African startups can no longer ignore their governance deficiencies

by MMC
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Since TechCabal expose on the toxic work culture in Nigeria payroll management Bento Africa, in March this year, new cases of workplace irregularities at startups came to light.

In April, West Africa Weekly reported that Flutterwave co-founder and CEO Olugbenga Agboola was involved in financial irregularities, insider trading, sexual abuse and bullying within Flutterwave. In October, Risevest co-founder and CEO Eke Urum was accused of sexual misconduct, among other allegations. An investigation by a committee later found him guilty of sexual misconduct, abuse of powerbullying, retaliation and harassment in the workplace.

The same month, Olumide Olusanya, co-founder and CEO of Kloud Kommerce, was accused by investors of mismanagement of funds and put their investment into the ground. Investors have drafted a petition to the Nigerian Economic and Financial Crimes Commission (EFCC), alleging that Olusanya diverted capital invested in Kloud Commerce into personal projects, spending investors’ money on expensive hotels and rentals. of cars during suspicious trips outside Nigeria.

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A recent report from TechCabal explained how Alain Nteff, Cameroonian co-founder and CEO of Healthlane, a health technology company based in Nigeria and Cameroon, could have spent $2.4 million in funding raised in 2020 after securing his degree from Y Combinator. The company is reportedly in debt, owing thousands of dollars to its suppliers and salaries to its employees for up to six months.

Why these scandals come to light may vary in detail and by company, but it can all be blamed on either poor corporate governance or its complete absence in many African startups.

Good corporate governance practice is the red pill

Corporate governance refers to the guidelines for how a company should be managed and controlled. It is an efficient, entrepreneurial and prudent management system, from the board of directors to senior management, to facilitate and ensure the long-term success of a business.

Corporate governance not only provides the framework for achieving a company’s goals, it also guides virtually every area of ​​management, from action plans regarding who and when to hire, to internal controls. , through performance measurement and disclosure of information by the company. But these frameworks are either flawed or completely absent in African startups, especially those that are in their early stages and where the focus is primarily on creating products and securing funding to bring them to market. For these early-stage startups — and, surprisingly, for most of their investors, who have some authority to check and balance the founders — corporate governance is an afterthought.

Besides the fact that early-stage companies rarely establish boards of directors, investors at the seed, pre-seed, and pre-series stages mostly hedge their bets by writing small checks to several startups and do not wish to sit on boards of directors. When you invest in more than 40 startups, for example, it will be too difficult to keep tabs on all of them, let alone serve on their boards. This is, for example, how some founders don’t send updates to investors and get away with it.

This issue was highlighted during an investment panel at the AWS Forum held in Lagos, Nigeria on November 9, when four early-stage venture capitalists (VCs) were asked about the state of governance of company in the African startup ecosystem. While they all thought it was important, their individual responses showed that investors are unlikely to closely monitor the startups they have stakes in anytime soon. Olumide Soyombo, co-founder of Voltron Capital, said he has invested in over 50 startups and there is no way he can sit on the boards of all these companies due to time constraints, a situation made even worse by the fact that he runs a technology company.

In the aforementioned Flutterwave case, the malpractices the company and its CEO were accused of occurred when the company was still in its infancy and Agboola took the lead. The company, which achieved unicorn status in March 2021, has raised a total of $474 million to date. The company has a board of directors, but it has yet to make an official statement on the April scandals.

In Bento, his tray request The company’s CEO, Ebun Okubanjo, gave up on making “people decisions” and hired a human resources manager to handle them instead. But the questions that remain unanswered are: Was the board aware of the CEO’s behavior before this publication’s expose? Why did they wait until a scandal broke out before removing Okubanjo from personnel management? Is this good corporate governance?

At Kloud Kommerce, despite the existence of a board of directors, the CEO still managed to squander the company’s funds. Where were the board members while this was happening, and what were they doing? The answer to this question is simple: they weren’t doing enough. The board has since disbanded and Olusanya is reported having installed himself and his wife as new and sole members of the board of directors.

In the case of Risevest, the company has never had a board of directors. After allegations of sexual misconduct and abuse of power were made against CEO Urum, the company established a commission to investigate the matter. The panel would find that while the evidence presented against Urum did not prove sexual assault, “the evidence presented to the panel, including admitted sexual relations (sic) with an employee and unwanted and inappropriate jokes and conversations, revealed an impropriety “sexual” statement reads the sign. The panel also said the evidence demonstrated a pattern of abuse of power, intimidation, retaliation and workplace harassment by Urum, and suggested the formation of a board of directors for the company.

Investors can decide to give up investing in a startup in the face of misconduct of any kind.

“Once we discover any impropriety with our founders, we sell (Future Africa’s stake in the company),” said Iyin Aboyeji, co-founder and CEO of Future Africa, a Lagos-based venture capital firm. , during the aforementioned AWS Forum roundtable. . But does this approach solve the problem? Should investors walk away from problematic startups rather than ensuring their portfolio founders behave ethically?

Although each of these cases has its particularities, there is a connection between them. The ones that didn’t have boards – Flutterwave and Rise – didn’t have any, probably because they were just starting out; and the first companies that had a board of directors – Kloud Kommerce, Healthlane and Bento – still managed to manage poor corporate systems because their boards of directors did not exercise effective oversight functions within companies.

While it may be difficult to serve on the boards of all of their portfolio companies, investors should at least insist that founders undergo leadership training and create a human resources entity that independently oversees well-being of its employees. “Investors need to be held accountable,” Barbara Iyayi, CEO and founding partner of Unicorn Growth Capital, a venture capital firm focused on Web-3, said during the AWS Roundtable.

The issue of corporate governance in startups is a global headache. But the reason it seems particularly bad in Africa, especially Nigeria, is because people – employees, investors and founders – are just starting to speak out. The series of revelations following FTX debacle, for example, is a great example of poor corporate governance at a global startup. FTX, which until November 11 was one of the second largest crypto exchanges in the world, had raised $1.9 billion and was valued at $32 billion, all without an accountant or board of directors. The company mismanaged its customers’ deposits to the point of becoming insolvent and filing for bankruptcy.

Following the FTX debacle, Nestcoin, a Nigerian blockchain startup that held $4 million of the $6.45 million raised in February on FTX, announced the layoffs of an undisclosed number of its staff. To be clear, Nestcoin’s problems are rooted in a complete lack of risk management on the part of its management, as such a large amount of money should never have been domiciled in one place, let alone on an exchange cryptographic. A board of directors or risk expert could have pointed this out.

Startups can learn how to implement systems from traditional business sectors such as banking, telecommunications and some large technology companies, which not only have a board of directors, but also hire a strong management team which decentralizes the power of a single person.

The African startup ecosystem is maturing and growing day by day. The number of new startups currently looking to enter the market has increased significantly. There are more and more startups looking for venture capital funding and more and more venture capital firms looking for the next market leader. Ensuring good corporate governance across the entire ecosystem has become even more important.

Startup founders are exploding capital all over the world, especially in Silicon Valley. But Africa cannot afford not to be economical. While the continent raised a record investment of around $5 billion last year, this still represents around 1% of all global venture capital funding in 2021. grow up fast and break things This model may not be suitable for Africa, which is why the ecosystem must be put in place to hold its professionals accountable from the outset for processes and ethics. No founder should waste $1 million on frivolities and no startup should lose $4 million in cash, simply because there is no system in place to audit, regulate and advise.

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