Africa's tech ecosystem is maturing, and tough questions are being asked. Where fundraises were applauded, investors are beginning to demand returns.
Consequently, exits have featured prominently in conversations around the state of the ecosystem. With IPOs remaining elusive, mergers and acquisitions have become a preferred exit route for startups and investors.
In October 2024, OmniRetail, a Ventures Platform portfolio company, acquired Traction Apps to shore up its fintech play. Ventures Platform assisted in the transaction just as it did in the acquisition of Brass earlier in the year.
Techpoint Africa spoke to Dotun Olowoporoku, Managing Partner of Ventures Platform, to learn what the firm considers before recommending acquisitions and the role that VCs can play in facilitating them.
This interview has been lightly edited for length and clarity.
In your opinion, why are acquisitions rare for African startups?
There are maybe five major reasons that I can think of. One is limited exit opportunities in Africa. There are very few large tech companies or international corporations that are actively seeking acquisition in tech companies.
We have to put the African tech ecosystem in context. We just started like yesterday, compared to other mature ecosystems. Sometimes, we get carried away with the boom of 2019 to 2021 and think that we've been doing this for over a decade. Not really.
The oldest tech startup you can think of would be less than 15 years old, and the biggest of them is Interswitch. So, there are limited opportunities for the ecosystem because most of the large tech companies are still new. They're just coming of age, and there are few international corporations who are making acquisitions in the region.
Number two is valuation mismatches. There are significant gaps between a lot of startups' valuation and what potential acquirers are willing to pay, especially in the context of many companies that have raised a lot of money at a high valuation. Most of the time, when you raise money, your valuation is a future promise rather than what you are worth now.
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But your exit valuation is your current value rather than future value. And when a startup has raised at maybe a $50 million valuation, and they have to sell, most of the time the buyer will not want to value them at $50 million because they're not just buying for future value; they're buying an asset. Sometimes you can see both correlate, but most of the time they are not.
The third reason is regulatory challenges as there are various regulations across African countries. Africa has 54 countries, and maybe 15 big markets, or thereabouts. If you want to acquire a company on the continent, you want to think about their scalability. You want to think about how they can go beyond just Nigeria to South Africa to Senegal.
The market together is huge, but individually, Nigeria is not enough of a market for you. I mean, Nigeria can serve a billion dollar business; we've seen examples of that. But there are very few markets in Africa that can serve a billion dollar business. And so you need them to be able to scale into a different part of the continent. That scaling can be challenged by regulatory hurdles that hinder an exit.
When you compare exits in Europe or America, where you have a large market with similar regulatory frameworks, markets, and distribution networks, you can easily scale a business across multiple countries.
The fourth reason is there is a lack of M&A experience on the continent. There are a few African startups and local investors that have any experience with the M&A process. That is changing and improving now, and we have to learn about this on the go. Our PE (private equity) brothers know a bit of that but the VCs still have a lot to learn.
And the fifth one, which is similar to the first point I made and is very complicated, is a lot of startups focus on growth and their mission is to become a billion-dollar business. The balance between that is very important. When you prioritise growth over exit, that means you are going big or broke.
And it can influence how you structure a business, how you scale, and how much money you raise, which can put you out of valuation targets for a number of companies that want to acquire you.
How can founders balance the need to provide an exit for investors and building a billion dollar business?
One of the important things for startup founders is to see it as an experiment. And the key thing about experiments is that you're guided by data. When you start a company, you have to be convinced that you can build a very big business or, at the minimum, a hundred million dollar revenue business.
You have to be convinced about it, otherwise there's no point in doing it. And the reason we invest is because we are convinced that you can build that kind of business. That is the starting hypothesis.
But as you're building that business, you have to see it as an experiment where you're getting data. The data could show you that the market is smaller, or the competition is so steep that you are not able to get everything in the time frame that you have and the money that you have or the landscape is changing or the best option is for you to build something that can plug into somebody else's and together, both of you can build that billion dollar opportunity.
The data can inform you of that, and if you see it, you say, Okay, I set out to build a payment system but as the market is changing, I might be able to build this and plug it into an eCommerce business, for example. That is informed by data, self awareness, and honesty of the founder, and also investors.
The data has changed from when we started, and we need to pivot, and that pivot does not necessarily mean that we change the business model or build a new product. It could be that we build something that can be sold, and that’s a deliberate decision that then informs how you run the business from then on.
In light of all this, what are some factors that Ventures Platform considers before suggesting an acquisition?
Like I said, we look at the data when we’re having these conversations, and it's informed by a quarterly review of all our companies.
We are privileged to have invested in over 90 businesses. We have data. And we do this intensive, full-day, quarterly review of all our companies, and we use that data to inform the decision.
The key thing to look at for one is, what is the long-term value creation opportunity here? Does this company have the strong fundamentals to create real value? Now, the question might be whether that value is better created in a new home or in a new setup. But do we still have opportunities to create long-term value here?
The second thing is does the founder have the temperament and liquidity of thought to be able to say, I'm happy to explore this new route of being acquired. That's very important because at the end of the day, the driver of the car is the founder; we're not.
The third thing here is where would this land. At this point, you want to think outside the box beyond the obvious acquirer. It could be like what happened with Brass when you have multiple people involved or it could be a direct one, like we had with OmniRetail and Traction.
Knowing that not every founder would be a good fit for an acquisition, do you take this into consideration before investing?
A founder can be fit to build a business and stay independent but not fit to be acquired because they will feel like an employee. So it's important to make that distinction. At the beginning, we don't look at a filter to see if this person can sell his business and become an employee or a C-level executive in another startup.
That's the wrong filter because that filter excludes a lot of founders that we have currently. Now, at the time we're looking at an acquisition, that filter is applicable.
That filter is not to say, if we don't think they can, then that's the end of it. No, it's just to look at a founder and ask, "Will this person be able to be part of the journey going forward or not?" It doesn't exclude a company from being acquired. It just puts a lot of nuance into how it's structured and what happens afterwards.
What roles should VCs play in facilitating M&As in Africa?
There are a few things that VCs should do but I'll start with what they should not do. What a VC should not do is to be like a PE that wants to sell the company. We are minority stakeholders. I want to emphasise that. Our role as a VC is not to force an exit; a PE with majority stakes can do that but that's not what we should be doing.
But what should we do? One is to build networks and relationships. We leverage our industry knowledge and connections to understand potential acquirers. Every time I'm talking to either an LP or another company or another agency, I'm always having a feeler for potential acquirers for my companies. It also informs who we bring in to co-invest with us in the startups.
The second one is guiding the founders and providing advice on how to position themselves for acquisition. We don't want our founders spending their days thinking about acquisition because companies are not sold, they're bought. You have to build a company that people want to buy. If you go out there and say you want to sell your business, your value has dropped.
The third one is we help them with diligence and ensure all their documentation is in order. The good thing is that we do a lot of work in that negotiation process and if there's any highlight of this year, it is that I spent a lot of time negotiating some of those acquisitions that you referenced. That role as a biassed and involved umpire is very important.
The fifth thing is market intelligence, where we can share insight on industry trends. We help founders to see the bigger picture on how they can position themselves for better synergy between both companies and to see how they can make better decisions during the process.
The sixth thing is we help with the math around the valuation, especially when communication starts breaking down. We also provide post-acquisition support when necessary. The last thing I will point out is we also provide the money sometimes for the acquisition to happen. So we commit to investing in the bigger entity.
What are the lessons you’ve learned from the acquisition conversations you’ve been part of?
The number one lesson is to be very cautious of the founder's ego and how to manage it. The ego is very important, and it should be managed properly. I don't know if you're familiar with the movie, The Godfather, or Italian mobs. There’s the consigliere who is an advisor to the godfather. Their role is to provide advice to the godfather.
That's the role of a proper VC. To understand that the founder is the driver and provide the right advice that will help them to make the right decision. That’s really important, especially when negotiating valuations. You’ll be surprised to see valuation negotiations fall apart not because of a lack of merit but because of a lack of ego alignment.
Governance is very important, and a lot of founders leave those things late. The role of governance in creating value and returning value during the acquisition is most of the time understated. Having all the proper documentation in place makes a huge difference in whether you’re acquired or not and can wipe out millions of dollars from your acquisition.
The third one is these things take long. Some of the announcements that you guys see took months, some nearly a year, for it to happen. So having a decent idea and understanding that this conversation takes a long time means that we have to then prepare for the long haul in terms of making sure the company has the right runway because you don't want to leave it too late.
The fourth one, which is good, is that it can happen without advisors. Acquisitions can happen when two founders have a level-headed conversation, and not just an acquisition because something's going bad, but two companies coming together to create a new and improved business.
