Unicorns vs. Exits - The Ecosystem's Dilemma
There is probably nothing more invigorating for a rapidly scaling startup to attain the “mythical” valuation of $1 billion – a unicorn, as it’s known in the trade parlance. It’s an achievement that comes with greater investment opportunities than ever for founders to realize their long-term ambitions, as well as much fanfare and recognition amongst investors, other startups, and the wider public.
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Across Emerging Venture Markets – spanning the Middle East, Africa, Pakistan, and Türkiye (MEAPT) – we at MAGNiTT saw venture capital funding cross $7 billion in each of the past two years, and the number of mega deals (raising $100 million or more) held steady at just over a dozen transactions. The increase in these mega deals means greater confidence in the region’s startups and brings many of them close to the coveted unicorn status.
The MEAPT region has seen its own share of unicorns in recent years, from Careem and EMPG in the UAE to Getir, Dream Games, and Trendyol Group in Türkiye to Jumia Group, Interswitch Group, Flutterwave, and Fawry in Africa. It is, therefore, natural for many to comment on “the next unicorn” from these regions and to speculate on how many unicorns could be forthcoming as MEAPT markets continue to attract talent, introduce startup-friendly initiatives and reforms, and promote more investments.
The Valuation Dilemma
However – and this might be a controversial viewpoint – I do not believe that having more unicorns should be the key indicator of a healthy startup ecosystem or investing environment. The reasons for this are numerous, starting with the difficulties of maintaining such valuations in light of a significant downward correction in 2022.
With funding becoming harder to secure in a high-interest rate environment, VC firms are being much more selective about where they deploy their capital, and more unicorns than ever before have been struggling to maintain their $1 billion valuations as they face macroeconomic headwinds.
Some have found themselves stretched too thin and have scaled back their ambitions in a scramble to conserve cash; often, expanding too quickly has spread these startups too thin and across too many markets, because the only way to achieve such valuations in Emerging Markets is to pursue geographic scale. This is far more difficult to do than in developed markets like the US and Europe and sets a challenging and occasionally unsustainable environment for founders.
💡 Food for thought. Should the metric for success of an ecosystem be the venture backed companies collective and individual contribution to a country's GDP?
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Exits vs Unicorns
To be clear, I have nothing against unicorns, and the palpable excitement for having more unicorn startups in Emerging Venture Markets can be a magnet for more founders and investors and raises the profiles of those countries with attractive ecosystems supported by incentives and demographics. In fact specific programs focused on supporting them can help accelerate and drive ecosystem development. But I would argue that we should look at trends in exits over time, whether via IPO, mergers, acquisitions, or other transactions.
In the Emerging Venture Markets, exits rose 36% in 2022 to reach a record 144 transactions as reported in our 2023 Emerging Venture Markets Investment Report, making it the busiest year for M&A in the MEAPT startup landscape. While we cannot be sure how successful these exits were, they are a much more important indicator of the regional ecosystem’s viability and long-term value for investors.
💡 Is 2023 to be another year of record exits across Emerging Venture Markets? Is it to be the year of consolidation?
Access our suite of FY2022 reports covering MENA, Africa, Pakistan & Turkey.
There is Strength in Data
One reason for this is that exits provide concrete data on the performance and value of a startup. While unicorns may capture headlines and garner attention, they may not always represent the larger trend or success of the ecosystem as a whole. More importantly, there is a difference between a notional unicorn valued greater than $1BN on paper following an investment round, versus a unicorn which was acquired for a value greater than $1BN providing exponential return on investments to the investors, the founders, the team and the ecosystem from which they were born.
This is why tracking all exits provides hard numbers on the financial outcomes of a startup and can give a more accurate picture of the ecosystem's health. Key to this is transparency around the deal values and returns to investors from which insights can be driven. With data and analytics becoming increasingly important for sound decision-making for both founders and venture capitalists, this point cannot be underestimated. By tracking and analyzing data on exits, investors and founders can better understand the risks and potential returns of different investments and make more informed decisions.
Another reason is that exits can provide a way for founders and investors to realize a return on their investment. With VCs typically needing anywhere from 5-15 years for investments to mature properly and maximize investor returns, achieving an exit is a key milestone for any startup or scale-up venture that marks the completion of an often grueling journey toward maturity.
More broadly, exits are a mark of maturity in the ecosystem itself and the operating and regulatory frameworks it offers to startups. They are a more inclusive indicator that can guide better policy-making and offer clarity to investors. In many developing markets, the path to an IPO or M&A may be less clear or established, making it more difficult for founders and investors to exit their investments and move on to new opportunities. Exits can therefore lend further credibility to governments and regulators seeking to attract more investments.
Get real-time data on exits in MEAPT: MAGNiTT Analytics