In 2022, we saw quite a few startup companies closing down, forcing us to look inward to see where we went wrong or which factors were at play.
Establishing a startup company can be challenging but rewarding, regardless of the corner of the continent you come from. With the right team, an exceptional idea, and the investment funding to back it up, startups can hit the ground running toward blinding success.
Unfortunately, this might not be the case for some startup companies.
Once in a while, a potential visionary entrepreneur can have a business idea that’s good enough to get them funding, but external factors end up becoming an obstacle forcing them to close up shop. When you consider that the average failure rate of startup companies in Africa was at 54% as of 2020, it makes you wonder what exactly goes wrong within the African startup space to set us up for failure. I mean, the last thing you expect to happen is to lose in your own home ground.
Mwongera Mutiga, Founder of RedBrick Africa, a leading provider of research, data, and insights for organizations across the continent said, “We know that anywhere from 70 to 90% of all startups fail within the first year of operation. What we have seen of late is indicative of this general trend.”
The trend in question is that of several Kenyan startup companies closing down within months of each other this year, which naturally took us all by surprise and raised questions. Like, for example, if one employee is let go by an employer, you would probably assume they were the problem. But if you hear of seven employees being let go from the same company shortly afterwards, you’d start asking if maybe the company or the workplace was actually the issue.
So is the startup scene the problem here?
“Success in any startup venture requires a proper understanding of the business environment you work in. For some startups, scant research is done to establish the reality on the ground, especially regarding the competitive environment, regulatory requirements, and consumer preferences, and this leads to a weak product offering that doesn't really meet any real needs,” added Mwongera.
Internal factors also contribute to the essence of startup success in Africa. According to Mwongera, “Leadership teams are also critical for start-ups; choosing the right people who understand the business, the market, and have local knowledge and experience is important. Funding alone, without proper local context, does not guarantee success.”
Then, of course, there’s the challenge of funding. Some start-ups run out of funds before they can stand on their own two feet, with several startup companies collapsing recently because of this dynamic.
Let’s look at the startups that went under in 2022 for various reasons, lack of funding being one of them.
Kune Food, which was founded in 2020 by one Robin Reecht was a food delivery startup that closed its doors in June 2022 after being in operation for just 18 months. The startup company aimed to provide customers with ready-to-eat fast food at affordable rates of $3.
However, the current economic downturn due to rising global inflation rates resulted in increasing food prices, which put up a fight against their profit margins. This also led to investment markets tightening up meaning investors were unwilling to bring in more money.
You can guess what happened next. Despite managing to get generous pre-seed funding and borrowing millions to ramp up production, the company was eventually unable to sustain itself due to high operational costs.
I’m pretty sure you’ve heard of Sky.Garden or rather come across their ads on social media or billboards on one of our highways. The E-commerce startup had an Amazon-like modus operandi, allowing third-party merchants to sell everything on the website from home goods to electronics.
The startup shut down its operations in September 2022 after being around for just 5 years. Why? A cash crunch after failing to close their next round of funding.
As you’d probably expect, investors were hesitant to make new investments due to increased interest rates, the Ukraine war, inflation, and rising prices which made the overall VC space difficult to navigate.
Notify Logistics came as a breath of fresh air to SMEs that were tired of renting shops at exorbitant rates. This startup came into existence in 2018 with the aim of subsidizing retail shop costs by cutting them in half compared to what conventional landlords were offering for small businesses. Notify helped SMEs cost share rent which was convenient for those unable to pay for physical outlets.
However, even after raising $370,000 in funding, it still wasn’t enough to keep them in business for long. Considering they were paying $6500 monthly for their three Nairobi stalls, they experienced difficulty breaking even, especially when you factor in the high operational costs. Additionally, they were becoming unsustainable with their vendors. In August 2022, Notify Logistics made the decision to shut down its operations.
WeFarm, founded in 2014, was an Agritech startup company developed as a platform for small-scale farmers to buy their agricultural products at competitive prices, share reviews, and get free advice on farming practices. The company had incredible growth and demand during the last 9 months of operations, but the market conditions would come to interfere with this.
Unfortunately, WeFarm was forced to close up shop in July 2022 due to difficult market conditions after barely one year. The company director, Sofie Mala, claimed the challenging market conditions made it difficult to set up and scale the business resulting in closure.
Let’s take a look at another African startup shutdown with a different story from the ones above because sometimes the sabotage comes from within.
In October 2022, we saw the closure of Kloud Commerce, a multichannel commerce solution for businesses starting in Nigeria due to mismanagement and misuse of funds by the company founder. This decision came after a long period of internal disputes between the startup founder, Dr. Olumide “D.O” Olusanya, and the executive team, which rendered the startup company crippled for months.
It seems the Founder, Dr. D.O, painted a shining but false picture of the company’s growth to mislead investors and obtain funding fraudulently, which was used for personal expenses and ventures. In this case, the investors were willing but the founder was weak, for lack of a better word.
Remember when we mentioned earlier that startup companies need to put equal focus on building from within, especially when it comes to the leadership teams? This is why.
Anyway, that is an entirely different conversation on startup leadership to be had another day (if you put the right drink in my hand).
How can we remedy this to set up African startups for success?
After seeing what happened to these startup companies to cause their downfall, how then can we learn from our mistakes and set up upcoming startups for success in the African and even global markets? Mwongera shared his insight:
“We need to do our research properly. People start and run businesses based on gut feeling alone, which is not enough; data, insights, and feasibility are needed to really understand the market and consumers.”
I couldn’t agree more. You can’t jump into a river with both feet without knowing how deep or shallow it is. Market research is key to helping you know which calls to make. After all, you want to succeed, don’t you?
“It's also necessary to put together the right team, with a good balance of local context and knowledge in order to navigate the challenges. Simply flying in with a good idea backed by money is not enough.”
You heard it here first, folks. Having a good business idea and securing funding is not enough. You also need to have the ultimate dream team to bring your vision to fruition.
“Lastly, being willing to make changes to the model and the operation of the business as time goes on is helpful, so as not to stay ‘married’ to an idea that isn't working. Willingness to pivot and do things differently should the need arise is helpful.”
We are living in an age of disruption where businesses live and die by their ability to adapt. That business idea may have come to you like a light in a dark tunnel which is why you believe it was meant to be. But if it’s not working out, then you might need to reevaluate things.