Why startups in Africa are failing

Nubia Capital

We are committed to investing in tech-enabled startups across Africa and helping founders grow extraordinary businesses.

Published Dec 10, 2023

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Introduction. “When you take risks, you learn that there will be times when you succeed, and there will be times when you fail, and both are equally important.” ― Ellen DeGeneres

Q4 2023 has been intriguing, especially with numerous news on the failure of African startups. In this quarter we learnt about  Dash, a Ghanaian fintech company that has shut down its operations. Dash had raised $86.1 million in five years from big-name investors such as Insight Partners, Global Founders Capital, 4DX Ventures, and ASK Capital. 

Over the past week, we learnt of Pivo, a Nigerian fintech startup that shut down after raising a $2 million seed round. 

Fintech isn’t the only sector facing challenges in the African startup ecosystem. Earlier in the year, we also learnt of the shutdown of 54gene, an African genomics research, services and development company addressing the need to include under-represented African genomic data in research which could lead to medical breakthroughs and new healthcare solutions worldwide.

Of course, A simple Google search reveals the various reasons that cause such numerous startup failures. They include cofounder conflicts, lack of funding (money running out), bad partnerships, being in the wrong market e.t.c but in Africa, the reasons might be more diverse. 

The VC mathematics 

VC mathematics suggests investing in Africa because it makes business sense.  VC mathematics suggests that Africa is emerging and could be the next China. VC mathematics and that of the entire ecosystem says that Africa has a growing middle class, there are many untapped markets and many unicorns are bound to emerge from Africa. 

Interestingly, the entire African startup ecosystem needs more investment. According to Anne-Marie Chidzero chief investment officer at FSD Africa Investments, we need to first acknowledge why Africa is a frontier market. We have a vast youth population, and we’re seeing that they will drive a lot of the innovation around the business models that will address our needs — whether their social or economic needs. We also need to acknowledge that there’s a massive gap in the market and figure out how to fund these early-stage concepts. These are unproven, novel models — they carry many inherent risks. This means while African startups seek more investment, it is quite risky to do so. 

Risky

meaning: 

  • full of the possibility of danger, failure, or loss.

In theory, VCs say that they are prepared to take a lot of risk by backing innovative solutions and incredible teams but in reality, they have high startup growth expectations and often project this wrongly by pushing startups to scale prematurely. 

The challenge is to earn a consistently superior return on investments in inherently risky business ventures.

Africa though with huge potential is very volatile. Venture capitalists must get returns, but often the best way will involve patience and long-term considerations, allowing these startups to discover product market fit, the right strategy and a viable business model.

We encourage VCs to take the long-term approach to African startups, invest and co-build, and help them build a viable business. 

This is definitely in contrast to the traditional VC model. Traditionally, VC money is not long-term money. The VC Concept involves putting capital into a company’s financial structure and resources until it attains a substantial scale and reputation, making it feasible for either corporate acquisition or entry into the institutional public-equity markets for liquidity. Essentially, the venture capitalist acquires a share in the entrepreneur’s concept, supports its growth briefly, and subsequently exits with assistance from an investment banker.

Adjusting the model to allow for profitability, in the long run, is a true adjustment but might be truly what Africa needs. 

Beyond the long-term game, VCs as with any typical business, are more willing to pour capital into proven industries. While this is somewhat inevitable, we call on more Afrocentric investors with a true aim to develop the various markets and industries in Africa

Entrepreneur mathematics 

Founders share a lot of the blame for the failure of their startups. As often as it is said, how real is the problem being solved? Founders must solve real problems and not just pursue rapid expansion. 

Founders exaggerate revenue and user traction to triple valuation and attract funding. As with any rule of nature, the facade will eventually crack. 

Conclusion

As we live in these beautiful times where Africa is becoming, we need to play our roles as VCs and Entrepreneurs correctly and truthfully, putting the unique ecosystem of Africa in mind but most importantly, the important call to play the long-term game. 


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