Africa’s Dynamic Startup Ecosystem: The Way Forward Following 2023 Shutdowns
In 2023, African startups suffered a fall in fundraising, with Kenya taking the lead in total secured funds, as illustrated below by Africa: The Big Deal. Sad to say, the series of shutdowns in 2023 poses an even greater threat to Africa’s economic development.
When comparing the disruptions of digital startups in developed countries like China, the United States of America, and the United Kingdom, which cumulatively boast over 1800 active unicorns, Africa, with fewer than 10 unicorns, is considered to be in its nascent stage. However, the fact remains that its digital ecosystem in the last decade has significantly influenced the African economy through innovations that have provided solutions to long-standing problems across industries.
Maximising Africa’s Economic Possibilities
The potential growth of the African economy through digital startups is an encouraging trend that demands sustained attention and discussion.
Digital startups are fast rising and leading funding rounds in Africa, with IT innovations that are not only solving problems across sectors but are also helping to reduce the unemployment rate, which, according to KPMG, is likely to worsen in the formal sector in 2024.
In regards to unemployment, over 15 startups in Africa ceased operations in 2023, according to Afridigest, leaving hundreds or thousands of staff unemployed. Typically, the focus of shutdown announcements centres more on the founders, and rightfully so. However, these discussions frequently overlook the post-shutdown state of the employees, some of whom played pivotal roles in building the companies before the crisis unfolded.
While the fact remains that not every business will be successful, with economic downturns, a lack of product-market fit, or a lack of funding being the top reasons for startup failures, poor leadership, fund misappropriation, or cofounder disagreements, although considered outliers, should not become recurring reasons for job losses in Africa.
Hence, the continuous dialogue around startup success and failure should serve as a roadmap for policymakers, investors, entrepreneurs, professionals, and even academicians to understand how these ventures can further contribute to Africa’s GDP growth and economic resilience.
Embracing Responsible Business Practices:
Diving deeper into Kuda’s CEO’s perspective in his recent editorial urging investors to “focus on Africa’s long-term opportunities,” achieving a shift in investor’s perceptions would require an internal transformation within the African tech ecosystem. To demonstrate a sustainable business model, startups would need to be firmly grounded in sound strategic planning and management practices to succeed and resist economic risks.
It requires a thorough grasp of the market, foresight into potential difficulties, and successful scaling and risk management measures. Hence, all actors need to work strategically to enhance the long-term attraction of local and foreign VCs.
Forging Ahead
Assigning blame solely to local investors for some startup failures, as we’ve seen over the past few months, is unfair, given that there have been some unforeseen circumstances. Nevertheless, by engaging in these discussions, investors can adopt a more receptive stance, prioritising listening.
Instead of hastily assessing individuals proposing suggestions, investors can sift through comments, giving heed to voices that offer a broader perspective on the impact of startup shutdowns and possible solutions to some of the problems identified.
Efforts to address controllable issues such as mismanagement, poor leadership, and R&D must be actively initiated. To ensure effective founder leadership and strong product-market fit, I recommend the following:
1. Establish partnerships with academic research institutes
Writing my academic research project on African startups last year was somewhat of a challenge due to a wide gap in the existing literature and limited available data on tech startups in Africa.
To start gaining accurate insights into the internal operations of funded startups, one viable avenue is for key industry stakeholders to consider funding academic research and adopting methods like participatory observation of the internal operations of African startups over time.
Beyond fostering trust, this strategy can reveal the true challenges of founders across industries, their leadership traits post-funding, and the impact the external environment has on their business strategies. Findings from this collaboration can help to proactively develop new frameworks, hybrid strategies, and business models that are unique to Africa’s dynamic market.
2. Enhance enhanced due diligence
The term “due diligence” has become somewhat clichéd, and I imagine its mention in this piece might elicit a few eye rolls. Despite the criticism directed at local venture capitalists for alleged laxity with due diligence, some VC firms, like Future Africa, have openly shared their due diligence strategies before committing funds. But how much more thorough can VC firms get?
“Startups take on the traits of their founders.” — Garry Tan, CEO of Y Combinator
In addition to existing solutions, the leadership challenges must be equally prioritised. As Garry Tan recently stated, “Startups take on the traits of their founders.” Therefore, local venture capitalists can:
- Seek better ways to evaluate founders’ character and capacity through professional background and reference checks, online presence, interpersonal skills, value alignment, and track record, particularly for second-time founders.
- Ensure founders are certified on the body of knowledge necessary to succeed in their respective industries before being funded. This includes strategic leadership. Their practical application of knowledge will contribute to the development of resilient organisations supported by strong leadership.
- Develop smart data capture systems that reveal the top reasons for investors’ funding and rejection decisions. The insights, if shared periodically with the public, could assist existing and future founders in improving their products or skills to avoid rejection, ultimately saving Africa’s developing economy and investors time and money.
3. Embrace proactive educational investments
Eunice Ajim’s recent assertion is logical. An African student in Junior Secondary School 1 today will graduate with a degree in computer science by 2034. Hence, a more proactive stance towards investing in students at the secondary school level is necessary.
It is vital to actively shape the trajectory of young talents across African regions to proactively address the ongoing talent shortage issue. Foreign investors cannot fully capitalise on Africa’s long-term gains without key local startup actors establishing the right kind of partnerships with both private and public institutions to invest in educating African children and upskilling our youth today for us to mirror Asia’s developmental trajectory tomorrow.
Final Thoughts
As Africans have formed an unconscious habit of drawing comparisons with the Western market, emphasis should lean more towards comparing startup success and sustainability. In essence, we should not get too comfortable using the popular “90% startup failure” statistics as consolation for our business failures.
On the bright side, despite prevailing negative narratives, new startups in Africa are creating solutions and securing funding as more data-informed and courageous venture capital firms continue to direct investments into the market.
It is reasonable to state that the future holds promise for African startups, but the stakes are high. All ecosystem players must collaborate to maintain Africa’s appeal as a robust market for both local and foreign investment, extending beyond the next decade.
Banner Artwork by Temidayo Odutokun
Title: Hand Work and Sustenance
Year: 2010.
