Exits that bring or provide liquidity in the African startup ecosystem are rare in Africa. According to Africa The Big Deal, since 2019, there have been only 4% of exits of all deals. This rarity of liquidity events has been a significant challenge for venture capitalists (VCs) and early-stage investors in the region. However, a new trend is emerging as VCs are turning to secondary exits as a path to liquidity.

Before delving into the concept of secondary exits, it is crucial to understand what liquidity means in the context of startups and why it is important. Liquidity refers to the ability to quickly convert assets into cash without affecting the asset's price. In the startup ecosystem, liquidity events are typically when a company is sold or goes public, allowing investors to cash out their equity stakes.

Liquidity is vital for several reasons. Firstly, it provides a return on investment for the stakeholders involved, including the founders, employees, and investors. Secondly, it allows for the reinvestment of capital into new ventures, thereby fostering a vibrant and dynamic startup ecosystem. Lastly, successful liquidity events can attract more investors to the ecosystem, bringing in more capital and expertise.

However, the traditional paths to liquidity, such as initial public offerings (IPOs) or acquisitions, are relatively rare in the African startup ecosystem. This is where secondary exits come into play.

Secondary exits occur when early-stage investors sell their equity stakes to growth investors at series A or B funding rounds. This process provides early-stage investors with a path to liquidity without waiting for an IPO or acquisition. It also allows growth investors to acquire a larger stake in promising startups, potentially leading to higher returns in the future.

The mechanics of secondary exits are relatively straightforward. An early-stage investor, such as an angel investor or a seed-stage VC, invests in a startup. As the startup grows and reaches series A or B funding rounds, growth-stage investors, such as larger VCs or private equity firms, come in. The early-stage investor then sells part or all of their equity stake to these growth-stage investors.

This transaction provides the early-stage investor with a return on their investment, even if the startup has not yet reached an IPO or been acquired. The growth-stage investor, on the other hand, acquires a stake in a growing startup, potentially at a lower cost than if they had waited for a later funding round.

Secondary exits are beneficial for the African startup ecosystem in several ways. Firstly, they provide a path to liquidity for early-stage investors, which can encourage more investment in the ecosystem. Secondly, they can facilitate the entry of larger, growth-stage investors into the ecosystem, bringing in more capital and expertise. Lastly, they can provide founders with more flexibility in managing their cap table and investor relations.

However, secondary exits are not without their challenges. They require a high level of trust and transparency between the early-stage and growth-stage investors. They also require a robust legal and regulatory framework to ensure that all parties' rights and interests are protected.

Despite these challenges, the trend towards secondary exits in the African startup ecosystem is a positive development. It provides a much-needed path to liquidity in a region where traditional exits are rare. It also reflects the maturation of the ecosystem, with more sophisticated investment strategies and structures emerging.

In conclusion, while exits that bring or provide liquidity in the African startup ecosystem are rare, the emergence of secondary exits offers a promising solution. By providing a path to liquidity for early-stage investors and attracting growth-stage investors, secondary exits can contribute to the growth and dynamism of the African startup ecosystem. As the ecosystem continues to evolve, it will be interesting to see how this trend develops and what impact it will have on startups and investors in the region.