{"id":555808,"date":"2021-11-28T04:00:56","date_gmt":"2021-11-28T04:00:56","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/whatsnext\/ma-looks-set-to-be-whats-next-on-planet-startup\/"},"modified":"2021-11-28T04:00:56","modified_gmt":"2021-11-28T04:00:56","slug":"ma-looks-set-to-be-whats-next-on-planet-startup","status":"publish","type":"whatsnext","link":"https:\/\/enterpriseam.com\/egypt\/whatsnext\/ma-looks-set-to-be-whats-next-on-planet-startup\/","title":{"rendered":"M&A looks set to be What\u2019s Next on Planet Startup"},"content":{"rendered":"

<\/a> Selling to an established giant is an option for most young companies (hello, exit), but they\u2019re rare<\/strong> in Egypt compared with the rest of the world.<\/strong> Among the handful here that spring to mind: Tinder parent company Match Group\u2019s acquisition of Egyptian matchmaking app Hawaya<\/a> (formerly known as Harmonica) and Delivery Hero\u2019s buyout of food-ordering platform Otlob<\/a>, which it later rebranded as Talabat.<\/p>\n

Until very recently, it has been almost unheard of for a local startup to acquire another<\/strong> early-stage company. That\u2019s changing. <\/strong>Look no further than B2B commerce platform MaxAB acquiring Moroccan startup WaystoCap<\/a> last summer, Egyptian edtech startup Tyro buying Nafham<\/a> just a few days ago, and RiseUp\u2019s buyout of Facebook community Starterhub<\/a> and startup journal MENAbytes<\/a> 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\u2019s Shotl<\/a> and Latin America\u2019s ViaPool<\/a>.<\/p>\n

WHAT\u2019S NEXT? We talked to local players to take their pulse on whether<\/strong> startup-to-startup acquisitions are likely to become more common here, <\/strong>what form they usually take, and what to watch out for when you\u2019re planning one of your own. The long and the short of it: We\u2019re looking at a wave of acquisitions in a handful of sectors <\/strong>\u2014 and founders need to take on board both caution and clarity before heading down that path.<\/p>\n

We\u2019re not alone: <\/strong>Some 268 venture-backed US companies acquired peers in the first seven months of this year, according to business-finding platform Crunchbase<\/a> \u2014 the most in the past decade.<\/p>\n

What\u2019s driving consolidation in the startup space? <\/strong>Record levels of venture financing, crowding in a handful of sectors, and newfound IPO prospects.<\/p>\n

The size of funding rounds in Egypt is skyrocketing<\/strong> \u2014 look no further than grocery delivery outfit Rabbit\u2019s record-breaking USD 11 mn pre-seed round<\/a> or Halan\u2019s recent USD 120 mn round<\/a>, which set a record for the largest round raised by a regional fintech startup.<\/p>\n

The median round in Egypt is now 12x larger than it was in 2014. <\/strong>Data from Wamda<\/a> suggests that back then it was USD 200k \u2014 our internal tracker<\/a> had it at USD 2.38 mn in 2020.<\/p>\n

And just as angel and VC interest is rising, so too are IPO prospects for more advanced<\/strong> startups. <\/strong>A SPACs law is in the works<\/a>, Swvl made headlines with intention to list on the Nasdaq<\/a> through US blank check firm Queen\u2019s Gambit, and e-Finance\u2019s successful IPO<\/a> has underscored that the EGX is hungry for new issuances from the tech space.<\/p>\n

More incoming money means more dry powder and more bandwidth to look for<\/strong> alternative, inorganic growth prospects \u2014 to say nothing of higher valuations<\/strong>, which mean your share becomes a more powerful acquisition currency, says Karim Bichara, a general partner at A15<\/strong>.<\/p>\n

The key: Acquisitions by startups aren\u2019t always all-cash arrangements \u2014 they often<\/strong> involve a share swap. <\/strong>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\u2019s Venture Lab<\/strong> 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\u2019re exiting entirely, expect them to go for the money, he says: \u201cThere is no standard \u2014 it is more of a case-by-case basis.\u201d<\/p>\n

Why buy a peer? Geographical expansion is often at the top of the list.<\/strong> \u201cA 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,\u201d CEO of Klivvr<\/strong> (and former cofounder of Halan) Mohamed \u201cNagaty\u201d Aboulnaga says.<\/p>\n

Swvl and MaxAB are cases in point: <\/strong>\u201cIf you expand organically, there\u2019s only that much speed you can expand by,\u201d Swvl<\/strong> CFO Youssef Salem says. Buying a player who is already growing in their market can help startups jump several hurdles at once \u2014 including penetration, brand equity and operations in a foreign country. \u201cWe 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,\u201d MaxAB<\/strong> CFO Omar Ghazaly tells us.<\/p>\n

Other times, licenses, revenue growth, the imperative to grow your user base, and talent<\/strong> acquisition are driving factors. <\/strong>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 \u201cacquihire\u201d in the trade).<\/p>\n

Remember to factor in time for due diligence <\/strong>\u2014 lawyer-speak for \u201ckicking the tires and making sure you\u2019re getting what you think you\u2019re getting \u2014 without any hidden surprises.\u201d For many startups, there\u2019s a balancing act between the months and months it can take to pull off an IPO \u2014 and the weeks it could take to just move in yourself. Tyro<\/strong> 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: \u201cWhen 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,\u201d Salem says.<\/p>\n

So what have Tyro, MaxAB and Swvl learned from their acquisitions? <\/strong>Internal playbooks for the acquirer\u2019s 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\u2019ll definitely want to bring on third parties to go over your target\u2019s financials, tech compatibility and to evaluate the cultural fit between the two entities. \u201cWe 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,\u201d Tyro\u2019s Osman said.<\/p>\n

Clarity on purpose and leaving one\u2019s ego at the door are essential for acquisitions to<\/strong> go well: <\/strong>What do you get from your acquisition target \u2014 and how does it benefit from you? \u201cIf you end up turning the company you bought into a copy of yourself, you haven\u2019t learned anything,\u201d Bichara says. \u201cThe playing field needs to be even and you need to leave your pride at the door.\u201d This will also ensure that founders from the sell side stay in it for the long-run \u2014 if that\u2019s part of the arrangement.<\/p>\n

And remember: Inorganic growth isn\u2019t the only path to growth and expansion.<\/strong> \u201cIf 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,\u201d Swvl\u2019s Salem tells us. This could cause a startup to lose its in-house dynamic and market launch squads. \u201cKeeping that inorganic and organic-market-launch DNA in the firm helps you get the best of both worlds,\u201d he adds.<\/p>\n

So which Egyptian sectors are most ripe for consolidation? Follow the funding rounds.<\/strong> \u201cAny sector that has seen over-investment is likely to start a consolidation phase a few years later,\u201d AUC\u2019s Ismail explains. Every few years, trends see entrepreneurs and capital piling into a small handful of sectors. \u201cIt started with telcos in the early 2000s, followed by ride-hailing and logistics, and currently fintech<\/strong>,\u201d Klivvr\u2019s Aboulnaga says. We\u2019re seeing price wars now in logistics and last-mile delivery<\/strong>, 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<\/strong> and healthtech<\/strong> industries to be next. \u201cOnce the SPAC law gets released, we will also see 3-4 SPACs, each acquiring one or more companies within two years,\u201d he adds.<\/p>\n

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