TLcom Capital managing partner Maurizio Caio on African unicorns, valuations and exits

Global tech talent platform Andela attained a $1.5 billion valuation this September and is currently the only non-fintech unicorn from Africa. Foreign capital propelled Andela to this status, however, Africa-focused venture capital firms such as CRE Ventures and TLcom Capital have been critical to the company’s early success.

Three years after investing in Andela, the latter raised a $71 million fund to invest in other African startups and has done so impressively, leading most of the rounds in which it takes part. Yet, Andela remains its poster child and the firm takes pride in having made the investment years back.

With the talent company’s unicorn news opening more conversations about the maturity of the African tech ecosystem, founder and managing partner Maurizio Caio, one of the continent’s well-respected VC partners, believes that while African tech is minting new unicorns every other month, it is ready to consistently produce high-value exits and IPOs over the next 18 months.

There is a lot chest-beating and happiness in the African ecosystem, not necessarily about the wrong things, but a subset of the right things. We’re celebrating the amount of money that is invested and the fact that some financing rounds are associated with very high valuations, including unicorn valuations,” Caio said to TechCrunch.

“But I think that for the long-term health of the ecosystem, we need a little bit to transition the conversation towards making money and on the return; on the fact that what counts is when these companies will eventually be sold or go public. That’s the valuation that counts.”

Whilst recent high-profile investments have been partly driven by the massive liquidity sitting in global capital markets looking for deployment, Caio says the primary driver is the strong business fundamentals achieved by African entrepreneurs transforming large and underserved markets.

He cites a list of markers in a playbook dubbed the “Exit Readiness Framework” to back up his thesis. In this interview with TechCrunch, Caio talks about this framework, how African tech is at the start of a completely new era fuelled by structural drivers, building sustainable tech companies, venture capital, unicorns and exits. 

TC: What’s the Exit Readiness Framework?

MC: The general idea which is also the readiness framework says, for us to have a stronger African venture capital industry that sees the long-term goal, we need to attract more capital to Africa. And to do that, we need to make sure that we create value.

The other fundamental thing that we believe is that return comes from only one source: business fundamentals, which means you have to have great companies operating in great markets. We should ask ourselves if we are building companies that will be able to attract buyers or attention of capital markets in the form of IPO, or SPAC or whatever because these are companies that have the substantial promise of generating a lot of cash as they win and execute in large and attractive markets.

You talk about unicorns being companies executing in large and attractive markets. How does one know these sorts of markets?

So, first of all, there is this idea that an attractive market is a large market. But other things make a market an attractive one for venture investment. One is that technology can make a difference, and the other is an industry that structurally has high margins and not a lot of CapEx.

There’s also a feature like the fact that there is consolidation happening by larger companies. From an exit perspective, you know that larger companies are looking for smaller companies to buy. Also, when there’s evidence that other emerging markets have gone through the cycle that Africa is going through now and have attracted a lot of capital. 

Are there particular industries that come to mind when referring to attractive markets in Africa?

One is sectors with large consumer markets that are not adequately served today because it doesn’t make sense economically. So you think about education, some of the fintech segments, health — these are markets where you don’t have a lot of companies playing there because they wouldn’t be able to make money because a lot of demand in Africa is low income. But technology can help you build much lower structures and make it profitable to serve those markets. So that is the first big category — the big consumer markets where technology can make it profitable to serve. 

There’s another one, which in our opinion, is even bigger. We call it fixing the broken verticals and these are more B2B with sectors that are entirely fragmented and inefficient. You think of retail, logistics, talent, automotive. They are gigantic markets where you don’t have to do anything to create demand, there’s a massive amount of demand, but the experience is horrible for businesses and consumers. So you need to have entrepreneurs with technology who can reinvent and redesign these industries. 

But I think we’re seeing more companies trying to solve what people would say are sexy problems than tackling these large underserved markets. Why do you think that is?

Well, there is nothing that is predefined. Spaces that have not created great companies can become an attractive investment when an entrepreneur interprets and makes them bigger. So, again, I don’t think that there are sectors that, by definition, which are not attractive.

When you see trivial problems getting funded, I don’t think we should blame the entrepreneur. The idea here is not that we need better entrepreneurs to have a larger ecosystem in Africa; we need better investors. So it’s on us, not the entrepreneurs. We see fundamentally about 200 to 300 entrepreneurs per quarter, we look at business plans, and we talk to a subset of them, and we invest in an even smaller subset.  

Founders have the right to launch a startup in a sexy place rather than a difficult market — sometimes some sexy problems have large markets — but it’s the responsibility of the investors to channel capital towards the areas that have the best outcome and expectations.

As an investor, do you think Africa has reached an inflection point?

The answer is yes. It was not realistic to think that this inflection point would have happened earlier. You know, it takes an average of 10 years or more to build a great company to a good or great exit. We all can have different views about when African venture capital started, yet it’s completely expected that the pipeline is now producing companies commanding higher valuation and unicorn exits. There’s a pipeline of other companies to come, so we are at the beginning of a very natural cycle that will produce more.

For all the talk of a growing ecosystem, why have we seen one major IPO and a few significant exits?

The framework that we adopt to assess readiness states that if a company serving a great market has material revenues and a clear path to profitability, it is ready to be acquired. To qualify for an IPO, though, the bar is much higher; you need high growth, one-year visibility, management governance. If you want to go on an international stock exchange, like Nasdaq, you need to have at least $90 million of revenues and at least $500 million valuation. 

It is possible to look at companies and see whether they are on the way to qualify for this. And that’s why when we look into the pipeline, we not only see that this framework confirms why Paystack, DPO, Sendwave were acquired or why Jumia and Fawry went public. But you can see going forward, companies that are completely ready for IPO now: Andela, SWVL, Interswitch, Flutterwave, OPay, Wave. And some companies may very soon be ready: Twiga, MFS Africa, Yoco, Kobo360, TeamApt. These are all companies that are getting there and I will not be surprised to see up to 10 IPOs over the next two to three years.

Interesting. But don’t you think that’s a lot, considering how more mature developing markets like India and Latin America have struggled despite many unicorns?

Once again, we’re back to the framework, and it’s not magic. It’s about how the company is performing. So you ask yourself, is this company operating in a large and attractive market? Yes. Do they have at least $90 million in revenues? Yes. Can they command a valuation of at least $500 million? Yes. They have a great management team and a serious board and visibility in one year. Are they growing fast and can that growth be sustained? Yes. At that point, you are ready. 

Also, it’s more of a matter of needing the capital strategically because let us not forget that IPO for some of the investors is an exit event, but for the startup and CEO, it is a financing event. So the decision to go public is driven by market conditions and you don’t want to go when the market is skeptical. You want to go when you can articulate the story to the capital market that makes it attractive for that market to give you capital.

So I think that many factors drive the exact timing, but when we talk about the readiness from the standpoint of what the company needs to look like, it’s possible to assess several companies that can reach those milestones.

Still talking about exits, we’ve only seen a couple of acquisitions made by these unicorns, or soonicorns. Do you think this should change?

Not really. On average, when public companies announce an acquisition, the stock price goes down because acquisitions are challenging to execute. 

It’s perfect if the acquisitions are targeted at making a stronger company achieve a lower cost position and deliver more value to customers. But there are always ways of doing it organically, by developing new products and technology and entering new markets. Acquisitions work as a way of executing your strategy more quickly.

How about acquisitions from international companies just like Stripe and Paystack? Is it a play we might often see in the future?

There will undoubtedly be more acquisitions on behalf of non-African companies buying African companies, which will become driven by sector and strategies. 

Will the big tech companies buy African tech companies to develop their presence in Africa? Yes. They will have their organic and inorganic strategy as Africa becomes a more profound place for these companies to be in.

There are also particular players such as international banks, financial services companies, insurance companies or agritech interested in looking at companies they can acquire to serve the African markets. So yes, there will be more of that. 

What’s your take about foreign money and founders dominating Africa’s startups and investments?

If you look at the 10 unicorns or soon to be unicorns, most of them are led by African founders: Yoco, Flutterwave, MFS Africa, Interswitch, SWVL, Kobo360. At the beginning of most tech ecosystems in Africa, it wasn’t so, but now I think the medium-term picture is that we have African entrepreneurs. 

TLcom Capital

TLcom’s Partners (L -R – Maurizio Caio, Andreata Muforo, Ido Sum and Omobola Johnson)

The other point is that once again, funds need to be intentional. And they can be an important factor in allocating capital to African investors. When we at TLcom Capital started to think about Africa, Ido and myself, we realised that we were not Africans and got Omobola and Andreata to be part of our team. And as we have hired more people, we’ve added more Africans. So the way to have more capital in Africa is to have more African venture capitalists. 

The other point is that, quite frankly, if there are great African companies that create employment in Africa that serves an African market that puts Africa on the map, if one of the founders is non-African, that’s fine in the big scheme of things. Let’s make sure that we convince capital markets that Africa is a great place to do business. Also, let us attract venture capitalists that don’t just write a check, get back on the plane and fly away. or hedge funds or private equity people, but African or Africa-focused venture capitalists on the ground that work with the entrepreneurs. 

Will it help if big funds like Sequoia, Tiger or SoftBank set up teams in Africa?

It’s a critical step and will be very important, but we’re not there now. These teams are starting to have people devoted to Africa, but yes, they will be better investors when they move people to Africa, which is needed because when you think about the big teams writing large checks and sitting in Africa to support companies, it is a very short list. And it should be longer.

So I think that there are two axes for that to happen. One is that these Africa-focused teams become bigger or international investors move teams to Africa. For us, the African-based VC teams’ primary role is to discover the companies and help them seed and Series A and get them ready for larger checks. That way, we can involve international funds that are learning about the attractiveness of Africa.

As venture capital records new highs in Africa and across the world, do you see that slowing down on the continent in the next couple of years?

I don’t think it’s going to be an amount of investment adjustment. What might happen is a lot of companies dying or fundamentally becoming irrelevant, and that’s what happens in every venture capital ecosystem. 

Another thing that we will see happening is an adjustment in valuations because the high valuations that we’re seeing now are a small subset of cases driven by the companies’ business fundamentals and a lot of money looking for a place to go. So we might see more reasonable and adjusted valuations from companies when they return to raise capital from less irrational investors, particularly in sectors with a bit of a bubble like fintech.