Opinion

How African startups can leverage mergers and acquisitions

The funding reset hit African startups hard. Now, M&A offers a lifeline. Strategic acquisitions are providing access to capital, resources, talent, and new markets, but regulators may be the snag.

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

In the world of African startups, growth is essential for survival. Achieving growth is paramount for founders, and mergers and acquisitions (M&A) emerge as a crucial strategy to accelerate that progress or even survive. Despite its potential benefits, M&A is a complex process.

Over the past decade, African tech startups have thrived, becoming engines of innovation and economic progress. However, the COVID-19 pandemic and global market reset have disrupted traditional funding routes, posing challenges to startups' survival.

We explore how M&A can offer a lifeline to startups impacted by the funding reset, enabling them to secure capital, expand their market presence, and ensure sustainability.

The impact of the global funding reset on African Startups

The global funding reset, which began in the second half of 2022 is a reflection of increased investor caution and reduced risk appetite. Early-stage startups, which heavily relied on angel investors and venture capital funding, found it increasingly challenging to secure financing. Moreover, the economic downturns across the globe have led to a decrease in foreign investments in African markets, further limiting funding opportunities.

Amidst these challenges, startups have to recalibrate their growth strategies and explore alternative funding sources to survive and thrive in the post-pandemic landscape. Mergers and Acquisitions have emerged as an attractive option for startups seeking to adapt to the changing investment landscape. Between 2021 to 2023, the ecosystem has seen M&A valued at over $100 billion serving as a wake-up call to startups of every size.

Parkit, which was founded by Gerald Black got acquired in 2021 by Fixit45, a spinoff of Cars45 and according to him, "the acquisition made opportunities and resources available to propel not just the business, but also our personal careers." He added that the acquisition opened doors to new markets, broader customer reach, and enhanced capabilities, combining the best of both companies' expertise and offerings.

"As part of the larger organization, I had the chance to create a lasting legacy, leaving a mark on the industry and transforming the way people approach the automotive market," Gerald said.

Why Mergers and Acquisitions?

"Mergers and acquisitions will significantly expand as unicorns like Chipper and Flutterwave will buy smaller companies to increase their market share. This will be a great trend because more M&A means there are exit opportunities for investors," Zachariah George, Managing Partner at Launch Africa Ventures told Bendada.com

As more M&A activity unfolds, stakeholders in the industry eagerly anticipate how these strategic partnerships will shape the future landscape of African tech startups, and here are a few reasons startups should consider it:

Access to capital and resources

Mergers and Acquisitions allow startups to access additional capital and resources that may be challenging to secure through traditional funding channels during uncertain times. By joining forces with a larger, more established company, startups can leverage their synergies to accelerate growth and innovation.

A case in point is Fluidcoins, a Nigerian crypto payment gateway acquired by UAE-based Nigerian-led Blockfinex, following its inability to raise additional funding. The deal was an acqui-hire, ensuring the founding team's continued involvement in the product. At the time, Blockfinex's founder and CEO, Danny Oyekan said there will be no management or staff changes.

Market expansion and diversification

For startups facing constraints in new markets, M&A provides an opportunity to expand into new geographies and diversify their customer base. Acquiring or merging with a company operating in a different market can open up new opportunities and revenue streams, reducing the reliance on their original market.

According to Ismael Belkhayat, CEO of Chari, a B2B e-commerce platform for informal retailers in Morocco following their acquisition of Karny, the moves weren't motivated by a need to grow its clients, Belkhayat told Rest Of World in a chat. Chari’s client base of 5,000 mom-and-pop stores in Morocco is barely 0.5% of the addressable market in the country, he said: “We’re fortunate to be in the kind of business that will keep growing organically.”

But the acquisitions will help accelerate the company’s move into new markets, whether that’s in other geographies — Chari wants to break into more Francophone African countries — or in adjacent businesses like lending to shopkeepers and their customers. “It’s very difficult to get credit licenses in African countries when you’re a small startup, so the only way you can do this is through M&A,” Belkhayat said.

In the face of economic uncertainty, M&A can expedite the scaling process, allowing startups to quickly achieve a larger market presence. The integration of complementary businesses can lead to increased operational efficiency and cost savings, boosting the startup's competitive advantage.

Talent and expertise

An acquihire can be a strategic move for big African tech players looking to gain access to domain experts and top talents in the industry. By acquiring a smaller startup primarily for its skilled workforce rather than its products or technology, these established companies can tap into a pool of specialized professionals with niche expertise. This influx of domain experts can bring fresh perspectives and cutting-edge knowledge to the larger organization, fostering innovation and driving growth.

Moreso, an acquihire allows the bigger startup to quickly scale up their teams with pre-vetted and experienced individuals. Talent acquisition is a significant challenge in the competitive tech landscape, and acquiring an entire startup ensures access to a group of talented professionals who have already demonstrated their capabilities in building and growing a successful venture. This not only saves time and resources on recruitment but also enables the acquirer to hit the ground running with a skilled workforce that can contribute to ongoing and future projects. Overall, the acquihire strategy can give big African tech companies a competitive advantage by enhancing their talent pool and reinforcing their position in the dynamic tech ecosystem.

An example is Bloc's 100% acquisition of Orchestrate in a combined cash and equities deal with its CEO & co-founder, Jerry Enebeli taking over the leadership of the Bloc engineering efforts. According to Bloc's Founder & CEO, Edmund Olotu "Jerry and his team have built an incredible platform that is a great fit with what we were looking to add to our suite of services so it made sense to acquire their proven expertise rather than building our platform from scratch."

"This is an exciting evolution for both businesses as we look to grow and build even more solutions that ultimately support the growth of African tech businesses in the coming years," Olotu added.

Related Article: Influencing over six mergers and acquisitions at Autochek

Strategic diversification

"Strategic diversification through an acquisition or a merger can be a risky but potentially rewarding strategy for startups," said Kristin Wilson, Venture Partner at Oui Capital.

For startups operating in industries heavily impacted by the pandemic or unable to grow due to certain factors, M&A can offer strategic diversification into more resilient sectors. By exploring acquisition targets or merger opportunities in industries with higher growth potential, startups can pivot their business models to adapt to the new reality. Another case in point was the 2018 merger of Konga and Yudala, which saw Konga transition from just being an e-commerce platform to a hybrid model with its offline play; Konga retail.

Challenges and considerations

While M&A can offer significant benefits, it is not without challenges. African startups must approach this option with careful consideration and due diligence:

Cultural alignment: Mergers between startups and established companies often lead to cultural clashes. Maintaining a cohesive and aligned corporate culture is crucial to ensuring a successful integration.
Valuation and negotiation: Startups may face challenges in negotiating valuations, as their financial performance and projections might be subject to greater scrutiny. Engaging experienced advisors can help strike a fair deal that aligns with the startup's growth potential.
Regulatory compliance: In Africa, M&A deals can encounter complex regulatory landscapes, varying from country to country. Complying with local laws and regulations is essential to navigating the deal successfully.

An example, though outside the continent is Visa's attempt to acquire Plaid for $5.3 billion but the deal was stopped due to regulatory concerns. The Department of Justice filed a suit to block the deal in November 2020, arguing that the combination would “eliminate a nascent competitive threat that would likely result in substantial savings and more innovative online debit services for merchants and consumers.”

Integration challenges: The integration process can be time-consuming and resource-intensive. Startups must carefully plan and execute the integration strategy to realize the expected synergies and cost efficiencies.

Final thoughts

The global funding reset brought about by the COVID-19 pandemic has disrupted traditional funding avenues for African startups. In response, mergers and acquisitions have emerged as a viable option for startups seeking to adapt, survive, and thrive in the new normal. 2021 saw 32 acquisition deals in the continent, while 2022 saw 39 acquisitions and 2023 has seen over 8 acquisitions so far.

By exploring strategic partnerships and acquisitions, startups can access capital, resources, talent, and new markets that would have otherwise been challenging to secure during these uncertain times.

However, startups must approach M&A with careful consideration, conducting comprehensive due diligence and valuations, and ensuring cultural alignment for successful integration. As the African tech ecosystem continues to evolve, M&A can be a strategic tool for startups to navigate the ever-changing funding landscape and unlock their full growth potential.