African startups and strategic M&A

Date: 14 Dec 2022

Silvia Ricciardi

Victor Basta, Co-Head at DAI Magister, stresses how strategic M&A is a vital option for African startups to succeed.

While African growth companies received a record $3.5 billion in the first half of 2021, more than double the amount in the same period a year earlier, the current funding downturn is global, and already affecting fundraisings everywhere including Africa.

According to Victor Basta, Co-Head at DAI Magister, funding rounds are of course essential for scaling a startup, but repeated dilution can dent in a founder’s overall ownership stake when the time comes to sell a company for ‘real money’. The current funding climate encourages African businesses to begin focusing on potential M&A exits, which require positioning, relationship building with key buyers and visibility as a strategically-valuable ‘winner’ to attract the highest-value M&A interest.

Victor Basta said: “The African market is a young ecosystem that is beginning to mature, and the overall focus is transitioning from raising cash through funding rounds to looking for the real money, which comes from M&A exits. Over the past 20 years 90% of successful market exits happen through M&A, not IPOs, so positioning for a successful M&A exit is mission-critical for any African growth business. However, it is understanding when and how best to sell that sets up business owners to receive the absolutely highest valuations.

When founders go through multiple funding rounds, inevitably founder ownership reduces significantly. For a founder, it’s simply better to sell a company for $100 million when you have a 25% share than $250 million when this has been diluted to 10%. Now in the current climate, before committing to further fundraising efforts, founders should always consider whether raising more money or exploring the possibilities of an M&A deal will yield a better return for them personally, and position their companies even more competitively with the additional resources to win in the market.

In general, African companies excel at solving difficult problems and scaling across borders, but they are far less strong at corporate marketing, particularly marketing towards the largest buyers. To attract serious interest, it is crucial that African startups promote themselves effectively toward strategics.”