Throughout this year, numerous African startups have shut down due to a lack of funds to continue operating. Among these are Kenya-based Notify Logistics and Kune Foods, South Africa-based Snapt and most recently, Nigeria-based Kloud Commerce.
Despite the current treacherous economic climate which has seen venture capital investments retracting by 50% year-on-year according to Harvard Business Review, the African tech ecosystem is coming off the back of a wildly successful 2021 venture funding bull run.
Last year, investors splurged over $5 billion on the continent’s tech startups, spread across over 350 deals according to investment firm, Partech. This represents an increase of over 260% in funding received by the continent’s startups in 2020.
Following such an investment book, the assumption would be that the backed startups would use their funding to operate while they scale, achieve product-market fit with an existing product, build a minimum viable product or start getting some recurring revenue to handle operating expenses. Alas, news of venture-backed startups shutting down due to dried up funds seems to be turning into 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 from four funding rounds, and Kloud Commerce had raised over $750,000 in pre-seed funding before its unceremonious bowing out.
The concern about these startups is not exactly that they shut down. After all, the high failure rate of startups coupled with skyrocketing inflation has made operating environments unfriendly and unpredictable. What is worrying is the reason for the shutdown, i.e, the startups running out of funds and more importantly, how they ran out of funds.
Some of the more common reasons for depletion of funds in some of these failed startups include misappropriation of invested capital by management through exorbitant personal usage, unnecessary and avoidable business expenses clogging up balance sheets, passion projects which do not align with the business trajectory, and unsustainable hiring sprees
The Clubhouse lesson
When the social audio app Clubhouse rose in popularity during the global pandemic-induced lockdowns in 2020, it managed to raise around $110 million in venture capital investment
The post lockdown era has not been so friendly to Clubhouse. Usage of the app has plummeted more than 70% from its February 2021 peak of over 10 million users, on the back of competition from other platforms like Twitter Spaces, and less consumption of live conversational audio as the world went outside.
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 head of community, head of news, 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 round which valued it at $4 billion, the startup is yet to lay off any of its staff or worse, shut down.
According to The Information, Clubhouse, yet to pull in any revenue, has enough cash in its war chest from its fundraising “to give it several years of runway.” This is attributed to the fact that it was frugal with the capital it raised at its peak, shying away from the exorbitant spending that is common with startups and maintaining its employee count of less than a hundred.
The startup can now afford to try and test products with needing to a raise capital in a down round at a much lower valuation out of desperation of running out of runway, something desperate African startups running out of runway might need to do as the economic downturn drags on.
Like Clubhouse, African startups are currently experiencing a decline from a funding boom which graced the continent in 2021, but unlike Clubhouse, many African venture-backed startups struggle to maintain a significant runway and are on a worrying trajectory.
Of course, it is fair to point out, 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 within the same period. Notwithstanding this, there are lessons to be learned between the two.
African startups, now faced with far more difficulty in raising capital, exacerbated by the current economic downturn, should refrain from unnecessary and frivolous spending of their raised capital. This can be achieved first by having clear and robust corporate governance structures in startups, something that has been lacking in the ecosystem for a while.
Robust structures like enforceable constitutions and actionable overseeing bodies like boards of directors would ensure that founders and executives are not free to do as they please with company funds, but stay on the operational route agreed upon between themselves, investors and employees.
With such structures in place, startups would have enough time to test their products and work towards achieving product-market fit, a Herculean task in the complex African ecosystem where vital market elements like the total addressable market (TAM), serviceable addressable market (SAM) and serviceable obtainable market (SOM) can take a while to determine and lockdown.
Any startup shutting down on the continent puts a dent in the entire continental ecosystem making it appear undesirable to future employees and investors who would not want to commit to startups which can shut down at any time.
Taking lessons from startups in matured ecosystems like Silicon Valley is one way to avert unfortunate circumstances incurred by startups such as Notify Logistics, Kune Foods, Snapt and Kloud Commerce.