Start-ups: African champions in the consolidation era

This is part 10 of an 11-part series.

Boosted by foreign funding, African tech raised more than $5 billion in 2021. There are now about 20 companies on the continent that have already reached their third round of funding aka Series C (including 12 in the last two years), which makes them capable of major strategic moves, whether by merger or acquisition. They are mainly active in fintech (Flutterwave, Chipper or Jumo), transportation and delivery (SWVL or Elmenus), healthcare (mPharma), e-commerce (Copia Global) or education (Andela and Spark Schools).

“At this level, companies have only two solutions to create growth: develop new products or open new markets,” says Johanna Monthé, a Cameroonian lawyer at Epena, a firm specialising in mergers and acquisitions in the tech sector in West Africa.

After raising $250 million in Series D in February, Flutterwave chose to have it both ways. At the end of February, the fintech’s chief Olugbenga Agboola announced new services and the arrival of the payment platform in new countries, such as Tanzania, known for its regulatory complexity.  “Consolidating allows you to quickly acquire users and market share, to recover an existing database while gaining profitability through economies of scale,” said Chiheb Ghazouani, lawyer and founder of the firm CAG, based in Tunis.

Overcoming recruitment problems

But it’s still important to find the right company to buy out. “More than the developed solution, which often takes a back seat, it is the team that is especially scrutinised in detail, because recruitment is the biggest problem for start-ups,” says mergers and acquisitions specialist Monthé. At the end of 2021, Flutterwave engaged the services of Disha, acquiring the Nigerian marketplace for a six-figure sum. In the process, the $3 billion fintech also acquired a database of 20,000 additional users.

And so the African tech scene has definitely entered the era of consolidation and the creation of future regional champions, largely financed by behemoths like SoftBank or Tiger Global, which are injecting receipts worth tens of millions of dollars.

Early consolidation

Driven by these giant shareholders, some startups are trying their luck even before the C series, like the Egyptian MaxAB, which specialises in e-commerce for professionals, which just swallowed its Moroccan competitor Waystocap. This is also the case of the logistics company Wasoko (ex-Sokowatch), created to serve small grocers and which stakes claim to 50,000 customers. For its second round of financing, which closed in mid-March 2022, it raised almost ten times the amount it raised two years ago when the company closed its first round of financing for $14 million.

These projects are now integrated early on into the majority of African start-ups’ business plans

Based in Kigali, this time around Wasoko has $125 million to launch in Côte d’Ivoire and Senegal and is also taking advantage of foreign investors’ growing interest in African tech. Valued at $625 million, the company generated $300 million in revenue last year. It now plans to enter the Nigerian and South African markets, which are known to be demanding, through acquisitions.

“These projects are now integrated early on into the majority of African start-ups’ business plans, even if all of Africa doesn’t operate at the same pace,” says Monthé. “All of my English-speaking clients [in Egypt, South Africa and Nigeria] are consolidating, unlike the French-speaking ones, which are less well-financed and therefore tend to focus on growing enough to attract potential buyers’ interest,” she explains. “We often talk about transactions in logistics, insurance and fintech, but in reality, it happens in all sectors,” points out the expert who advised the e-commerce platform TradeDepot when it bought Ghana’s Green Lion in February.

Less watchful investors

Could this frantic race for ultra-fast growth lead to a speculative bubble? It’s hard to say, says Monthé. One thing is for sure, investors are now living in “fear of missing an opportunity” and are sometimes less careful about the governance of start-ups. The misadventure of the payment application Dash illustrates this problem. Just two weeks after raising a record $32.8 million in seed funding, the start-up was forced to close down at the request of the Ghanaian Central Bank, because it had been operating for more than two years without a licence.

Prince Boakye Boampong, Dash’s multi-faceted entrepreneur founder, who had already come through Y Combinator with a previous start-up, had attracted prestigious investors such as Insight Partners – which counts in its portfolio big names such as Twitter, Tumblr or the e-commerce platform Shopify and the French unicorn Qonto.