Throughout this year, many African startups have closed due to a lack of funds to continue operating. These include Kenya-based Notify Logistics and Kune Foods, South Africa-based Snapt, and more recently Nigeria-based Kloud Commerce.
Despite the current treacherous economic climate which has seen venture capital investments shrink by 50% year-on-year according to Harvard Business Review, Africa’s tech ecosystem is emerging from a bull run in venture capital funding extremely successful in 2021.
Last year, investors poured more than $5 billion into tech startups on the continent, spread across more than 350 deals according to investment firm Partech. This represents an increase of more than 260% in funding received by startups on the continent in 2020.
Following such an investment book, the assumption would be that the supported startups would use their funding to operate as they evolve, achieve product market fit with an existing product, build a minimum viable product, or begin to obtain recurring revenue to manage operating expenses. Alas, news of venture capitalist-backed startups closing due to lack of funds seems to be becoming a weekly norm.
Notify Logistics raised over $370,000 in August 2021; Kune Foods raised a $1 million pre-seed round in June last year; Snapt raised over $4 million in four funding rounds, and Kloud Commerce had raised over $750,000 in pre-seed funding before it unceremoniously pulled out.
The concern about these startups isn’t exactly that they’re closing. 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 shutdown i.e. the startups are running out of funds and more importantly, How? ‘Or’ What they ran out of funds.
Some of the most common reasons for the depletion of funds in some of these failing startups include management misappropriation of invested capital via exorbitant personal use, unnecessary and avoidable business expenses cluttering balance sheets, passion projects that don’t fit not to the company’s trajectory, and unsustainable hiring
The Clubhouse Lesson
When the social audio app Clubhouse gained popularity during the global pandemic-induced shutdowns in 2020, it managed to raise around $110 million in venture capital investment.
The post-lockdown era hasn’t been so friendly for Clubhouse. App usage is down more than 70% from its February 2021 peak of over 10 million users, due to competition from other platforms like Twitter Spaces, and a less consumption of live conversational audio as the world went out.
The platform also lost several high-profile celebrities who had flocked to the app during the pandemic, and also saw the exodus of several high-ranking executives, including its community manager, chief information officer , its Global Head of Sports 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 undisclosed Series C funding round that valued it at $4 billion, the startup has yet to lay off none of its employees or worse, closed.
According to The Information, Clubhouse, which has yet to generate revenue, has enough money in its war chest from fundraising “to give it several years of runway.” This is attributed to him being frugal with the capital he raised in his heyday, avoiding the exorbitant expenses that are common with startups and keeping his number of employees below a hundred.
The startup can now afford to try and test products by needing to raise capital in a down cycle at a much lower valuation out of desperation to run out of lead which desperate African startups run out of lead may have to do due to the economic downturn. drags on.
Like Clubhouse, African startups are currently experiencing a decline after a funding boom that graced the continent in 2021, but unlike Clubhouse, many African venture-backed startups are struggling to maintain a meaningful track and are on a trail. worrying trajectory.
Of course, it is fair to point out, as a caveat, 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 over 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, should refrain from wastefully and frivolously spending their raised capital. This can be achieved first by having clear and strong corporate governance structures in startups, which has been lacking in the ecosystem for some time.
Strong structures such as enforceable constitutions and decision-making oversight bodies such as boards of directors would ensure that founders and managers are not free to do what they want with company funds, but stay on the operational path agreed between them, the investors and the employees.
With such structures in place, startups would have ample time to test their products and strive to achieve product-market fit, a herculean task in the complex African ecosystem where vital market elements such as the market Total Addressable Market (TAM), Usable Addressable Market (SAM), and Usable Available Market (SOM) may take some time to determine and lock in.
Any startup that closes on the continent harms the entire continental ecosystem, making it undesirable for future employees and investors who would not want to commit to startups that may close at any time.
Learning from startups in mature ecosystems like Silicon Valley is one way to avoid unfortunate circumstances suffered by startups like Notify Logistics, Kune Foods, Snapt, and Kloud Commerce.
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