Global startups, over recent years, have struggled to secure successful exits due largely to a disparate IPO market, waning buyer interest, and heightened regulatory scrutiny for M&A deals in large organisations. When venture fund flow dwindles, there often follows a decrease in both the number and value of company exits. Founders and investors typically liquidate their equity stakes through an IPO or M&A – the process known as ‘exits’. However, the viability of these exits is in jeopardy in the face of a slow IPO market and a lack of buying interest, issues which may be further exacerbated by increased regulatory scrutiny surrounding M&As.
Regulatory bodies globally have ramped up their scrutiny on M&As, concerned over possible monopolistic behaviours and issues surrounding data privacy. As a result, larger corporations have become more hesitant to acquire startups, leading to a decline in the number and value of startup exits. Additionally, the reduction in venture capital inflow into the startup ecosystem impacts the likelihood of these exits. Less funding availability can lower the valuation of startups, making them less attractive to larger organisations in search of profitable acquisitions.
In Africa, there was a surge of M&A exits in 2021, with 44 transactions and close to $6 billion in venture capital investments. However, these numbers fell to 29 exits in 2022 with investments reducing to just over $3 billion. Despite this drop, local financiers remain hopeful about a potential increase in M&A activity within this challenging market.
Private equity funds are showing a rise in interest in the African market, offering some hope for future business growth. Institutional investors from Europe and Asia have begun to tap into the region’s growth potential.
Startup exits decline amid regulatory hurdles and IPO slowdown
It’s the tech sector, specifically fintech, e-commerce, and telemedicine startups, that continue drawing investment attention. Diversification seems key, however, the challenge lies in navigating the complex regulatory environment and political instability.
TLcom Capital’s Andreata Muforo predicts a further reduction in funds by 2024, which she attributes to firms cutting back due to limited capital availability. However, she predicts underfunded companies will seek to increase consolidation and M&A transactions to enhance value on a larger scale. She suggests being agile, adjusting strategies and keeping a clear vision during these unpredictable economic circumstances. Importantly, she notes potential opportunities for innovation and a shift towards more sustainable and resilient business models.
Questions were raised about the $20 billion invested in the African tech ecosystem given the comparatively small number of exits. A debate amongst experts continues on whether significant exits should be recognised or not. Some suggest a mismatch in investment numbers and exits points to an inflated market valuation. Others argue for the the long-term impact and sustainable growth these investments can foster in the African tech landscape.
Additionally, in the African tech ecosystem, there were successful exits by an expense management startup and an advanced machine learning company who secured over $20 million and $108 million respectively before being acquired. This attests to the value of unique technologies and strategies in securing investment and growing company value. Hence companies must regularly adjust their strategies to align with evolving industry trends to secure optimal success.
