Tech

The rise of unicorns – Africa’s growth story

The rise of unicorns: Africa's growth story

1,000 unicorns globally: A delightful oxymoron

In 2013, in the wake of the flurry of billion-dollar exits during the time, Aileen Lee, Founder of Cowboy Ventures, had utilized the term ‘unicorn’ to describe the rarity of these companies. Of this unicorn club, Aileen had estimated that about four unicorns were born per year within the decade, with over 39 unicorns spawned in the United States of America at the time. Many of these successful startups had built and grown over 10 years before hitting over 96% of their value. Signifying the gradual scalability that they had ramped up over years of consistency and action.

Most startups hit over 96% of their value after the 10th year. Source: NFX, 2021

Aileen had further pointed out that tech companies could be easily grouped into about four major business models: consumer e-commerce, consumer audience, software-as-a-service, and enterprise software. At the time, unicorn startups represented over 0.07% of the total estimated 60,000 software and internet companies that had captured funding. An outstanding feat at that moment, but one that has paled over the years, due to the greater frequency of companies within the billion-dollar rank.

Early this year, CB Insights reported that we now have more than 1,000 unicorn startups across the globe, a feat which Brian Lee at CB Insights describes as an oxymoron, given the relevance of the term ‘unicorn’. Startups are growing rapidly across various geographical and commercial markets. In January alone, over 42 startups achieved unicorn status, with four becoming decacorns (the name for startups at over $10 billion or more valuation).

There are also increased activities in private markets in different parts of the globe, as many startups are looking at exits. Last year alone, CB Insights details that over $621 billion came into the global ecosystem in what has proven to be a record year in funding for many continents. The year had ended with about 959 unicorns and about 44 startups with decacorn valuations.

Africa’s growth story

African unicorns: Between profitability and valuation

While this growth in funding, as well as the massive spawning of unicorns, has been much of a global trend, Africa’s nascent ecosystem is still in celebratory and anticipatory modes as its unicorn club continues to grow. At present, the continent has just about seven unicorns, with still a lot of soonicorns gearing up for their celebratory announcements.

Africa's unicorns are presently about seven, within sectors like fintech, ecommerce, and education/jobs - Startup Lagos
Africa’s unicorn startups

Just recently, Flutterwave had graced the African tech ecosystem with the announcement of its $250 million Series D raise, and its growth to a $3 billion valuation. The dynamic fintech company accompanied this remarkable news with its announcement of a rebrand and new revolutionary product services. While many pundits and skeptics are careful about the smokes and mirrors in company valuations, it is important to expressly applaud the significant exploits of Flutterwave as a poster boy, and in general, African fintech in showing the scalability and viability of African tech.

The question that many ask, however, is which of profitability or valuation should a company chase. Many companies seem to be chasing building multiple-digit valuations and growing revenue, as against having a viable and long-lasting product that is profitable. The harsh economic environments of Africa’s markets also make it difficult for companies to post positive EBITDAs or make a profit. As history has shown with other tech companies, many of these companies suffer a markdown on their valuations when the smokescreens clear.

In a fixated stance on valuation, one may over-value startups even whilst they are suffering under the burden of losses, or managing very mismatched business models. These startups may, therefore, predicate their survival and subsistence on moving from one raise to another. This, in turn, has sometimes, led investors towards a focus on bottom-line growth, and not just discount-led growth.

Mergers and acquisitions: Going farther together

However, as growth happens, it is important to understand that one important aspect of growing is realizing that the strength can be better consolidated through unity and collaboration with others.

As the global ecosystem has continued its astounding growth, last year, CB Insights records over 10,792 global M&A exits, at a 58% growth rate from the previous year, and with crossing the 10,000 mark for the first time. Africa too has been privy to a number of significant mergers and acquisitions. Recently, TradeDepot had announced their acquisition of Accra-based Green Lion to further stimulate their geographical expansion across Africa. Aside from this most recent example, there have been acquisitions by Flutterwave of Disha, the content creator platform, as well as Treepz Inc’s acquisition of Ugandan mobility startup, Ugabus sometime last year.

As Africa’s tech ecosystem continues to broaden horizontally and vertically across markets, and within sectors, it is crucial that acquisitions and mergers occur to bolster the impetus and reach of companies.

The higher they rise, the harder they fall

Even as unicorns rise, so they fall.

There is no guarantee that a unicorn is, like all dogs, destined for the heavens alone. Big companies fall to the earth, in quasi-scriptural fashion, along with a third of other companies around them. Not like a literal third, but dragging along other companies in the wake of their fall. A good example of this is WorldCom that dragged along in its clumsy collapse, one of the five big accounting firms of the world, Arthur Anderson.

In the tech universe, Theranos’ collapse, a startup that was touted to have reached over $10 billion in valuation, is one that has unique lessons for startups. Toying over $724 million of capital from venture capitalists and private investors, Elizabeth Holmes, CEO and Founder of Theranos was making false claims of Theranos’ revolutionization of the blood-testing industry. When things began to cave in, Elizabeth’s net worth dropped dramatically from a massive $4.5 billion to nothing.

The greatest collapses by unicorn startups

The African tech ecosystem has a lot to learn from the experiences and lessons of these fallen masters of the sky. Lessons on the importance of incorporating ethics into management and the day-to-day running of the startup enterprise, as well as the importance of paying attention to the three pillars of sustainability in their dealings: environmental, social, and governance needs. These are some important tidbits on what startups on the continent need to keep themselves succeeding and succeeding for the long run.

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