Profit Decline in Resale of African Startup Shares: Is it a Positive Development?

The phenomenon of secondary selling, commonly referred to as secondhand trading, is ubiquitous, manifesting in markets across the globe. From Lagos and Kinshasa to De Villiers Street in Johannesburg, traders and buyers engage in lively negotiations over bales of "pre-loved" clothing. Notably, a substantial portion of iPhones and laptops circulating in Africa bears the tag of being "London-used." Even in the realm of luxury, renowned brands such as Richemont, LVMH, and Rolex navigate the delicate balance between sustaining demand through waitlisting and grappling with the influx of desperate luxury shoppers turning to the grey secondary markets for pre-owned watches and other high-end items. Secondary markets pervade various sectors.

It could be argued that this secondary market is the true market, where the core transactions take place. For instance, trading shares of publicly listed companies on a stock exchange can be viewed as a sequence of parallel secondary transactions on a large scale. When discussions revolve around the financial market, it is often this market that is being referred to. This perspective extends to segments of the bond market, commodities, and potentially the market for financial derivatives, all rooted in secondary trades.

In the context of Africa's technology space, TechCabal's Muktar Oladunmade and the author have previously delved into how secondary transactions contributed to the wealth of founders, startup employees, and early-stage investors. However, they observe that the zenith of secondary transactions appears to be fading, with challenges arising in divesting shares in private venture-backed technology startups on the continent. While acknowledging instances where founders and angel investors may have exploited secondary transactions, the article contends that unless the majority of primary investments made between 2018 and 2022 are on the brink of failure, the secondary market in Africa should not be at a standstill.

The focus, the article suggests, should not be on the pursuit of effortless wealth reminiscent of the trends in 2021 and 2022. Instead, the secondary market should play a role in establishing a market-clearing valuation for African startups, leveraging the enhanced understanding of market dynamics. The article touches upon the notion of local tech IPOs as a potential avenue but cautions that such aspirations might remain elusive if the private market for secondary transactions persistently guards valuations deemed implausible.

Within the venture capital landscape, secondary market transactions unfold as investors seek to acquire stakes in "hot" companies, consolidate gains in perceived portfolio winners, or cater to the desires of founders and key employees by allowing them to capitalize on accumulated paper wealth. However, the contemporary landscape presents a different reality, characterized by a scarcity of "hot" startups, exorbitant valuations deterring potential investors, and a prevalence of workforce downsizing.