Post-financial crisis ushered in an era of easy capital for some African enterprises that were considered to be operating in high-growth areas. Most of the startups were in mobile payments, e-commerce, and last-mile logistics.
Nigeria, Kenya, and South Africa have served as bases for these young companies that have mastered the art of raising millions of dollars more than the valuation of some listed companies. While they have registered success in getting capital–something that most companies struggle with in Africa–the path to profitability has proved to be impassable.
Copia Global, the B2C e-commerce platform and the parent company of Copia Kenya, is the latest of the many examples of firms that have not been able to become profitable. The company raised $123 million across eight funding rounds, but now shutting down after it failed to hit profitability.
Copia’s decision to seek insolvency protection came just a month after another firm, iProcure Limited, suffered the same fate. In 2023 September, B2B logistics startup Sendy also entered administration after it failed to attract new investors.
The three, alongside tens of other companies that have attracted millions of investments in Kenya, have raised questions about the viability of some of the ideas that received overwhelming investors’ backing.
Nigerian and South African startups have also suffered the same fate. South African mobility startup WhereIsMyTransport shut in March after raising $27 million. Others include Nigerian Pivo, 54gene, and Lazerpay.
The list is endless, which begs the question, what is going wrong with these well-funded ideas?
Due diligence
Venture capitalists have blamed the mass failures on poor investment decisions, but it goes deeper than that. Millions have been pumped into ideas that even locals had doubts about. In the end, what was made to look like a successful idea crumbled under the weight of poor performance.
Investors have been accused of giving founders money without interrogating their business model, understanding the market, and with little to no information about the backgrounds of people running the companies.
Consequently, they end up losing their money–while the founders go on about their lives. Some jump into new ideas and seek fresh funding from unsuspecting investors. A vigorous background check on the businesses and the founders would have saved investors a loss of money.
At the same time, it would have channeled the funds to deserving ideas that have been starved of funding.
Fraud
Founders of some of the collapsed startups have been accused of fraud and living lavishly off investors’ money. Without proper controls and weak local laws to protect investors, some people have created schemes to steal money in the name of seeking funding for their enterprises.
Most of the enterprises collapse less than 10 years after starting and just a few years after receiving fat cheques from institutional investors and venture capitalists.
Tough regulations and laws
Africa has been blamed for the unpredictable regulatory environment which has compounded startups growing woes. Obtaining necessary permits and licenses is a long and complex process, which delays operations. In some cases, firms have been suspended or shut down after regulators delayed issuing licenses.
Startups, unlike established companies, do not have safety nets in cases of sudden policy change. They end up suffering severe damages to their damages in such cases.
Harsh economic environment
Local and global economic realities have hit most young firms hard. Currency fluctuations, high inflation, economic downturn, and high interest rates have crippled most businesses. The worst hit are companies with cross-border operations.
In 2023, central bankers in Africa maintained high interest rates to curb rising inflation. Globally, investors fled the African capital market for attractive returns in the Western bond markets are their respective central banks increased rates.
Ideas not scalable
Some of the ideas that founders tout as solutions to local problems are not scalable. Some startups have neglected a key component, comprehensive market and customer research. This leaves some of the companies with great ideas, but just not enough market.
Investors have not interrogated the scalability of e-commerce startups, even though the continent does not have supporting infrastructure. A general lack of trust in such platforms has also hampered the takeoff.
Other ideas like payment solutions are also just trying to solve a problem that does not quite exist. Telco-provided payment systems have filled the gap that was left by banks.
