Acquisitions, more than IPOs, will create Africa’s early startup successes

Africa has made its global IPO debut. Pan-African e-commerce company Jumia—a $1 billion-valued company—began trading live on the NYSE last week.

The stock offering made Jumia the first upstart operating in Africa to list on a major global exchange.

This raises expectations for unicorns and IPOs to create the continent’s first wave of startup moguls. But unlike other markets, big public listings and nine-figure valuations could remain rare in Africa.

The rise of venture arms and startup acquisitions will factor more prominently than IPOs in creating Africa’s early startup successes.

I’ll break down why. First, a quick briefer.

Primer on African tech

Not everyone may be aware, but yes, Africa has a booming tech scene. When measured by monetary values, it’s minuscule by Shenzen or Silicon Valley standards.

But when you look at volumes and year over year expansion in VC, startup formation, and tech hubs, it’s one of the fastest growing tech markets in the world.

As for building blocks, Africa has 442 active tech hubs, accelerators, and incubators (by GSMA numbers).

Image via GSMA

It is becoming a startup continent, with thousands of VC-backed ventures descending on every problem and opportunity. Prominent startup categories include fintech, e-commerce, logistics, and agtech. Blockchain-enabled ventures, such as Hello Tractor and SureRemit, are cropping up, too.

Nigeria, Kenya, South Africa, and Ghana have emerged as centers for VC, startup, and incubator activity. The value of capital going to tech companies annually is still the subject of statistical debate, but by Partech data, the continent surpassed the $1 billion VC mark in 2018.

Image via TechCrunch

While $1B may barely register in markets like Silicon Valley, that volume represents a more than one-hundred percent increase in VC to Africa over a four year period, at least by one comparison.

The value thesis for African startups shapes up around demographics—primarily youth populations and urbanization—and growth, reform, and modernization in the continent’s core economies.

Though Africa (primarily Sub-Saharan Africa) still stands last in most global rankings for smartphone adoption (33 percent) and internet penetration (35 percent), the continent continues to register among the fastest growth in the world for both. Overall, Africa’s countries, businesses, and 1.2 billion people are digitizing rapidly.

As startup scenes go, Africa is currently performance light, in terms of the big money-events. There’s a handful of notable exits and only one unicorn and one major IPO (the same company, Jumia).

Still, it’s a young tech market. Most of Africa’s VC growth, startup formation, and improvement in digital infrastructure has occurred over the last 5 to 10 years.

Prospects for IPOs

Circling back to prospects for African startup IPOs, there are several companies that could join Jumia to list on a big global exchange.

Pan-African fintech company Interswitch’s plans to pursue a dual listing on the Lagos and London Stock Exchange have been delayed since 2016.

Interswitch does not release financial stats, but given its growth building payments and digital finance infrastructure throughout Africa, the company could conceivably generate $100 million in annual revenue.

I mention that benchmark because that $100 million revenue point has served as the unofficial IPO benchmark for startups and investors. Jumia achieved it last year (with big losses in tow).

It will be difficult for startups operating in Africa to hit that revenue mark, even with all the leaps and bounds occurring in the continent’s economies and tech sector. The overall operating environment is still pretty costly and grueling.

Make no mistake, more IPOs are coming.  In addition to Interswitch, African startups whose fundamentals could satisfy investor expectations include Nigerian payments company Paga, e-commerce venture MallforAfrica, along with fintech ventures Cellulant (Kenya) and Jumo (South Africa).

That said, when it comes to payout events for founders and investors in Africa, I’d look to acquisitions. More specifically, acquisitions of ventures scaling digital models across Africa’s informal economic spaces.

Startups and Africa’s informal economy

Massive amounts of commercial activity take place in Africa off-the-grid of taxation, data-capture, or registered businesses.

The continent’s informal sector is estimated to comprise up to 50 percent of Africa’s economic activity and employ over 60 percent of its workforce. GDP revisions in several African countries revealed outdated statistical methods were missing billions of dollars in commercial transactions. A drive or walk through any major African city— bustling with markets and street traders—reveals business is happening everywhere, and not always connected to formal services or captured in government statistics.

The needs and demands of consumers and SMEs operating in Africa’s informal sectors have also eluded many of the continent’s established companies.

Startups are shaping APIs, products, and business models to scale and create revenue streams and services in Africa’s informal economic spaces. Prominent sectors for this span agtech, digital advertising, logistics, e-commerce, and mobile customer acquisition apps.

Fintech ventures to tap Africa’s large unbanked and underbanked consumer and SME populations holds the most potential. The sector now receives the most VC investment by recent WeeTracker, Briter Bridges, and Partech research.

Image via BriterBridges

Some startups, such as Mines.io and M-Survey, are already selling their services to large African banks and telcos. And, some of these big banks and telcos are establishing venture arms for startup investment.

You probably see the equation coming together here. Startups in Africa (particularly in the fintech space) are finding ways to connect VC, to digital, to mobile, to serve client needs and create revenue streams in Africa’s informal economy. They are usually tapping consumer and SME demand larger companies have not been able to reach.

It’s a fair bet these established African companies—banks and telcos in particular—will start acquiring some of these startups, creating exits and the continent’s early round of tech millionaires. And these events will likely happen sooner and in greater volume than big African tech IPOs on major exchanges (we’ll talk about prospects for local listings in a future Extra Crunch piece).

So keep an eye on Africa’s startups scaling solutions in the continent’s informal economy. Their CEOs could be next up to join the club of successful global founders.