By Anzetse Were, Senior Economist and Green Finance Advisor at FSD Kenya
Recently headlines in Africa have been filled with African tech companies announcing that they are closing, filing for bankruptcy, entering into administration, implementing massive lay-offs and/or substantially cutting back their operations. Most of these companies were once regarded as a new dawn of entrepreneurship from the continent and examples of African companies that would not only become leaders in Africa, but also global leaders providing innovation solutions to global challenges.
From GroIntelligence, Copia Global and iProcure, to Sendy, Dash, Paystack, Wasoko and Twiga Foods all have been in some form of serious distress. As an African who has worked with the start-up sector in Kenya, it’s been a disappointment to see such massive distress, but frankly unsurprising. I was part of a team in FSD Kenya that provided resources to start-up firms in the tech space in Kenya. Most of the firms that were successful continue to post robust performance: they certainly did when FSD Kenya exited support in late 2022.
To be clear, there are other challenges in the Africa innovation and start-up scene beyond firm-level challenges such as approaches and style of investors, vulture capital, regulations and policies that stymie performance, a poor business environment etc. This article focuses on the firm simply because there are firms in Africa that have figured out how to manage these internal and external dynamics.
There are four major factors that need to be managed when a start-up is scaling and getting large amounts of funding:
- Management capabilities: Founders of start-ups have skills that allow them to see, understand and exploit a new market opportunity. They often have very deep knowledge and expertise in a certain sector, sub-sector, or value chain, and how to create an entrepreneurial approach to meet the market opportunity therein. This is brilliant and needed. However, they do not necessarily have the capabilities to manage a rapidly scaling company and all the politics, financial pressure, performance expectations, people management, and investor needs that must be handled. This often leads to a myriad of challenges such as inappropriate approaches to expansion, an inability to navigate difficult funding environments, challenges with meeting employee rights and needs, and even alleged legal trouble. These management gaps cannot be filled with an investor being assigned a seat on the board. Customised support on management capabilities ought to be part of the core support founders and start-up teams are given as part of the evolution and growth of the business.
- Ego: Many a solid company has faltered at the door of the founder’s ego. Founder ego inflation often translates to an inability to be corrected, difficulty listening to concerns/red flags, a stubbornness in approach, and sometimes even conceit and hubris. A founder’s decision to let their ego inflate (usually because of massive initial success) is a serious liability for their start-up as it blinds them to the significant new needs of their business. It is important that founders decide to focus on the business, not themselves, because getting millions is only the start of the hard work.
- Over-innovation and market cannibalisation: Many start-ups focused on the African market are often trying to solve similar market problems and seek to tap into similar market segments–and may cannibalise each other’s markets over time. Obviously, most of these start-ups don’t know all their competitors, let alone the approach their competitors are taking to solve a similar problem. There are many reasons for this siloing, a big one being the culture to keep the innovation secret so that the firm can be the ‘first off the block’ to scale, attract funding or receive accolades. Thus, the start-up scene in Africa suffers from over-innovation in some sectors with firms eating into each other’s markets from inception. This poses fundamental challenges to scaling, even across borders.
- More than money: What we have discovered over years is that, for the most part, start-ups don’t necessarily need capital, they needed a host of other support even more, as outlined below:
If I really wanted to play the hardball argument, I would say that in addition to above, what we are seeing is not just strain or a ‘funding winter’ for some in the Africa tech scene. Rather this is a massive market correction after years of the misallocation of funds to firms, too many of which didn’t have the business models, aptitude, and maturity to manage the demands required after massive fundraising rounds. But it’s not only the firms’ fault. Too often, investors have not designed their funding approach and style to meet the requirements of start-ups in Africa. Too often investors fail to develop their own capabilities to make their skills relevant and fit-for-purpose. As a result they often do not have abilities to appropriately meet the financing requirements, demands, and opportunities of one of the fastest growing continents in the world.