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🔦 Deal in the spotlight - Paystack

🔦 Deal in the spotlight - Paystack

(by Claus-Peter Schmitt and Julius Müller)

Iconic API-first payments infrastructure company Stripe acquired Paystack for $200M in one of the largest exits on the African continent.

Key facts about Paystack and the deal:

  • Value Proposition: Paystack gives merchants online and offline the opportunity to offer a frictionless payment experience to its customers by providing a simple, full-stack API
  • Founded: 2015 / HQ: Lagos, Nigeria
  • Stripe Acquisition: $200M all-stock transaction
  • Latest Funding Round: Series A in Aug 2018 at an undisclosed valuation | Funding: USD8m
  • Estimated ARR: $14.8m
  • Notable Investors: Stripe, Visa, Tencent, Y Combinator
  • Announcement: Stripe

Paystack wants to solve the problem of a “broken payments system” (according to founder Shola Akinlade) to become a growth engine for merchants all over the African continent. They provide a quick way of integrating various payment systems like card payments, bank transfers, and mobile money operations. Their full-stack API allows customers to ‘securely collect, encrypt, transmit, and store customer card information while offering continuous anti-fraud and chargeback protection services.’

🚀 Why you should really care about this deal

  • Paystack is basically the ‘Stripe of Africa’ - Stripe is on a mission to ‘increase the GDP of the internet’ and Paystack was founded to be ‘the growth engine for a new generation of innovative, forward-looking organizations operating in Africa’. Both businesses are hugely popular among developers. The question as to why Paystack decided to become part of the Stripe group can actually be seen more like a “Why not?”. Through their shared history, they grew closer organically and are as aligned on their objectives as they could be. Even though culturally both companies are very close - both have a largely customer-driven innovation process for example - Paystack is expected to remain an independent brand and entity for now. Yet, without having to worry about fundraising anymore, Paystack can focus on the execution of their main priorities of expanding their presence in Africa, building software and services across the continent, and increasing the reliability of their product.
  • Paystack’s vertical expansion. Paystack launched “Paystack Commerce” this June which provides a suite of tools for small businesses to “sell more online” and a “toolkit for African creators to bring ideas to market”. That reminds us a bit of “Anyone, anywhere, can start a business”. Paystack was quick to stop the comparisons with Shopify right there, but the move could still be a symptom of one of the observations we shared in our focus on API-first companies in our last edition. Both last week’s spotlight company Twilio and Stripe have the firepower to acquire or build their own solutions to capture more of the value chain while powering the backend themselves. Publicly-listed Shopify might be too intimidating to take on directly in the core market by now - the African market would seem more accessible. And who knows, maybe the trial goes well enough to emulate the move in other geographies as well.
  • Stripe and Paystack’s shared history: Paystack was the first Nigerian company to come out of Y Combinator (W16 batch, check out their YC application). Stripe had come out of YC just seven years earlier (S09). We are not familiar with Paystack’s pitch back then but it’s not unreasonable to think that they initially branded themselves as “Stripe for Africa”. That was enough of a promise to attract Stripe as a strategic investor (Stripe led their Series A in 2018) and Paystack has operated in close alignment with their more established role model since then. Using a stake in another company to experiment instead of venturing out yourself could prove to be a valuable strategy for other scale-ups as well - would help to avoid costly disasters where the start-up really doesn’t understand the new markets or verticals (looking at you, Uber).

🤔 What you need to believe in

  • Stripe ability to tackle regulatory challenges: It really is difficult to find any fault with the strategic rationale of Stripe behind this deal - they were intimately familiar with Paystack for years, the acquiree builds a strikingly similar product and they share the same developer-first philosophy. Yet, the deal is clearly a macro bet on the promise of the African continent when it comes to digital transactions. The market potential is obviously staggering; however, every business with heavy exposure to the fragmented financial market in Africa still faces significant regulatory risks, as the FT reports following the deal, citing experts. Payment processing on the African continent might be more likely to be powered by cryptocurrencies that are largely government-agnostic. Stripe, however, shut down experimental crypto support back in 2018. Stripe co-founder John Collins did state back in June though that Stripe “is following crypto for buying things online very closely, [...] but that’s not something that has happened at scale yet”. We believe that crypto could play a major role in facilitating digital payments where legacy infrastructure is both underdeveloped and extremely inefficient - maybe Paystack could test such payments with little risk for their parent company (they are already experimenting anyway, according to some reports). That approach seemed to work well for Stripe to understand the payments market in Nigeria and Ghana - why not try to understand crypto as well before rolling it out in other markets?

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