Why are African Start-Ups Failing?

Small to medium enterprises are the backbone of emerging economies offering employment opportunities to youth on the continent. Start-ups are another avenue of job creation on the continent and are a sort of “hybrid” form of employment, offering opportunities in both formal and informal sectors. Africa’s start-up landscape is defined by four countries: Nigeria, Egypt, Kenya, and South Africa – combined, in 2021, 564 companies in these four regions received over $2 billion in investment. In the backdrop of such success, one would expect 2022 to be massive, but it seems the promises of previous success are stalling as several start-ups face difficulties amidst a myriad of socio-economic challenges.

Funding Drought

The global economic downturn is cited by many founders as the reason for closure or reduced operations. Global macro-economic and geopolitical developments including the currencies of emerging economies weakening against the dollar, higher interest rates, higher energy and commodity prices, and supply chain challenges are contributing to the current cash flow issues faced by CEOs and founders – foreign investors are falling back and making investments where they’ll receive more bang for their buck.

Leadership Misconduct

Nigerian start-up Flutterwave made a big splash in February 2022 after receiving $250 million in their Series D tripling their valuation from $1 billion to $3 billion in less than 12 months, making them the highest valued African start-up. In April 2022, the fintech unicorn was mired in controversy after allegations of workplace misconduct surfaced against the start-up’s CEO and several other senior employees, leaving them to battle lawsuits only shortly after their increased valuation. In June 2022, Kenya’s Assets Recovery Agency (ARA) launched investigations into fraud and money laundering made by at least 10 firms resulting in a freeze of several bank accounts linked to Flutterwave.

These allegations created mistrust with partners and investors calling to question the integrity of the fintech’s C-Suite team.

Frugality Challenges

It’s no secret that start-ups skew to the flashier side of operations. Impressive corporate offices, top talent acquisitions, and outlandish marketing budgets tend to be prioritized higher than the real gritty work. Many start-ups achieved success through “bootstrapping”, a practice no longer favoured over short-term wins.

As a rule of thumb, growth should be top of mind to founders; marketing should support the growth and innovation achieved through months of research and development, fancy corporate offices should be a by-product of long hours spent with the core team learning the business, and recruiting should only be considered once the budget can accommodate them.

The Silicon Valley spirit of “move fast and break things” doesn’t apply here – founders must play the long game.

Head-in-the Sand Venture Capitalists

It seems that funding is often only disbursed to a particular set of founders who meet a certain criterion: impressive educational background, business background and exposure in a developed country, team diversity and balance.

These metrics add no value whatsoever to a start-up, deeming them doomed from the start.

What VCs need to focus on is whether a founder is a native with experience in the industry they plan to operate in.

Solving Imaginary Problems

Solving imaginary problems is a cardinal sin for any entrepreneur yet, way too often, start-up founders seem to repeat this mistake. The formula to building a million-dollar start-up is to create solutions to simple everyday problems.

Start-ups like Kune Food and Sky.Garden made this mistake by ignoring the traditional industries they were competing against. Ready-to-eat meals at $3 or less sounds great on paper, but that would take away the human interaction cherished between customers and “kibandas”. The third-party merchant model of Sky.Garden couldn’t replace the relationship between electronic sales merchants and customers; in a business where a tactile element comes into play before purchase, seeing an item on a screen without being able to physically touch it worked against them.

Africa is a vast continent with massive potential to create unicorns. Perhaps once the global macro-economic landscape stabilizes, we will witness a positive shift for start-ups.

Article by Katherine Keango