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January 12, 2024
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African VCs: Exploring Secondary Markets for Unprecedented Liquidity

In Africa, venture capital firms are increasingly turning to secondary markets to find liquidity and exit opportunities. The surge in venture funding in recent years has created a demand for secondary sales of startup shares, allowing early investors, founders, and employees to cash in on their investments. However, as big-ticket investments slow down, finding buyers for these shares is becoming more challenging. According to data from The Big Deal, only 4.8% of venture deals in Africa have resulted in exits, including initial public offerings and mergers and acquisitions. Secondary transactions, where employees or investors sell their shares to other investors, have become a popular alternative for recouping investments in the African tech ecosystem.

Angel investor syndicates and micro-funds have been the biggest winners in secondary market transactions. These early investors have been able to sell shares in high-growth tech companies to newer investors looking to get into “hot” startups. Startup founders and employees have also benefited from selling portions of their shares in secondary transactions. However, some venture capital firms have been hesitant to participate in secondary sales, and in some cases, they have missed out on lucrative opportunities. Secondary markets are seen as a viable exit path by some investors, particularly larger VC funds that want to simplify cap tables and have better control over corporate governance matters. However, selling secondary shares does not necessarily benefit the company itself, as the proceeds go to shareholders rather than being reinvested in the business.

Opportunities for secondary share sales are dwindling as foreign investors with deep pockets pull back from making large investments. This leaves local funds and development banks to support growth-stage companies. As a result, fewer secondaries are happening, which means fewer opportunities for early investors to profit. Angels are being advised to take a long-term approach to their investments and to plan for 5 to 10-year scenarios rather than quick flips on secondary markets. Additionally, secondary market transactions tend to thrive in frothy markets, so in the current capital-constrained environment, there may be fewer opportunities for these types of sales.

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