African Tech Prepares for Startup Shutdowns in Nigeria and Kenya

by MMC
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African investors and operators are so far optimistic about startup closures, reassuring themselves that some failure is an inevitable feature of any venture capital-based industry. But there is an effort to look closely at the various causes of failure, such as blatant fraud and mismanagement versus battling difficult macroeconomic conditions, or simply poor execution.

“If you’ve been around for several years and you’re still trying to raise money without really a path to profitability, obviously investors will start to lose confidence at some point,” said Hannah Subayi, a partner at Launch Africa based in Dakar. Businesses.

Failing to anticipate low cash reserves appears to be a pressing problem. Lexi Novitske, general partner at Norrsken22, said “many founders” are still burning through cash as if they expect their existing investors to automatically provide cash whenever it’s needed. According to her, “we are not at the worst time of this momentous winter and they should plan for 24 months of runway. Yet some people think we are too conservative.” Founded last year by two Swedish entrepreneurs, Norrsken22 this month raised $205 million for its first investment fund in Africa.

A subtext of the alarm concerns what it means for Africa’s nascent tech ecosystem that a wave of shutdowns precedes notable exits for investors. The majority of venture funds invested in startups on the continent come from international investors. With the possible exception of development finance institutions which are more patient in recouping their returns, investment managers expect most global financing sources to withdraw from Africa in a wave of closures.

“I think we will be punished more if we don’t have winners,” QED’s Ajayi said. Speculation about the health of the ecosystem is premature because there have not been enough failures to make an assessment, but “the negative effect of not having winners is much greater than the effect of losing losers,” he said.

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