What can exits tell us about African startups' performance
Digging deeper into the data
The last year has seen a dramatic change in the venture capital and investment landscape globally, as well as in Africa. CB Insights notes that global venture capital fell by 35% from 2021 to 2022. The majority of the fall was in the second half of 2022 and has continued into 2023. Briter intelligence data shows that Africa was not resilient to this downturn. The total volume of funding dropped by 40% from H1 2022 to H2 2022.
The change from 2021 peaks to 2023 lows is generating interesting discussions within the investment and venture landscape in Africa. Investors have shifted their attention from growth at all costs to performance and are seeking data that can help them make sense of the difference. Foreign investors continue to ask whether Africa is a good investment destination.
In response to these questions, Briter has been digging deeper into its own data. We’ve been sharing some of our early thinking through our monthly #BriterEye newsletter and ‘digging deeper’ series. Our approach has been to start with the data we have on the number and size of investor exits in Africa and see what it can tell us about the performance of markets and sectors. An investor exit is when an investor sells part or all of their ownership in a business and when their investment return is realised. The most common exit for investors in Africa from startups has been through mergers and acquisitions.
Our understanding from discussions with the ecosystem is that private equity groups and corporates are more likely to acquire businesses that are more capital efficient [1]. Using our Briter Intelligence platform data, we’ve been developing an indicator using our exit data that we are testing as an imperfect proxy to help us make sense of capital efficiency in Africa and across sectors and markets: the ratio of the number of deals for a sector or market to the number of exits in a sector or market [2].
It assumes that more capital-efficient sectors and markets will have fewer deals relative to the number of exits. Therefore a smaller ratio is associated with better capital efficiency as it took less deals to get to an exit. Looking through this lens paints a different picture of the “Big 4” and Fintech in Africa. We unpack this further in the two charts below.
1. Exits and deal activity don’t mirror each other
The chart above shows the ratio of the number of deals in a given country to the number of exits. It shows that investor exits follow a similar pattern to investor deals with the majority being completed in the “Big 4”. However, rather than South Africa and Egypt lagging Kenya and Nigeria as it does in terms of volume of funding, they lead in terms of the number of exits. Further, they have done so with fewer deals leading to a better ratio of deals to exits, particularly for South Africa which is home to more than a third of exits in the tech sector in Africa. The opposite happened in Nigeria and Kenya which saw more deals and funding between 2018 and 2021, but which has not translated into the same volume of exits.
Further, several smaller markets which don’t dominate headlines when it comes to deal flow have done relatively well in terms of their exit performance. Investors and startups in Tanzania, Zambia and Morocco have proven that there are pathways to exits outside of the “Big 4”.
2. “Crowded” sectors do not always perform the best
A crowded trade is a term typically used in the hedge fund industry when a vast majority of investors are all holding the same position. This is often the result of the information and data getting better in a particular sector or industry that allows these traders to see the same market opportunities. In other cases, it’s because traders fear missing out on the trade. If everyone is in it, they should be too. It seems a similar phenomenon can occur in venture capital. Venture capital is after all a team sport where investors work together to conduct due diligence and complete investment rounds. There is a feedback loop where sectors and markets that receive funding, typically receive more funding.
Nowhere has this been more evident than in Fintech, which has been the continent’s top sector in terms of the number of deals and volume of funding since 2015. It has accounted for nearly half of funding raised in the digital and green ecosystem in Africa. However, exits have not kept up to the same extent. Fintech accounts for less than a third of exits on the continent. Investors are already taking note of this. The share of funding to fintech from the total volume of funding dropped by 18% from 2021 to 2022, the biggest drop off of any sector. Fintech still remains popular in 2023 with notable late stage deals for MNT-Halan in Egypt and Peach Payments in South Africa, but we already seeing more funding and deals outside Fintech as investors search for the next opportunity. Cleantech, in particular, has been one bright spot in the last year. It currently shows a good ratio of deals to exits, but cleantech is risking becoming a crowded trade. Questions about its commercial viability are already being asked. It may be good for investors to keep an eye on the efficiency of the sector as more and more money chases opportunities in this space.
So what?
After a half-decade of growth at all costs, capital efficiency is making a comeback. High valuations and high volumes are no longer attracting investors as they used to. More and more investors are looking into startups’ performance and their ability to generate revenues and get to profitability. Data shows that markets like Tanzania and Zambia which are receiving way less funding compared to the “Big 4” still have viable exit pathways. In addition, while funding to fintech startups remains resilient, deals are outpacing exits. Already investors are shifting their attention to the new opportunities.
The focus on performance provides an opportunity for new startups. Many sectors and products have been overlooked in favour of Fintech and other sectors that have dominated headlines. Now investors are searching for what’s next and what they can get at better prices. Niche is no longer bad. It is likely that this environment will put pressure on existing growth stage startups, but also seed the future unicorns in Africa. We hope looking at how these sectors and products are already performing in terms of capital efficiency can give an indication of where that may be.
In our next article in ‘digging deeper’ series, we will be exploring what markets outperformed or picked up momentum in 2022 and what you should be on the lookout for in 2023. As always, follow us here to stay updated on the latest data and insights coming out of Briter or sign up for a demo of the Briter Intelligence platform here.
1. Learn more about capital efficiency from this excellent article by Igor Shaversky from TechCrunch.
2. We tried to look at the volume of funding startups receive in a sector or market in relation to the volume of exits but the majority of exits are undisclosed.