Funding drought devastates African startups, leaves trail of job losses

A record 20 start-ups closed down across Africa last year, and many more scaled back operations due to a general funding drought that impacted many countries on the continent, leaving a trail of job losses.

Last year, the amount of funding raised by start-ups on the continent declined by 31 percent to about $4.5 billion, from the $6.5 billion raised in 2022, which significantly impacted cash flows for budding companies.

According to the African Venture Capital Association (AVCA), a number of start-ups, which had previously raised significant amount of funding from investors, last year closed down after failing to raise follow-up funding rounds.

“This funding drought led several early-stage companies to either significantly downscale operations or shutter completely,” said AVCA in its latest Venture Capital Activity in Africa Report.

“Reasons for their ultimate death range from a lack of working capital after failing to raise follow-on funding rounds, difficulties establishing sufficient and sustainable market penetration, and allegations of corporate governance misconduct against founders.”

In Kenya, where start-up funding defied the global drought to post a significant increment, at least five firms which have each raised over $1 million in funding in the past, either shut down or scaled back, after failing to raise additional funding.

Among them is logistics firm Sendy, which boomed during the pandemic peak after raising $20 million in follow-up financing in January 2020. After shutting down its retail and supplier platform in late 2022, the firm last year was put under administration after defaulting on its debts.

Another one, Zumi, which was a business-to-business e-commerce platform, also shut down in March 2023, after failing to secure follow-up funding to continue its operations.

Besides those that closed down, others also reduced their operations, laying off up to 30 percent of their workforce, as was the case with Twiga Foods, which is also currently struggling to keep up with its debt obligation with some of its creditors wanting it liquidated.

Nairobi-based e-commerce platform Copia, which, after raising over $123 million in funding, expanded into Uganda, suspended its operations in Kampala, laying off its staff there.

Across Africa, thousands of people are estimated to have lost their jobs in the wave of start-up closures and scale-backs last year, mostly in the top four start-up markets on the continent – Nigeria, Kenya, Egypt and South Africa.

Nigeria had the most casualties, with at least eight start-ups, including genomics firm 54gene, crypto exchange platform Bundle Africa and web3 firm Lazerpay, folding, and several others downscaling.

“These strategic retreats and hard pivots for growth-focused ventures triggered a series of mass job cuts which resulted in over 1,000 layoffs across the continent in 2023,” says AVCA.

“Should the lack of liquidity and present market challenges persist, founders may be forced to make tougher, strategic decisions in order to remain afloat and prioritise profit.”

There was an overall slump in start-up funding last year, as high inflation and high interest rates in the US dis-incentivising investment in budding companies in Africa and across the globe.

The number of young companies sent into the graveyard may continue to increase this year, should the funding drought continue on a downward trajectory, according to AVCA’s prediction.

Meanwhile, the era of foreign nationals dominating the African innovation scene, may be coming to a close as majority of start-ups that receive investor funding to solve problems on the continent are founded purely by Africans.

Latest data by startup funding tracker Disrupt Africa shows that last year, 86.7 per cent of the start-ups that raised money from different investors had only African founders, while those consisting of only expatriate founders had dwindled down to just 4.2 percent.

Start-ups that have a mix of local and foreign co-founders accounted for just 9.1 per cent last year, an indication that investors now have more confidence in start-ups with only local faces.

“The issue around non-African founders securing funding in Africa is well-documented, but is increasingly becoming less relevant,” said Disrupt Africa in its latest African Tech Start-up Funding Report.

Indeed, about four years ago, start-ups with only local faces found it harder to raise funding from both local and international investors, while those with expatriates, especially white or Asian, could easily raise funds even to solve non-existent problems.

In 2019, a majority of the start-ups domiciled in different African countries that raised over $1 million in funding were founded by foreigners, as local-led firms got the least investments.

In Kenya, 65 percent of the funded start-ups that received funding were started by expatriates, and 24 percent had both local and foreigners as co-founders, with only 11 percent being purely locally led ventures, analysis by Nairobi-based venture capital Viktoria Ventures shows.

Across the continent, 45 percent of all start-ups that received funding in 2019 had foreign founders, while only 32 percent had any local co-founders in their boards, but this has now changed.

By 2022, about 94.8 percent of the funded start-ups in Africa had at least one local co-founder, with the majority being founded by only Africans.

Last year, the number improved to 95.8 percent, meaning expatriate-founded firms in Africa have fallen to less than five percent, from 45 per cent in 2019.

Previously, experts argued that the African start-up scene was dominated by foreigners because most of the funding also came from foreigners, with local investors accounting for just a minority of capital financing for start-ups.

“Finances are traditionally more available in the more developed markets, so it’s only logical that they’ll give them to the people who can convince them the most,” Flocash founder Sirak Mussie told The EastAfrican in an earlier interview.

According to the AVCA, from 2014 to 2020, 40 percent of start-up investors hailed from North America, mostly the United States and 25 percent from Europe, while only 18.6 percent were based in Africa.

By last year, the number of investors within Africa had risen to 29.4 percent, while start-up investors from North America and Europe now account for 31 percent and 22 percent respectively.

This shows that while the majority of investors are still from outside the continent, more African investors have cropped up, narrowing the gap that previously existed.