M&A may be solution to African startups’ market size issues

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On a continent where internet penetration remains low, and though it is increasing spending power does not match that of people in the United States (US) and Europe, startups in Africa may be advised, in certain circumstances, to adopt a “together we’re stronger’ mentality.

In a post on his blog in October last year, Martin Zwilling, chief executive (CEO) and founder of Startup Professionals, said startups needed mergers and acquisitions (M&A) in order to grow, as organic growth alone may only yield a fraction of the potential of their business with the additional strategies of M&A.

“Many entrepreneurs are paranoid about the partnership approach, and think that M&A is only an alternative for large companies who are flush with cash. Both of these qualms are wrong and shortsighted,” Zwilling wrote.

Drawing from  the book “Build, Borrow, or Buy: Solving the Growth Dilemma” by Laurence Capron and Will Mitchell, Zwilling espoused a framework for entrepreneurs to help build their companies. The facets of this strategy include evaluating internal development versus external sourcing, adding basic partner contracts or alliances, investing in selective strategic alliances, and actively pursuing M&A.

“M&A is “buying” resources for growth. This makes sense when you anticipate needing the freedom and control to make major changes to enhance growth, with a credible integration path while retaining key people,” Zwilling said.

He warned that too much emphasis on organic growth can become a “straightjacket that leads only to incremental innovation and limited horizons”.

Zwilling’s thoughts were no doubt aimed at American startups, but they resonate in Africa, where the size of many markets is not big enough for a handful of startups all doing the same thing to be all be successful.

E-commerce is one such space. Let’s take South Africa. Though most people are in agreement that e-commerce will boom in Africa and become a huge market, it is still early days. Only 1.3 per cent of South Africa’s consumer retail takes place online, compared to 14 per cent in the United States and Europe. Yet there are a huge amount of companies fighting it out for this tiny market.

Two major players in South Africa realised that in 2014. Takealot, which earlier in the year raised US$100 million in funding from Tiger Global, admitted defeat in its efforts to win market share alone and merged with its biggest rival Kalahari. Naspers, which owns Kalahari, had itself in February closed no fewer than five of its smaller e-commerce sites.

“The move was driven by the fact that, without scale, South African e-tailers simply can’t compete successfully against the local brick and mortar retailers and foreign companies such as Amazon and Alibaba,” Takealot said of the merger, which makes complete sense for both parties, who can now work together to serve those that do shop online in South Africa and grow that market.

Companies in other markets have not been so clever. During 2013, the South African taxi hailing sector looked a busy and competitive space. Global player Uber loomed large, but seemed to face adequate competition from the likes of Snappcab and Zapacab. However, again the market proved too small to sustain so many companies.

Uber, with its spending power and global scale, could afford to play the long-game, but the others could not. Despite talking about a merger, Snappcab and Zapacab remained separate entities. Though Snappcab remains in business, Zapacab closed earlier this year. And Uber is a dominant power. One can only speculate what could have happened if the two smaller startups had combined their resources and expertise to challenge Uber, rather than scrap it out over what was left of the market.

As Zwilling notes, there is the need for the right balance to be found. M&A should not be a priority, as organic growth can still reap dividends. But, as Takealot and Kalahari realised while Snappcab and Zapacab did not, in a continent where the markets are often small but the stakes high, there could occasionally be benefits in admitting “together, we’re stronger”.

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent's most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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