Founders and entrepreneurs are facing a challenging time. Pre pandemic, valuations were centred on growth and the perception of future scale, now it’s all about current profile and the path to profitability. In terms of valuation multiples, basically we are back to early 2020 as if 2021 didn’t happen: valuations have more or less returned to where they were two years ago. Mergers & Acquisitions (M&A) is also more and more prevalent, even in funding rounds; around half of DAI Magister’s African large round advisory work, currently across 11 significant projects, involves some element of M&A (one year ago that number was zero).

More broadly, investors today are more careful about committing large amounts to Africa, and yet there are many ‘worthy’ African growthy companies needing more capital to grow. As a result, nearly all significant African growth companies face a next fundraise ‘in this environment’ and need to plan forward in terms of what investors now ‘require,’ and the options they must navigate their next funding event. This is exacerbated by the fact that for many African growth companies, their current investor group is often smaller funds and/or DFI’s, neither of which can be expected to lead and price a significant next raise. In a growing number of situations, this means companies must now consider potential M&A mergers or exits alongside their fundraise plans.

What does Disney have to do with companies in Africa?

The ‘discount for growth at all costs’ cuts across all growth companies, everywhere. Take Disney, who have invested heavily in streaming and largely succeeded, finally surpassing Netflix in number of subscribers in October 2022 (235m vs 223m). In a ‘2021 market’ Disney’s remarkable, sustained growth at scale would have been richly rewarded by the market. Today, because streaming has remained highly unprofitable for Disney, its share price tumbled 40% as a result, and its CEO replaced.

Elsewhere, the downturn has cut the valuations of unprofitable publicly traded SaaS companies by around 50%. For profitable SaaS companies, that reduction was only 30%. The message is unequivocal: the market, and by extension growth investors, are paying somewhat less for profitable companies still growing strongly, but far less for unprofitable ones even those showing much faster growth and even leadership in their segment.

If what you sell is discretionary, your valuation has been hit hardest

While 70-80% of consumer spend in Africa is on essential goods and services, not all of it is. Again, global trends reflect directly on African growth companies. Businesses such as Peloton and Door Dash have seen huge valuation cuts in this downturn, as their addressable market has been cut back due to consumer belt-tightening. It’s the same in every downturn, especially one fuelled by higher inflation: the first thing to fall is non-essential spending (recreation, travel, furnishing, etc). The good news is that, in an African context, so many growth companies focus on essential products and services. For the vast majority of African companies seeking funding, it will be essential to show that what you sell is essential, which should help them avoid the worst in terms of valuation drops.

Balance sheet lenders are having a rough time

There has been a huge compression in the valuation of Buy Now Pay Later (BNPL) companies, which is now affecting similar lenders across Nigeria, South Africa, Kenya and Egypt. Klarna, a Swedish global leader in BNPL operating in a large number of geographies world-wide, is perhaps the best, most visible example. Its private valuation dropped by 40% in its latest round, and in response it has had to pivot to become profitable. Since approximately 70-80% of start-ups in Africa sell money at the end of the day, this becomes highly relevant for African lenders looking for a next round.

Also, it becomes essential for them to position themselves as relatively insulated from BNPL trends, either because of what they finance, how they operate, the lack of competitive sources of lending, or the terms they charge. Providing a service that banks cannot offer, or lending where banks are too inefficient, can be very profitable, and so African lenders can very often build a customer base that is far more attractive, and has relatively lower credit issues, than investors would expect for developed-market BNPL lenders straying further and further afield to lend to people they know very little about. However, its critical for African companies to position themselves successfully against the “BNPL” tag which only a couple of years ago was used with pride in many African fundraising decks.

Neobank u-turns

Powered by nearly unlimited funding and the success of companies as disparate as Monzo in the UK and Nubank in Brazil, digital ‘neo-banks’ focussed on growth at any cost.  Their cost of customer acquisition (CAC) was relatively low and they were “cool” among the large group of under 30’s distinctly uninterested in banking with their parents’ bank.

Today, they are facing increasing competition and rapidly rising CAC’s that are making it very hard for many to become profitable. Only two out 25 of the largest neo-banks are profitable. Out of 400 neo-banks worldwide, the equivalent of 95% are still losing money (Monzo has a 44% loss margin, Revolut -75% and N25 – 143%) years after being founded, and even now most earn less than $30 per customer per year. There are a few bright spots: Starling is moving to consistent profitability and Monzo has a major push to become profitable, but its fair to say that raising money as a ‘neo-bank’ these days, anywhere in the world, is incredibly difficult to do.

It pays to save the planet

Nowhere is more money being raised today than in climate tech. This extends to Africa and the Middle East, and there it is the only sector where $ amount of funding is going up. Also, there are many more climate funds searching for deals with ample ‘dry powder;’ it’s a major reason that Green Light Planet (AKA Sun King) in Nairobi was able to raise their mega-round from General Atlantic’s climate fund and M&G’s newly created mega-fund dedicated to climate.

Climate tech covers a broad spectrum of categories. Many, many companies operating within mobility, agriculture, or energy can position themselves credibly as a climate tech company. This story is like ESG a few years ago; if a company could integrate a credible ESG story into their value proposition, they could raise more money or the same funding at higher prices. And the proof of this lies in the fact that there are a number of companies in Africa who have already raised this year within the climate tech sector. 

Climate tech funding in Africa was only $0.6 billion in 2021 yet doubled to $1.2 billion in 2022 while other key sectors such as fin-tech declined. Key sectors include sustainable mobility – with Moove raising $105 million in March 2022 and raising $31 million in December 2021, energy, with companies like Daystar being acquired by Shell in September 2022 and Yellow Door Energy raising $400 million in October 2022, and agritech, with Apollo raising $40 million in March 2022 and Twiga raising $50 million in November 2021.  

As Larry Fink, Chairman and CEO of BlackRock says: “The next 1,000 unicorns won’t be a search engine or media company, they will be developing green hydrogen, green agriculture, green steel and green cement.”  We are seeing this trend play out everywhere, including very clearly already in Africa.

Restructuring is no longer a dirty word

In 2021, any mention of a restructuring or job cuts would have tanked a company’s valuation. Now, very often it raises it, because the baseline on which investors evaluate the potential of a company has completely shifted. So much so that in our experience probably 70% of the time today, instances of restructuring is viewed positively.

Preparing for a successful M&A exit

The African ecosystem has so far focused on funding growth. This makes sense as only 5 years ago the growth sector barely existed. However, the current downturn is accelerating companies’ thinking about exits, even as exits are largely unproven yet. What we are seeing is preparation for an exit take two forms. The first is active discussions around merging two private companies, and the rationale here is simple: neither company feels it can qualify to raise the kind of money it aspires to in the current market, but together the combined company can position as a multi-market, multi-product aspiring African leader, and aim to attract larger international funds increasingly tiering to focus only on clear ‘winners.’  The second is a large group of successful African growth companies who have now become large enough, and are moving quickly enough toward profitability, to already be attractive African ‘platform’ acquisitions for international majors.

We have already seen a few instances of this, with Paystack being acquired by Stripe and DPO becoming the African platform business for Network International. What we are seeing today is boards increasingly pushing CEO’s to think about engaging with potential buyers, and marketing to buyers as well as potential investors. We expect therefore that there will be many more ‘dual track’ funding rounds in 2023-24 as companies explore raising money and being acquired at the same time. Meanwhile we are also seeing the first evidence of this, with companies as diverse as Shell, Moniepoint, MFS, Fairmoney and Yassir expanding through targeted acquisitions to build up their own offerings and geographic reach.

Our view is that it is still early days: for every Stripe, there are a dozen more international buyers who are ‘thinking about Africa’ but have yet to pull the trigger on a deal. In the coming 12-24 months, we expect many to act, and for returns to begin to flow back to the ecosystem that has carefully nurtured these companies over the last few years. In terms of sectors, the most active we expect will be fin-tech: there is huge interest in African fin-tech from international and African players, and the battles between banks and telcos will only fuel valuations and interest in many fin-techs of scale on the continent. As companies across fin-tech, tech-enabled commerce and renewable energy reach scale and maturity, and while the funding environment remains challenging, we expect another 10 or more strategic acquisitions will happen across Africa in 2023 alone, making this a record M&A year in the growth sector, and a sure sign that the ecosystem is maturing from just funding to actual returns.

Learn more about us.



Say Hello