Sunday, 28 November 2021

M&A looks set to be What’s Next on Planet Startup

Selling to an established giant is an option for most young companies (hello, exit), but they’re rare in Egypt compared with the rest of the world. Among the handful here that spring to mind: Tinder parent company Match Group’s acquisition of Egyptian matchmaking app Hawaya (formerly known as Harmonica) and Delivery Hero’s buyout of food-ordering platform Otlob, which it later rebranded as Talabat.

Until very recently, it has been almost unheard of for a local startup to acquire another early-stage company. That’s changing. Look no further than B2B commerce platform MaxAB acquiring Moroccan startup WaystoCap last summer, Egyptian edtech startup Tyro buying Nafham just a few days ago, and RiseUp’s buyout of Facebook community Starterhub and startup journal MENAbytes a few years back. Mass transport startup SWVL, which originated in Egypt and is looking to go public via merger with a SPAC, acquired two startups in recent months: Spain’s Shotl and Latin America’s ViaPool.

WHAT’S NEXT? We talked to local players to take their pulse on whether startup-to-startup acquisitions are likely to become more common here, what form they usually take, and what to watch out for when you’re planning one of your own. The long and the short of it: We’re looking at a wave of acquisitions in a handful of sectors — and founders need to take on board both caution and clarity before heading down that path.

We’re not alone: Some 268 venture-backed US companies acquired peers in the first seven months of this year, according to business-finding platform Crunchbase — the most in the past decade.

What’s driving consolidation in the startup space? Record levels of venture financing, crowding in a handful of sectors, and newfound IPO prospects.

The size of funding rounds in Egypt is skyrocketing — look no further than grocery delivery outfit Rabbit’s record-breaking USD 11 mn pre-seed round or Halan’s recent USD 120 mn round, which set a record for the largest round raised by a regional fintech startup.

The median round in Egypt is now 12x larger than it was in 2014. Data from Wamda suggests that back then it was USD 200k — our internal tracker had it at USD 2.38 mn in 2020.

And just as angel and VC interest is rising, so too are IPO prospects for more advanced startups. A SPACs law is in the works, Swvl made headlines with intention to list on the Nasdaq through US blank check firm Queen’s Gambit, and e-Finance’s successful IPO has underscored that the EGX is hungry for new issuances from the tech space.

More incoming money means more dry powder and more bandwidth to look for alternative, inorganic growth prospects — to say nothing of higher valuations, which mean your share becomes a more powerful acquisition currency, says Karim Bichara, a general partner at A15.

The key: Acquisitions by startups aren’t always all-cash arrangements — they often involve a share swap. A company is more likely to use cash in an acquisition after raising a large round, while startups with higher valuations may prefer an all-share transaction, founding director of the American University in Cairo’s Venture Lab Ayman Ismail tells us. But it also largely depends on the seller: If the entrepreneurs on the selling side plan to stay on to grow the business, they will probably prefer shares. If they’re exiting entirely, expect them to go for the money, he says: “There is no standard — it is more of a case-by-case basis.”

Why buy a peer? Geographical expansion is often at the top of the list. “A lot of companies from Egypt, UAE and Saudi Arabia will start acquiring companies in Africa, Latin America and Europe, because the money coming in is much more than the capacity of talent in the Egyptian market to handle,” CEO of Klivvr (and former cofounder of Halan) Mohamed “Nagaty” Aboulnaga says.

Swvl and MaxAB are cases in point: “If you expand organically, there’s only that much speed you can expand by,” Swvl CFO Youssef Salem says. Buying a player who is already growing in their market can help startups jump several hurdles at once — including penetration, brand equity and operations in a foreign country. “We were looking to enter Morocco, and when we found a culturally aligned team over there, acquiring it gave us a faster leap into the market,” MaxAB CFO Omar Ghazaly tells us.

Other times, licenses, revenue growth, the imperative to grow your user base, and talent acquisition are driving factors. If a startup needs to pursue a license for a certain activity, it may opt for buying a similar company that already has it, Bichara explains. Acquiring a company for its user base or revenues is also high on the list, but this can easily become tricky: customer retention under a new setup and brand name is far from assured. Startups may also go down the acquisition route to take on new talent at a significantly smaller competitor or complimentary company (and “acquihire” in the trade).

Remember to factor in time for due diligence — lawyer-speak for “kicking the tires and making sure you’re getting what you think you’re getting — without any hidden surprises.” For many startups, there’s a balancing act between the months and months it can take to pull off an IPO — and the weeks it could take to just move in yourself. Tyro CEO Mokhtar Osman says his company spent 5-6 months on the due diligence process for its acquisition of Nafham. Higher metabolism outfits like Swvl try to move faster: “When we decide to grow organically [in another country], it takes us 30-45 days [to set up]. So if we decide to do it through an acquisition, it needs to happen in [a very similar time-span] to keep up with the overall pace of the company,” Salem says.

So what have Tyro, MaxAB and Swvl learned from their acquisitions? Internal playbooks for the acquirer’s operations and acquisition strategy are crucial for future transactions and seller onboarding, they say. Also, ensuring adequate valuations and keeping steady, friendly relationships with competitors can assist in being in the right place at the right time when the time for consolidations comes. And you’ll definitely want to bring on third parties to go over your target’s financials, tech compatibility and to evaluate the cultural fit between the two entities. “We decided to get an external finance expert to analyze the two companies, their balance sheets and their employees for two months. That helped a lot,” Tyro’s Osman said.

Clarity on purpose and leaving one’s ego at the door are essential for acquisitions to go well: What do you get from your acquisition target — and how does it benefit from you? “If you end up turning the company you bought into a copy of yourself, you haven’t learned anything,” Bichara says. “The playing field needs to be even and you need to leave your pride at the door.” This will also ensure that founders from the sell side stay in it for the long-run — if that’s part of the arrangement.

And remember: Inorganic growth isn’t the only path to growth and expansion. “If you only expand by acquiring other players in other countries, you lose your ability to compete and find yourself at the mercy of finding a target market,” Swvl’s Salem tells us. This could cause a startup to lose its in-house dynamic and market launch squads. “Keeping that inorganic and organic-market-launch DNA in the firm helps you get the best of both worlds,” he adds.

So which Egyptian sectors are most ripe for consolidation? Follow the funding rounds. “Any sector that has seen over-investment is likely to start a consolidation phase a few years later,” AUC’s Ismail explains. Every few years, trends see entrepreneurs and capital piling into a small handful of sectors. “It started with telcos in the early 2000s, followed by ride-hailing and logistics, and currently fintech,” Klivvr’s Aboulnaga says. We’re seeing price wars now in logistics and last-mile delivery, with value propositions becoming very similar to each other. That makes the sector ripe for acquisitions in the near future, he says, adding that he expects the edtech and healthtech industries to be next. “Once the SPAC law gets released, we will also see 3-4 SPACs, each acquiring one or more companies within two years,” he adds.

Your top stories on future trends for the week:

  • Edtech startup Educatly closed a USD 1 mn pre-seed round from Irish state development lender Enterprise Ireland, Falak Startups and a group of angel investors.
  • Fintech startup HollyDesk raised USD 325k in pre-seed funding in a round led by angel investor Faisal Abdel Salam.
  • Three Egyptian startups were chosen to join Techstars Riyadh accelerator: Tegarti, a cloud-based point of sale and retail management platform, Glamera, an app for booking beauty and health services, and Untap, an all-in-one software for planning, launching managing, and assessing online innovation and talent acquisition programs.

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