Expansion, exits, and pan-African startups
Each week during Season Two of The Flip, we’re going to publish an essay that corresponds with that week’s podcast episode. This week is Season Two, Episode Two: Global Ambition - Lessons from Tech Expansion, featuring Osarumen Osamuyi from The Subtext, Keith Davies, formerly with Zoona, Wiza Jalakasi from Hover, Tayo Oviosu from Paga, and Victor Basta from Magister Advisors.
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Expansion, exits, and pan-African startups
This episode starts with a premise - that the nature of venture investing, which seeks a requisite scale, paired with the depth (or lack thereof) of certain markets, and for certain products, compels startups to seek to expand geographically, and to do so, perhaps, earlier in the journey than that of their counterparts in other markets.
In fact, US-founded B2B software companies, in expanding to their next market - Europe, in particular - are doing so increasingly later in the startup’s life. According to Frontline Venture’s European Expansion 2020 report, startups are choosing to expand to Europe, on average, 8+ years after founding, and after they have raised their Series C.
Meanwhile, Helium Health, founded in 2015, raised its “Series A for Africa expansion”; Kobo360, founded in 2017, raised its Series A with plans to “expand to 10 new countries”; Sokowatch, founded in 2016, closed its Series A with “plans to… target new African markets”. Expansion earlier in the journey, and generally, with a significantly smaller war chest to do so.
This, of course, is not an entirely representative comparison given the vast differences between startups in the aforementioned report, and startups in Africa. However, I do nonetheless believe that we can use some data points from this report to discuss in the African context, as it raises a few questions that we discussed in this past week’s episode, and that we will discuss in next week’s episode (subscribe here 😁).
What is "good enough" for a strategic buyer?
Why do startups expand? To find more customers and growth, develop greater efficiencies at scale, diversification to account for certain political or economic realities on the continent, and so on.
What about the role expansion plays on fundraising & attractiveness of the business on the startup’s path to growth and ultimately exit?
For the companies analyzed in Frontline’s report, European expansion is part of ”the classic IPO path”. The report argues that “well-run B2B software companies should derive 25-35% of global revenue from Europe by the time they go public”.
This underscores the expectation of what it means to build out a sustainable business outside of a company’s home market, as well as investor expectations about the size of that business outside of their home market.
As Nataly Kelly, Hubspot’s VP of Localization, in response to Frontline’s report, writes,
When it comes to an IPO path, the European revenue range is not so critical as a quantitative value. Instead, the value matters due to what it says from a qualitative perspective about the company’s viability. The strength of its business fundamentals are what matter most.
Now, this applies to “the classic IPO path”, which African startups, invariably, are not on. But the same logic applies, whether we’re discussing a sale to a private equity firm or a strategic buyer.
This is something I talked about with Victor Basta, whose M&A advisory firm Magister Advisors has worked on some of the biggest equity rounds on the continent.
What does good look like to be attractive to a strategic buyer? …in payments, there’s a huge premium to be able to buy one that delivers Africa multiple markets… if you have $30 million of revenue in one of these markets in Africa, it becomes more valuable to have 20 in one geography and 5 and two others than it does to have 28 in one geography and 2 in another.
Are these considerations startups ought to take into account as they explore market expansion?
There is a related question about what does it mean to be a pan-African startup, particularly as a fundraising narrative.
Do operations in five countries in East Africa make you pan-African? Does Nigeria, Kenya, South Africa make you pan-African? Does operating in the OHADA zone in French-speaking Africa make you pan-African? What percentage of your revenues need to come from outside your home country?
What has to be true for a company with comparatively smaller resources to fulfill the promise for expansion in a non-homogenous market?
On one hand, we see startups committed to building out most or all of their stack in one market before considering expansion. On the other, we see demand-led opportunities and strategic partnerships taking other startups into new markets.
Meanwhile, for those searching for homogeneity, it’s about matching the problem and the set of market conditions, which may mean looking outside of the continent. This we have seen with companies like Paga and Migo, whose next markets after Nigeria are in Latin America.
For Paga, in particular, their market expansion is commencing after nine years of operations in Nigeria alone. That’s something I recently talked to Tayo Oviosu about. Tayo, the Founder and Group CEO of Paga, has been very careful not to brand Paga as a pan-African company.
It's actually an easier story for me to tell and I think I could tell it very credibly, that we are going to be the PayPal for Africa. I could tell that story very credibly and everybody would buy it. But that's not us. It's just not real.
It’s an important distinction for Paga, which is expanding to Mexico as its second market after Nigeria. PayPal for Africa doesn’t get to expand to Mexico. But the global fintech Paga does.
To be sure, building out successful businesses in Latin America undoubtedly maximizes strategic value for Paga and Migo, as well. And given the market size and under penetration of (financial) services in markets like Mexico and Brazil, perhaps even more so than expansion to smaller markets in Africa.
And as these companies seek to widen the expansion opportunity set, it will prove instructive for those looking for growth and to maximize value for their current and future stakeholders alike.
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