatory environments that make M&A negotiations challenging. To effectively complete the transaction, adherence to local rules and regulations is necessary.

Here’s an example from outside Africa: Visa wanted to buy Plaid for $5.3 billion, but this didn’t happen because of rules. The Department of Justice said the deal could stop competition and make things worse for businesses and people.

Integration challenges

Also, it’s not easy to put things together after merging. It takes time and costs a lot. Startups need to plan and do things right to save money and make things work well.

Conclusion

In the future, mergers and acquisitions (M&As) will become more common as the business world grows. The goal is to get more of the market and find skilled people and resources. Even though most M&As are between small businesses, we can notice bigger companies finding ways to buy African startups.

Startup owners need to think carefully before deciding on any M&A deals. They should also ask for advice from lawyers who know about these changes and understand startups, the African business world, and what people want to buy.

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