Risevest’s Chaka acquisition: Is M&A the next best route for struggling African fintechs?

On Tuesday, Risevest, a Techstars-backed fintech startup, completed its acquisition of Chaka, a digital trading platform, as first reported by TechCabal. The deal, which had been under discussion for months, was officially confirmed and approved by both companies’ founders, Eke Urum of Risevest and Tosin Osinbodu of Chaka, on Tuesday.

“We’re excited, especially from the perspective of people; high level and strategically, this deal makes sense,” said Osinbodu. “I’m excited about how Chaka’s product will evolve and how we’re going to learn from the Risevest team.”

According to Eke, while Chaka’s ownership and cap table will get updated, “everything else remains; the team stays the same.”

However, the acquisition comes at a time when the fintech ecosystem has recently been ridiculed by controversies and instability, not just from the investor’s pessimism and low funding, but from founders themselves, who have been at the beaming lenses of the media.

Amongst the handful of African fintech companies that have faced significant challenges. Eyowo, Payday, Cellulant and Patricia, four prominent names in the industry, have recently encountered difficulties that have raised questions about the stability of fintech ventures on the continent.

Chaka, founded in 2019, has had its share of turmoil. In December 2020, the Nigerian Security and Exchange Commission (SEC) banned its operations, citing a lack of the necessary license. However, Chaka managed to navigate this setback and became the first trading startup to receive a digital sub-broker license in March 2021.

Risevest, on the other hand, focuses on simplifying dollar investments for Nigerians. Despite its relatively short history, it has secured investments and evolved from its previous incarnation as Cashestate, an investment service vehicle specializing in dollar-denominated real estate investments.

The broader picture of the Risevest-Chaka acquisition

The acquisition of Chaka by Risevest reflects a trend in the African fintech sector where companies are now increasingly looking to mergers and acquisitions (M&A) as a strategic move to overcome challenges, avoid a public backlash of a potential failure, or expand their offerings. It may also be an approach that allows fintech startups to pool resources, access complementary licences, and strengthen their market positions.

The Positives

In recent years, mergers and acquisitions (M&A) have emerged as the primary exit strategy for startups, with founders increasingly eyeing this path as a means of realising the value of their ventures. Africa’s startup ecosystem has witnessed a notable surge in M&A activities, with South Africa, Egypt, and Nigeria leading the way. 

The acquisition of Paystack by Stripe in 2020 also ignited M&A activities in the fintech space in Nigeria. Other sectors have also seen smaller yet significant mergers and acquisitions, such as the acquisition of Lynk by EdenLife, Autochek’s acquisition of KIFAL Auto, CoinAfrique, and most recently, a majority stake in AutoTager.

In Q1 2023 alone, seven M&A deals took place in the African startup ecosystem worth over $710m. In comparison, only two startups have exited through an initial public offering – the other common form of exit for startups worldwide – since 2019. E-commerce platform Jumia was the first, listed on the New York Stock Exchange, while Egyptian fintech Fawry went public on African soil.

However,

Looking at Payday, one might question the real motive of founders who seek mergers and acquisitions. For instance, despite raising $3 million in a seed round, Payday found itself in discussions to sell the company just six months later. Favour Ori, the startup’s CEO, confirmed that the company was entertaining conversations with potential acquirers. “Active conversations are being had with people who reached out and expressed interest in buying,” he said.

Prior to coming out publicly to state this, an earlier publication had reported that Moniepoint was in discussions to buy Payday; as “Moniepoint had issued a letter of intent to acquire Payday, contingent upon specific performance benchmarks being met”, a TechCabal report stated. But that deal did not see the light of day; it is reported that the company had lost its appeal to Moniepoint’s board.

Read also: Red Flags Abound; Payday users lament questionable service, loss of funds

Are African fintechs losing their appeal?

But aside from Payday, the African fintech landscape has witnessed more turmoil. Eyowo, a popular digital banking platform, recently announced its shutdown due to ongoing challenges. The company, known for its values and commitment to customer service, faced difficulties that led to a change in its business model, pivoting towards what it called “becoming a financial technology platform focused on financial connectedness and intelligence.”

Similarly, Patricia, a Nigerian crypto startup, suffered a security breach, leading to the loss of significant funds. Although the majority of the assets were recovered, the company is currently grappling with the fallout from the breach, with Bitcoin withdrawals being temporarily disabled. And then there’s Cellulant, which this year slashed 20% of its workforce in order to adopt a “product-focused strategy”. This is despite a revelation early this year that the company was laying off 30% of its staff.

This raises the question of whether mergers and acquisitions are now the best way for African fintech to regain its former charm and appeal, which previously attracted investors from all over. This was pretty much the same way Nigeria’s banking sector regained its integrity following the 2005 recapitalisation policy of the Olusegun Obasanjo administration.

In Conclusion,

The Risevest-Chaka acquisition, on the one hand, might signal a potential path forward for African fintech companies. By joining forces and capitalizing on each other’s strengths, these startups may aim to overcome regulatory challenges and competition while offering innovative financial solutions to a growing user base.

On the other hand, it may also signify that founders and startups, especially in the fintech space, are becoming redundant with their ideas, lacking an essential vision to drive a sustainable product and venture, or perhaps, lacking essential product and people management skills which cause them to fail at the slightest industry shock or none.

Lastly, as African fintechs continue to navigate the complex financial terrain, the Risevest-Chaka deal may yet serve as a beacon of hope, showcasing the potential for strategic partnerships and M&A activities to drive growth and stability in this dynamic sector.