Africa’s recent tech boom brought a surge in venture funding, fueling the growth of numerous startups. This period also witnessed a vibrant secondary market for startup shares, offering early investors, founders, and employees a chance to cash out. However, the landscape is shifting.
The limited exit options for African startups, with only a handful going public or being acquired, pushed investors towards secondary markets to recoup their investments. These transactions involve existing shareholders selling their shares to new investors.
One example highlights this trend: a VC firm reportedly managed to return its entire $5 million first fund through a secondary sale of Moniepoint shares. Similarly, founders and employees at several high-growth startups, like Flutterwave and Andela, have benefited from selling portions of their stakes in secondary transactions.
Angel investor syndicates and micro-funds emerged as big winners during the boom. These early investors sold shares in promising startups to newer entrants eager to get a foothold in the “hot” market.
However, the funding slowdown has cast a shadow over secondary markets. Attracting buyers is becoming increasingly difficult. A case in point: an early investor in Flutterwave struggled to find a buyer for their shares, despite the company’s CEO announcing IPO plans.
The changing environment has divided opinions on the viability of secondary markets. Some view them as a lifeline for early-stage investors seeking liquidity before a company’s IPO or acquisition. Additionally, larger VC firms see them as a way to simplify cap tables (ownership structures) and exert more control over portfolio companies.
On the other hand, several investors argue that secondary sales offer no real benefit to the company itself. The proceeds go to existing shareholders rather than being reinvested in growth. Development finance institutions, in particular, are hesitant to participate in deals involving secondary share sales, preferring their investments to directly support company expansion.
As foreign investors pull back and local funds struggle to fill the gap, opportunities for secondary transactions are dwindling. This creates a challenge for early investors seeking short-term exits through secondary markets. Experts advise them to adopt a long-term perspective, prioritizing building strong companies that can eventually generate sizable returns through traditional exits.
The future of secondary markets in Africa’s startup ecosystem remains uncertain. Their relevance may be tied to broader economic conditions and the success of portfolio companies in securing more conventional exit options.
