Next Wave: Trading second-hand shares in African startups does not make money anymore. That’s good?

Cet article est aussi disponible en français <!– In partnership with –> <!–TopBanner Join us for TechCabal Battlefield, Moonshot’s startup competition where you can showcase your startup idea to a global audience and an esteemed panel of judges and stand a chance to win up to 2.5 million naira in funding for your business! Click to register for TC Battlefield First published 21 January, 2024 Secondary selling—also known as secondhand trading—exists everywhere. The markets of Lagos, Kinshasa and De Villiers Street in Johannesburg are full of traders and buyers haggling over bales of “pre-loved” clothing. A significant number of iPhones and laptops sold in Africa are “London-used”. Even luxury brands are not spared: Richemont, LVMH and Rolex all walk the fine line between maintaining demand via waitlisting and pushing desperate luxury shoppers to the grey secondary markets for pre-owned watches and other luxury items. Secondaries happen everywhere. One can argue that this secondary market is the real market. Trading shares of publicly listed companies on a stock exchange, for example, is simply a series of parallel secondary transactions at scale. When people talk about the financial market, this is the market they are usually referring to. It is the same for the parts of the bond market, commodities, and (maybe) even the market for financial derivatives built on top of secondary trades. TechCabal’s Muktar Oladunmade and I have written about how secondary transactions in Africa’s technology space made founders, startup employees and early-stage investors rich. We also pointed out that the heyday of secondary transactions seems over as people struggle to shed shares in private venture-backed technology startups in Africa. Sure founding teams and angel investors may have abused secondary transactions by selling dressed-up burnt potatoes to newer investors and cashing out. But unless almost every primary investment made in the four years between 2018 and 2022 is a smouldering wreckage about to explode in flames, the secondary market in Africa shouldn’t be frozen. It also should not be about making easy wealth à la 2021 and 2022. Instead, it should be playing a role in creating a market-clearing (for want of a better word) valuation for African startups now that the peculiarities of the market are better known. We’ve spoken about local tech IPOs, but it will remain a pipe dream if the private market for secondary transactions continues to jealously guard valuations that are improbable. In the world of venture capital, secondary market transactions happen because investors are desperate to buy stakes in “hot” companies, or want to consolidate their gains in what they feel is a portfolio winner. Or maybe they just want to keep founders and key employees happy by allowing them to taste some of the paper wealth they’ve accumulated. It’s a much different world today. There are fewer “hot” startups to chase after, regardless of how much marketing and PR arsenal is deployed. Valuations are too steep for anyone remotely interested, and layoffs are all too common. The State of Tech in Africa Q3 2023 By the end of the 3rd quarter of 2023: Two African countries gave crypto a greenlight. 738 tech workers were laid off in Africa. 7 acquisitions were reported. And energy/climate tech related companies took the spotlight. Plus a lot more! Download the full report to revisit one of last year’s most notable quarters Get it in your inbox But in many ways, a tighter secondary market is a beast of its own making. Like any market, selling “second-hand” shares in a company will be difficult if there are no buyers or sellers, or when buyers and sellers cannot agree on a price. Since venture funding is at a 3-year low in Africa, I suspect it’s a mixture of no or few buyers, creating a wide gap between the price buyers offer and what sellers want. This standoff is unnecessary because it is prolonging a much-needed rebalancing in the world of African venture. And it is disreputable to pretend as if this rebalancing is not already happening. While it is undoubtedly deserved in most cases, it is not a stretch to think that some good companies will be destroyed in this unforgiving market correction. A lot of that value destruction will happen because existing investors are too timid or blinded by fear to stand by their convictions. But some of it will happen because VCs are already writing down the value of companies in their portfolio to zero mentally. Writing down a company to zero mentally means the investor lacks the mental or operational bandwidth (not necessarily funds) to support a portfolio company. When an investor mentally writes down huge swathes of their portfolio, the investor (and the investee) automatically become deadweight to each other. It is either the investor made colossal mistakes with the ventures they backed. Or they are making one with that unconscious decision to give up on the hidden gems within the company. An active secondary market was the exciting place where riches were to be made. Now it will have to be the painful and useful place where portfolios are rebalanced and expectations are reset. Tweeting and WhatsApping about it will not change anything. Now that the quick flip method of going to the secondary market to extract high prices for poor investee companies is not working, startup investors (who still have cash to deploy) may fare better if they approach the deadlocked secondary market as an opportunity to scour the market and rethink what they are best placed to support and what exits in that sector should mean. Do you have a message for Africa’s tech leaders, policymakers or the leading workers building the continent’s startups? Talk to us to find out how we can help share your message on this newsletter. Email bizdev@bigcabal.com to start. Send an email. Instead of hoping for secondary transactions that will “reward” early investors and founding teams. Investors may find that is better to take advantage of current deep discounts to rebalance portfolios that were damaged by