Numerous African firms have folded this year due to a lack of funding to continue operations. Among these are the Kenyan companies Kune Foods and Notify Logistics, as well as the South African companies Snapt and, most recently, Nigeria’s Kloud Commerce.
The African tech ecosystem is coming off the back of a phenomenally successful 2021 venture funding bull run, which has seen venture capital investments shrink by 50% year-over-year, according to Harvard Business Review.
According to investment agency Partech, investors spent over $5 billion on the continent’s tech businesses last year, split over over 350 acquisitions. By 2020, the funding obtained by the continent’s startups will have increased by more than 260%.
After such an investment round, it is presumed that the backed firms would use their funds to operate as they scale, achieve product-market fit with an existing product, construct a minimum viable product, or begin generating some recurring revenue to cover operational costs. Unfortunately, reports of venture-backed firms folding because of a lack of funding seem to be becoming the new normal every week.
In August 2021, Notify Logistics raised more than $370,000; in June 2021, Kune Foods raised $1 million in a pre-seed round; in four investment rounds, Snapt raised more than $4 million; and prior to its abrupt closure, Kloud Commerce had raised more than $750,000 in a pre-seed round.
The issue with these startups isn’t so much that they fail. After all, unfavorable and uncertain operational circumstances are a result of the high starting failure rate and rapidly rising inflation. What’s concerning is the shutdown’s cause—startups running out of money—and, more significantly, how they did so.
The management of some of these failed startups misappropriated invested capital by using it extravagantly for personal use, unneeded and avoidable business expenses clogged up balance sheets, passion projects that did not align with the business trajectory, and unsustainable hiring sprees are some of the more frequent causes of fund depletion.
The Clubhouse Tutorial
Clubhouse, a social audio app, raised over $110 million in venture capital funding after it became more popular amid the pandemic-induced lockdowns in 2020.
Clubhouse has not had a lot of luck since the lockout. Due to competition from other platforms like Twitter Spaces and a decrease in the consumption of live conversational audio as more people stepped outside, the app’s usage has fallen by more than 70% from its February 2021 peak of over 10 million users.
Along with losing a number of well-known celebrities who had flocked to the platform during the pandemic, the site also lost a number of top executives, including its head of community, head of news, global head of sports, and head of brand development.
Clubhouse has not raised money since April 2021, when it announced its confidential Series C round, valuing the company at $4 billion. Despite these obstacles, the startup has failed to fire any employees or, worst still, shut down.
The Information claims that even though Clubhouse has not yet generated any revenue, it has amassed enough money from fundraising “to allow it several years of runway.” This is explained by the fact that it was thrifty with the money it raised at its peak, staying away from the extravagant spending that is typical of startups and keeping its employee numbers at under 100.
As the economic downturn continues, desperate African entrepreneurs may need to obtain funding in a down round at a much lower value in order to avoid running out of runway. The startup now has the means to test products without having to do so.
Unlike Clubhouse, many African venture-backed firms struggle to maintain a sizable runway and are on a concerning trajectory. African startups, like Clubhouse, are already witnessing a fall from a financing boom that blessed the continent in 2021.
Of course, it is appropriate to draw attention to the significant differences between the operational environments of Silicon Valley and the African tech sector as a caveat. After all, the $27 billion raised by entrepreneurs in Silicon Valley during the same period dwarfs the $4.3 billion raised by African startups in the previous year. Despite this, there are still things that can be learned from both.
The current economic slump has made it much harder for African companies to get funding, thus they should refrain from using their raised funds for superfluous or wasteful purposes. First, clear and strong corporate governance frameworks in startups, something that has been lacking in the ecosystem for a long, can help achieve this.
Strong governance mechanisms, such as enforceable constitutions and enforceable boards of directors, would ensure that founders and executives did not have unrestricted access to company funds and instead adhered to the operational plan reached between themselves, investors, and employees.
With these structures in place, startups would have the time they need to test their products and work toward achieving product-market fit, a Herculean task in the complicated African ecosystem where key market elements like the total addressable market (TAM), serviceable addressable market (SAM), and serviceable obtainable market (SOM) can take some time to identify and lock down.
Any firm that folds makes a dent in the continent’s ecosystem, making it appear unappealing to potential employees and investors who wouldn’t want to put their money into businesses that could fold at any time.
One strategy to prevent the unpleasant events experienced by firms like Notify Logistics, Kune Foods, Snapt, and Kloud Commerce is to learn from startups in established ecosystems like Silicon Valley.