First published 16 March, 2025
Image: TechCabal
Two years ago, a discussion highlighted how a data gap affects startup fundraising, a problem now affecting Africa’s venture capital (VC) ecosystem by restricting transparency around exit decisions.
Secondaries—investors selling shares in startups to each other—dominate exits in Africa, as IPOs are scarce and mergers and acquisitions are slow. The reliance on secondaries is a compromise for many African fund managers who choose current options over uncertain future prospects in a volatile market, especially nearing the end of their fund cycles.
The secondary market functions on a willing-buyer, willing-seller basis, where buyers usually hold more power, often leading sellers to accept lower prices to secure liquidity. This situation can result in shares being bought at discounts of up to 40%.
One example includes an early-stage pan-African VC firm missing out on exiting a Kenyan digital commerce marketplace at a $100 million valuation due to rejecting a 50% discount offered by other investors.
Another instance involves an early-stage firm selling secondaries during a fintech’s recent fundraise at a 30% discount from the valuation. These discounted valuations can pose challenges for smaller funds in meeting return expectations, hindering their ability to achieve a 3x return on investment as their stakes are consistently sold at reduced prices.
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Secondaries are the primary exit method, and the consistent devaluation of stakes in these deals by smaller funds may impede fund returns. Failure to deliver satisfactory returns can hinder future capital raising, creating funding gaps for early-stage startups and slowing African startup growth.