Why We Are Likely to See Less South African Startup Acquisition
The acquisition of start-ups can provide the new business with a technological boost that gives it a competitive edge. The fact that this deal benefits both the company and the acquirer is a win-win.
Acquirees have access to a larger pool of markets, resources, cash, and a very handsome payout for their founders, employees, and investors. On the other hand, the acquirers benefit from product diversification, hiring new personnel, and market growth.
South Africa’s start-up acquisition
As of last year, South Africa’s start-up ecosystem took the lead in exit mergers and acquisitions in the world. This is true, according to Disrupt Africa’s 2022 South Africa Startup Ecosystem Report. The acquisition narrative in South Africa last year began in January with the $88 million purchase of Adapt IT by Volaris Group.
Afterward, more acquisition news was reported, including the acquisitions of Principa by Hyperclear, inq.’s acquisition of Syrex, Gumtree by Impresa Capital, Teraco by Digital Realty, and TymeBank by Retail Capital.
From 2015 to last year, South Africa accounted for one-third of all acquisitions of African tech start-ups. According to Disrupt Africa, a total of 357 South African tech start-ups raised a total of US$993,684,600. According to Tshepo Magagane, an investment banker at one of the country’s top banks, the country’s economy facilitates successful acquisitions of start-ups.
“It is primarily the shape and structure of the economy that allows for acquisitions.” South Africa has more established corporations that are now reinvesting in the startup IT ecosystem. Capital markets and our banking system are also contributing,” Tshepo Magagane said.
Significance of start-up acquisition
The tech ecosystem is a collection of many organizations working together to promote technological advancements for economic growth. One of the ways to achieve this is through start-up acquisitions.
This approach promotes international expansion, obtains the finance needed to scale, or provides access to a larger client base. One example of acquisition driven by market expansion is the acquisition of online art marketplace Wezart by Africa Fashion International.
In addition, established companies and some capable start-ups acquire other start-ups for the sake of diversification. This can be seen in the acquisition of PayJustNow by Weaver Fintech which allowed them to expand into buy-now-pay-later. TymeBank also expanded into offering online services for SMEs after acquiring Retail Capital.
They are other acquisition that has not only boosted the growth of the acquired company but provided more efficient services and products. The implementation of the digital economy depends critically on a robust, efficient tech environment. This is due to the fact that they are necessary for turning even start-up ideas into successful, high-growth enterprises.
In South Africa, fintech is a major driver of activity within the startup space. According to last year’s report, there are almost three times as many fintech start-ups as there are in any other single field.
The current narrative of acquisition in South Africa
For some reason, there has been a calm in the tech ecosystems in Africa as regards start-up acquisitions. There has been news of several fundings going on in the continent but only a whisper in the merging and acquisition.
The star country of acquisition, South Africa, is yet to make the news with its tech start-ups. It has been 5 months into 2023 and there’s not a single acquisition yet in the country.
However, it is not standing alone as other African countries have yet to report a start-up acquisition except Nigeria. Fluidcoins, a Nigerian crypto payment gateway startup was acquired by Blockfinex, a Barbados- and Seychelles-registered crypto exchange company. This acquisition was facilitated by Dan Holdings Limited, the parent company of Blockfinex and a web3 ecosystem and venture fund.
Aftermath of last year’s acquisition
Ever since the shutdowns of major firms and promising start-ups, investors have been skeptical about acquiring current start-ups without a proven concept. The fact is that no investor intentionally buys a business without foreseeing the profit it can bring. This avoids the situation of buying high only to sell low later on. However, this has been the news of this year.
On April 10, Uber agreed to sell over half of its stake in Careem to Emirates Telecommunication Group for $400 million. This is a devastating return from the $3.1 billion purchase of the Dubai-headquartered Careem.
Following that, on April 13, Walmart announced that it would sell the online menswear retailer Bonobos to WHP Global. The Express and Brand management company got it for $75 million. The retail giant paid $310 million for it in 2017, so this is a lot less.
Why we might be seeing less of it moving forward
It is hardly surprising that the pace of acquisition has fallen after what happened in the first quarter of this year. Moreover, the role of venture capital in making start-ups efficient for acquisition is less efficient, especially in South Africa. The change in the global investment environment has led to the shutdown of AlphaCode and Nasper Foundry. Two of the country’s most prestigious accelerators.
Before this year, funding deals had generally grown year over year over the previous three years. Both in terms of the number of start-ups supported and the overall financing amount.
However, recently in South Africa, programmes put on by certain venture capitalists turned out to be mentoring programmes. The start-ups receive a limited sum of money and resources to support the education and training they have acquired. Hence, startups lack the financial support needed to expand to the point of acquisition. As a result, it is challenging for investors both people and organisations to deploy resources, much alone buy start-ups.
According to Xoliswa Moraka, founder & Managing Director at Colab4Growth (Pty) Ltd, accelerator programmes are not doing much to beef up startups potential.
“I think there is a need for engagement and communication of all players in the ecosystem to say, ‘hey, let’s rethink what the accelerator model in South Africa needs to look like.’ Many accelerators have failed to deliver on their promises to open markets for these startups. They have just become glorified classrooms where these innovators sit around to listen to stuff they could easily just find online. This does not benefit either the entrepreneur or the ecosystem as a whole,” she said.