Africa’s venture funding boom between 2020 and 2022 gave birth to a bustling market for secondary sales of startup shares. It made early investors, founders and employees wealthy as one VC firm was able to return its entire first fund, worth $5 million, through a secondary sale. But as big-ticket investments slow to a trickle, it is getting harder to find buyers.

Africa’s startup ecosystem has long faced an exit problem. According to The Big Deal, a comprehensive database of startup funding in Africa, there have been 2,971 venture deals since 2019, but only 143 exits (4.8%). This includes initial public offerings (IPOs), mergers and acquisitions. Faced with limited opportunities to recoup their investment, investors in Africa’s tech ecosystem have turned to secondary share sales to collect profits. Secondary transactions refer to when employees or investors in a company sell their existing shares to another investor.

In September 2023, an early retail investor in Flutterwave was looking to sell 50,000 shares at a $3.75 million price tag, a person familiar with those conversations told TechCabal. This was barely one month after Flutterwave’s CEO, Olugbenga Agboola, told Bloomberg that his firm would go ahead with its IPO plans.

“Angels love secondary exits,” Joe Kinvi, partner at Hoaq, an angel investing community, told TechCabal, “Funds, not so much because they need to return the fund and selling out early might not return the fund.” 

However, African VC firms are not averse to selling when the opportunity arises. One early-stage pan-African VC firm returned its first fund, a $5 million micro-fund, after it sold part of its Moniepoint shares in a secondary transaction, three people familiar with the sale told TechCabal. 

In a few cases where VC firms delayed participating in secondary transactions when the opportunity arose, they sometimes lost it all. 

One such case is 54Gene, the now-defunct genomics startup. Investors in the company were offered an opportunity to participate in a secondary share sale at a $100 million valuation, according to three people familiar with the matter. Two people said most investors passed up on the opportunity, and 54Gene would later shut down in a cloud of controversy after raising $45 million. 

Syndicates and micro-funds are big winners

Angel investor syndicates and micro-funds have been the biggest beneficiaries of secondary market transactions. The funding boom of 2021 and 2022 was a boon for these early investors who sold shares in companies they had invested early in to newer (and typically) desperate investors looking to get into “hot” startups. 

Startup founders and employees have also benefited from selling parts of their shares in secondary market transactions. 

“Employees of high-growth tech companies have, on average, reached the end of their stock options vesting period and are now open to liquidity,” said Jude Dike, the CEO of GetEquity, a Nigeria-based investment platform. “Ideally, these liquidity sales used to be the next time the company fundraises, but with the current drought, companies and employees are looking at alternative options.”

The founders and early team members at Moniepoint made “millions of dollars” from selling their equity at the startup in secondary transactions, according to one person familiar with those deals. 

Dike added that employees from Flutterwave and Andela have also sold equity in their respective companies. TechCabal has previously reported that Wasoko, the Tiger Global-backed Kenyan e-commerce startup, allowed employees with vested shares to sell their stake three times over the company’s lifetime. 

When Kuda Bank closed its $55 million investment co-led by Valar Ventures and Target Global in 2021, secondary sales by existing early investors made up part of the deal, one person with knowledge of the matter told TechCabal, requesting anonymity. That round valued the fintech at $500 million.

Secondary markets as a viable path?

Some investors see secondary markets as a vital exit path. ”We see interest from larger VC funds doing Series A, B and C, [who] want to buy out early-stage investors to simplify cap tables and exert better control in corporate governance matters,” one early-stage VC investor told TechCabal, requesting anonymity because she was not authorised to discuss private matters. The investor, a partner at one of Africa’s most active VC firms, said her firm was actively talking to growth-stage investors who want to buy out their stake in some portfolio companies. “Since you invest at pre-seed, if you can exit at Series A and Series B with the right level of returns, it can be interesting,” the VC partner said.

Sometimes investors buy secondaries when it is sold at a discount to improve their internal rate of return. Internal rate of return or IRR, is one way investors measure the profitability of their investments. However, selling secondary shares “does not materially improve the company” since proceeds from secondary transactions are paid to shareholders instead of being invested in the company, Ik Kanu, founding partner at Atlantica Ventures, told TechCabal. Kanu says his firm, a pan-African VC firm that manages a $50 million fund, prefers to invest in deals where their funds are invested in helping the company grow.

Like Kanu, some investors, especially development finance institutions, do not also want the funds they invest to be used to pay earlier investors. In at least one instance where a development bank is involved, early-stage investors are already having difficulty closing investment rounds that include secondary share sales by existing investors. 

Foreign investors with deep pockets are stepping back from writing big cheques, leaving newly formed local funds and development banks to prop up growth-stage companies. As a result, opportunities for investors to exit with secondary share sales are dwindling. 

Fewer secondaries mean fewer opportunities for early investors like angels to collect profit on their investments. Uwem Uwemakpan, Head of Investments at Launch Africa Ventures, believes angels should plan for 5 to 10-year scenarios. “Angels have to make investments with long time horizons in mind, rather than quick flips on secondary markets,” he said.

Secondary market transactions tend to flourish in frothy markets, Kanu said. “In the present macroenvironment where capital is not flush, you won’t see too many secondaries.”