It has already been established that several African startups struggle to survive, and most of them eventually fail. The failure rate of African startups was 54.20% between 2010 and 2018, according to a recent report from Wee Tracker and GreenTec Capital Africa Foundation on “The Better Africa Report.”
Ethiopia (75%), Rwanda (75%), and Ghana (73.91%) had the highest rates of startup closures. The startup closure rate for Africa’s top three startups was greatest in Nigeria (61.05%), followed by Kenya (58.73%), and South Africa (54.39%). But, according to CBInsights research, the average startup failure rate in Africa will be 54% in 2020. According to the Startup Genome research, 90% of new businesses fail, and 10% of them do so within the first year. According to the survey, two to five years are when startup infant mortality occurs most frequently, accounting for 70% of cases.
Four months ago, we cited a lack of access to the same level of funding and resources as startups in other regions of the world, fierce competition from well-established multinational corporations, socio-economic instability, and infrastructural challenges as some of the reasons African startups failed.
But, given the present course of events, African entrepreneurs are now more likely to confront even greater difficulties as the situation around the world gets worse. Sadder is the fact that post-seed funds are likely to become scarce as more investors fail to see the potential of startups to expand beyond their current scope. Several industry experts are already predicting tougher times for startups looking to raise Series A.
Even though some founders are not surprised by this, Africa is just not prepared for the problems that will affect the business. It is already difficult to turn an idea into a successful business. It is more difficult to raise the required seed capital. Stepping into the current scene’s volatile financial structure affects everything.
There is no doubt that early-stage growth firms and industry influencers are both impacted by the current narrative surrounding the global digital environment. This calls for heightened skepticism about expansion-focused initiatives.
Industry titans and early-stage businesses are both being severely impacted by the current investor winter. Layoffs are occurring across all industries, from software to consulting, and the collapse of Silicon Valley Bank has sent the banking industry scrambling.
Since peaking in late 2021, according to Crunchbase data, Series A investment has decreased for five straight quarters. From the highs reached in late 2021, Series A quarterly investment is still down by around two-thirds.
Generally speaking, raising funds for expansion has never been simple. Crunchbase claims that the chances of moving on to a Series A round have never been very good.
Investors typically avoid post-seed startups because they are at a stage where there is uncertainty about the product and market fit. Investors find it easier to take a small risk on pre-seed and seed stage enterprises than it is to stake a large amount on successful companies that are expanding quickly.
Building a solid team of co-founders and advisors is one method firms might draw Series A funders. A team of seasoned professionals can help convince investors that the startup has success potential. Even so, it is a difficult charge.
Many African startups don’t have a proven track record. This is especially true for early-stage firms, which are frequently viewed by investors as high risk. There are several methods to get around this obstacle, but it can be difficult for young startups to compete with more established businesses for funding.
A scalable business model is essential for a startup’s expansion. It is, nevertheless, also the most demanding aspect that a new business carries. A business plan that may increase profit over time by boosting revenue while reducing costs is essential for a startup to advance. Yet, given the current situation, it is quite difficult to develop an idea that satisfies the aforementioned conditions while still being distinctive and original, as the industry has already been captured by hundreds of startups with unique business strategies, struggling to survive the market.
Startups must first gain a solid understanding of the environment they are currently working in and likely will remain for the foreseeable future in order to choose their next steps. The terms of the VC game have shifted in line with the market’s slump, which might extend through the end of 2023, prompting VCs to reevaluate how they go about making investments.
The tactics entrepreneurs employ may differ from business to business, but they are all focused on one goal: using money as efficiently as possible. These tactics will determine whether firms survive as VCs prolong the time required to invest in them. Strong capital efficiency metrics are now more important to investors than exceptional growth rates. A startup must demonstrate high capital efficiency if it hopes to obtain an expansion investment.