The Many Paths to Exit
It all starts with an idea. Whether it serves to address a particular problem, improve the ways we have traditionally done something or change the world as we know it, every entrepreneur’s dream is to build an idea so great it has the potential to completely disrupt the status quo and often build up considerable personal wealth at the same time.
It is a tremendous feat, and one whose success culminates in an exit. Or does it? Is the exit the ultimate end-goal? Or is it but a phase in the growth of a company as it changes hands privately in a transaction, or publicly in capital markets? Should we be talking about liquidity events instead? And why are these a point of focus? On a practical level, at some point in time, and certainly when institutional investors have provided an entrepreneur with capital, they will be looking for some liquidity event, or events, as they build a business. This is how venture capitalists return money to their limited investors. When an entrepreneur accepts money from a venture capitalist, they are agreeing explicitly, in something called a “redemption clause,” or implicitly to make their shares valuable and liquid at some point so they can ultimately repay their investors handsomely. Even in the absence of institutional investors, employees and co-founders will eventually want to taste the fruits of their labor. While a liquidity event may be an exit for some investors who sell their ownership stakes and move on, it more importantly offers a financing opportunity for the company, leading to a new stage of growth.
MEA’s ecosystem is developing incredibly rapidly now, and “exits” have become the talk of town. To observe what was once a mere idea become a successful business that both does well and good is an experience I have had the honor to partake in as both an entrepreneur and investor. But to witness and enable firsthand our region’s venture ecosystem develop from its capital-starved state a decade ago to the mature, rich and diverse hub it is today is truly a privilege.
Over the past years, exits and liquidity events alike, have increased in numbers and evolved in structure and sophistication, making MEA living proof of the potential of emerging market founders to build tech solutions with global potential and generate sizable returns for investors, entrepreneurs and employees. With this in mind, it is important to note the different types of exits and liquidity events, and the propensity for each across the region and different industries.
When considering a liquidity event, founders typically take one of three routes, each of which comes with unique regional dimensions and its own set of benefits and drawbacks. For founders, the first step is to determine for whom the liquidity event is meant and how it serves the purpose of the company within its life cycle.
First, we have the classic sale or merger (often referred to as M&A). Comprising the majority of industry exits, it is one of the most common routes for entrepreneurs in MEA and the US alike. In the US, M&A represent 88% of exits. MENA has already recorded 9 acquisitions in the first half of 2021, with deals boasting increasingly larger sizes. In the last 3 months alone, Abwaab acquired EdMatrix, Bevy acquired Eventtus, Halan merged with MNT, Zip Co acquired Spotii and Tamer Group acquired Mumzworld. Of all the exit options, M&A typically carries lower risks and greater strategic rewards. The consolidation of two businesses creates unique operational synergies through which the unified whole becomes greater than the sum of its parts. In a merger, two entities come together as one. In an acquisition, parts of the selling company’s assets are transferred to the buyer, with retention of key personnel, including the founder, typically built into the deal structure. In certain cases, start-ups are acquired purely for the talent. Known as an acqui-hire, this type of acquisition serves to bridge the gap between the demand and supply of talent and is a common move in the tech space.
Then, there is the infamous IPO (“Initial Public Offering”) or, taking a private company into the realm of public markets by selling its shares on the stock market. The IPO is often a goal and aspiration of founders globally, but this exit path remains elusive for entrepreneurs in emerging markets due to regulatory limitations, including profitability requirements, high transaction and listing fees and limited liquidity levels, and overall perception of the risks involved. The first half of 2021 saw a grand total of 1,070 IPOs worldwide. Only 5 of those were from MENA, which is less than 1%. The process of going public takes an average of four to nine months (or more for emerging market start-ups), involves a breadth of stakeholders, from investment bankers to regulators, and commonly includes a lock-in period for founders and investors when they are unable to cash in on the exit. Its success is dependent on the market conditions at the time of listing. For many founders, these are significant deterrents against an IPO as an exit strategy.
The “newer” alternative is the SPAC, where a company is formed for the sole purpose of raising capital through an IPO to then in turns acquires a private company within a predetermined cut-off period. It is typically less risky and more certain than going the traditional route. 2020 was deemed the year of SPACs, culminating in the first quarter of 2021 recording 305 SPAC IPOs raising a total of $98 billion globally. Regionally, Anghami went public in early 2021 by merging with Vistas Media Acquisition Company, a SPAC, at a valuation of $220 million. As SPACs materialize, the region will certainly see an increasing number of deals over the next few years.
The third exit option is known as secondaries, where founders, employees and/or investors sell their (partial) stake in the business to another investor, whether an existing investor, growth or private equity firms. Secondaries are a popular choice as it allows companies to stay private for longer. An alternative to this approach is the company buying back some of the shares with its own cash. This has been done in both small and large companies alike and is the cornerstone for many of the employee liquidity programs, including companies the size of Tesla.
Irrespective of the selected liquidity path, this is an exciting time for the region’s ecosystem as it is coming to greater maturity. While 2019 was a record year for exits in the region, 2021 is looking promising. The upward trend is poised to continue as international interest in regional opportunities increases, and regional investors come to terms with acquisitions as a more rewarding path than building from scratch.
And with that, onwards and upwards!
We have only just started.
 MAGNiTT H1 2021 Venture Report
 EY Global IPO Trends 2021 Q1.