Throughout this year, numerous African startups have closed due to lack of funds to continue operating. Among these are those from Kenya Notify Logistics Y kune foodsbased in South Africa snap and, more recently, based in Nigeria cloud trading.
Despite the current treacherous economic climate, which has caused venture capital investments to shrink by 50% year over year according to According to Harvard Business Review, the African tech ecosystem is emerging from a wildly successful 2021 venture funding bull run.
Last year, investors splurged over $5 billion in the continent’s technology startups, spread over more than 350 deals according to investment firm Partech. This represents an increase of more than 260% in the financing received by startups on the continent in 2020.
After such an investment book, supported startups would be expected to use their funding to operate as they scale, achieve product market fit with an existing product, create a minimum viable product, or start earning some recurring income for manage operating expenses. Unfortunately, news of venture capital-backed startups shutting down due to funding shortages seems to be becoming a weekly norm.
Notify Logistics raised more than $370,000 in August 2021; kune foods raised a $1 million pre-seed round in June of last year; raised snap over $4 million four rounds of funding, and Kloud Commerce had raised over $750,000 in pre-seed funding before its unceremonious withdrawal.
The concern about these new companies is not exactly that they will close. After all, the high failure rate of startups, coupled with skyrocketing inflation, has made operating environments hostile and unpredictable. What is worrying is the reason for the closure, i.e. startups are running out of funds and more importantly, What they ran out of funds.
Some of the most common reasons for depletion of funds in some of these failed startups include misappropriation of invested capital by management through exorbitant personal use, unnecessary and avoidable business expenses that clog balance sheets, passion projects that don’t align with the business track record and unsustainable hiring sprees
The Clubhouse Lesson
When the social audio app clubhouse rose in popularity during the pandemic-induced global lockdowns in 2020, managed raise about $110 million in venture capital investment
The post-lockdown era hasn’t been so friendly for Clubhouse. App usage has plummeted more than 70% from its February 2021 peak of more than 10 million usersthanks to competition from other platforms like Twitter Spaces, and less consumption of live conversational audio as the world went abroad.
The platform also lost several high profile celebrities who had flocked to the app during the pandemic, and also saw the Exodus from several high-ranking executives, including its head of community, head of news, global head of esports and head of brand development.
Despite these challenges and the fact that Clubhouse has not raised any capital since April 2021 when it announced its Round Series C which valued it at $4 billion, the startup has yet to lay off any of its staff or, worse yet, go out of business.
According to the informationClubhouse, which hasn’t made any income yet, has enough cash in its war chest from its fundraiser “to give it several runway years.” This is attributed to the fact that he was frugal with the capital he raised in his heyday, shying away from the exorbitant expenses that are common with startups, and keeping his number of employees under a hundred.
The startup can now afford to test and test products with the need to raise capital in a round down at a much lower valuation due to the desperation of running out of a runway, something desperate African startups running out of runway may need to do as the economic downturn drags on.
Like Clubhouse, African startups are currently experiencing a decline due to the funding boom that graced the continent in 2021, but unlike Clubhouse, many venture-backed African startups are struggling to keep a meaningful track and are in a worrying trajectory.
Of course, it is fair to note, as a disclaimer, the stark difference between Silicon Valley and the African tech ecosystem as operating environments. After all, the $4.3 billion raised by African startups last year is dwarfed by the $27 billion raised by Silicon Valley startups in the same period. Despite this, there are lessons to be learned between the two.
African startups, now facing much more difficulty in raising capital, exacerbated by the current economic downturn, must refrain from unnecessarily and frivolously spending their raised capital. This can be achieved first by having clear and strong corporate governance structures in startups, something that has been lacking in the ecosystem for a while.
Strong structures, such as enforceable constitutions and actionable oversight bodies, such as boards of directors, would ensure that founders and executives are not free to do as they please with company funds, but stay on the operating path. agreed between them, the investors and the employees.
With such structures in place, startups would have ample time to test their products and work to achieve product-to-market fit, a Herculean task in the complex African ecosystem where market vitals such as total addressable market (TAM), useful addressable market (Sam and affordable market available (SOM) may take a while to determine and lock.
Any startup that closes on the mainland puts a dent in the entire continental ecosystem, making it seem undesirable to prospective employees and investors who wouldn’t want to commit to startups that may close at any time.
Learning lessons from startups in mature ecosystems like Silicon Valley is one way to avoid unfortunate circumstances that startups like Notify Logistics, Kune Foods, Snapt, and Kloud Commerce incur.
