Why there are so few exits in the Nigerian tech space and what can be done

I have never been excited about mergers and acquisitions. My liberal business mind believes acquisitions stifle competition and limits innovation and I love innovation. Over the years, however, I have learned that mergers and acquisitions, both generally referred to as exits in the venture capitalism and private equity space, are good and are quite required to have a healthy ecosystem.

An ‘exit’ is when a start-up is acquired by a larger organization or becomes a public organization. If a start-up exits, more often than not it means the idea and service are viable, enough to be purchased by another firm. There are many positives from exits, one unique positive of interest is how rewarding it can be.

When eBay acquired PayPal for $1.5 billion in 2002, the beneficiaries of that deal were Elon Musk, Peter Thiel, Reed Hoffman and other PayPal executives. They have all gone on to establish companies that are revolutionizing the world such as a Tesla, SpaceX, LinkedIn, YouTube etc.

It’s worthy to mention that 6 of them are billionaires today.

Billionaire Elon Musk is a cofounder of PayPal
Image Credit: REUTERS/Patrick T. Fallon – RTX1B282

Beyond just being rewarding, exits equip entrepreneurs with the resources to re-invest their talent, experience and passion to start up other companies that could make more impact and solve more problems.

Still on the PayPal story, Jawed Karin, Chad Hurley and Steve Chen were staff of PayPal when the company was acquired. Together the three of them went on to found YouTube, the second most visited website with over one billion monthly users.

A very important benefit of exits especially for the tech ecosystem is that it reveals level of growth. Between 2009 and 2019, the world’s largest start-up ecosystem, Silicon Valley, had over 40 exits all above $500 million. The total value of these exits is $956 trillion according to a survey by Founder Collective.

While the survey was focused on exits among software and e-commerce startups, it shows its location has the third-highest GDP per capita in the world.

India is currently one of the fastest-growing mature tech ecosystems. Investment has grown 5.4 times from $1.3 billion in 2016 to $7.2 billion in 2020. Bengaluru has been ranked 6th for the world’s tech venture capitalist investments.

The Indian private equity and venture capital sector saw 151 exit deals in 2020. While we are not privy to the value of those deals, this reflects how important exits also indicate the growth stage of the ecosystem of a region and should be something to expect.

The African tech space has attracted a lot of attention from foreign investors. In 2020, the African Tech ecosystem secured a total VC funding of $1.43bn in 359 equity rounds (+44% YoY) according to Partech Africa.

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Paystack, acquired by Stripe, remains one of the few successful exit stories in the African tech space
Image Credit: Paystack

In this same year, we saw some notable exits including World Remits acquisition of Sendwave for $500m, DPOs sale to Network International for $288m, Nigerians own Paystack acquired for $200m by Stripe and Fawry’s IPO to gain Unicorn status.

Comparatively, we are still a mile behind other mature tech spaces despite the volume of exits experienced in 2020. We cannot ignore that the African tech ecosystem is still nascent and in its early stages but for the African ecosystem with 6 unicorns, we should have more exits.

Major reasons why there are few exits in Nigeria

Transparency

The first reason for the small number of exits in the Nigerian start-up ecosystem is transparency. Exits involve 2 identities; the acquirers and the acquired.

Most acquirers, which are larger organizations, financial institutions etc still lack a robust understanding of the business models, operations and performance. Because of that, they would rather create competing organizations than acquire existing ones.

GTBank, one of Nigeria’s foremost banks valued at N1 trillion recently became a holding company and as part of its new structure, launched its own payment company to challenge the existing players.

Why there are so few exits in the Nigerian tech space and what can be done
GTCO is delving into the payment technology space with its own product rather than buy out a fintech startup
Image credit: Investogist

Speaking to analysts in march, the MD/CEO OF GTBank, Segun Agbaje said: “Payments is a space we’re coming into so we will have to look at the likes of Paystack as bigger than us on the day we start, as knowing more than us, but I promise you we will bridge that gap very quickly.”

Like I said earlier, while competition might stir innovation in the long run, acquisition can also hasten it, but not everyone sees it that way.

A strategy start-ups can adopt to build trust in the ecosystem is to be open and transparent with results. Digital lending start-up, Carbon, made its financials public for the first time in 2018. Although it’s typical for foreign private startups, it’s almost an anomaly in Africa.

While there are fears of posting results ranging from bad marketing and PR if massive losses are incurred and possible regulatory shutdown if profits exceed expectations, it is important to build trust and security for start-ups.

Unstable regulatory environment

While starting a rival company is a local issue, foreign investors are unable to adequately engage in acquisition talks due to the unstable regulatory environment. In 2021 alone, the tech ecosystem has experienced a cryptocurrency ban, Twitter ban and most recently freezing of USD accounts.

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Governor of the Central Bank of Nigeria, Godwin Emefiele…

Many Nigerians are concerned that the regulators might begin to convert USD in accounts and this shows the degree of scepticism in the system, how much more among foreign investors. As earlier stated, while investment into the African start-up space has increased, the acquisition of companies will require a lot more stability.

In 2020, 86 VC equity deals were completed by startups in Egypt, followed by 72 equity deals completed by startups in South Africa. This is not surprising considering South Africa and Egypt sit in 84 and 114 on the Ease of Business index of 2020, compared to Nigeria’s 131.

What can be done?

The government needs to create a more enabling environment to attract and retain acquirers. This can only be achieved through symbiotic partnerships between companies and regulators leading to compromises in strict policies that stifle innovation.

Unwillingness of founders

Finally, the last cause of the small amounts of exits is because start-up founders are unwilling to merge with larger organizations. There really isn’t a price on an idea and no one should be forced to sell a business they have built from scratch to another person. However, exits can empower both companies to achieve unspeakable heights and make a bigger impact.

Final thoughts from the PayPal story, after the acquisition of the company by eBay, it became the platform for the success of eBay. 70% of all auctions on eBay accepted PayPal payments and it became the default payment option for many users. By the end of 2007, PayPal generated $1.8 billion in revenue. By 2012, PayPal’s total payment volume processed was $145 billion accounting for 40% of eBay’s revenue.

What can be done?

More openness to expansion of the ecosystem by mergers and acquisitions. A strategic exit will definitely reward the founders and provide a platform for the idea to receive full expression and appreciation.

In conclusion

With more collaboration and a better enabling environment, start-ups can develop into companies with big-ticket exits. For this to happen though, founders must be willing to leave their organizations for the sake of the growth of the ecosystem. It might be a Christ-like gesture, however, future organizations would be forever indebted.


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