African startups like their foreign counterparts haven’t been immune to the global economic meltdown that has in one way impacted the growth of these companies.
In 2023, major African startups have either laid off staff, changed business models or shut down due to economic realities and internal factors they couldn’t easily navigate.
Bundle, Payday, Kippa, Dash, 54gene, Vibra, Paxful, Mara, Patricia, Lazerpay, Pillow, Pivo to mention a few are African startups that have fallen under this category.
In a chat with Segun Cole, who holds multiple portfolios in the African tech ecosystem as an investor, founder, entrepreneur and partner.
He founded the Fund the Gap Alliance a Pan African network to address the issues of local founders’ under-representation in the allocation of venture capital funding and a recent addition to his hat is serving as a Managing Partner at Maasai.
Maasai helps companies in distress sell if not full but parts of their business, such as their assets, customers, data, or intellectual property. This way, they can recover some of their losses, pay off their debts, or pivot to a new direction.
Segun shared his thoughts on factors contributing to the challenges sending these startups off their tracks, how they can adapt to remain relevant and many more.
According to Segun, the global economic downturn has certainly affected the African tech ecosystem, as it has reduced the demand for tech products and services, and made it harder for startups to raise funds and access markets.
However, Segun asserts that the downturn is not the only or the primary factor. There are internal factors specific to African startups that pose significant challenges and obstacles. These factors are more structural and systemic, and require more long-term and holistic solutions.
Segun highlights some of these internal key factors that make Africa challenging for tech entrepreneurs and investors:
- A fragmented market of 54 countries, each with different regulations, languages, cultures, and consumer preferences,
- Low consumer purchasing power, limits the potential revenue and profitability of tech products and services.
- Complex and inconsistent regulations, create barriers to entry and increase the cost and risk of doing business.
- Inadequate data communications infrastructure, which affects the quality and reliability of internet access and mobile connectivity.
- Scarce capital and digital talent, constrain the growth and innovation potential of tech startups.
These factors as explained by Segun differ from other global markets, such as Asia, Europe, and North America, where tech ecosystems are more mature, integrated, and supportive.
“In these markets, tech startups have access to larger and more diverse customer bases, more stable and favourable regulatory environments, more advanced and affordable infrastructure, and more abundant and skilled human and financial resources.”, Segun remarked.
Addressing the issue of the fundraising process and utilization of funds concerning the survival and success of African startups. Segun pointed out the following issues:
- The fundraising process is often lengthy, complex, and costly, as startups have to deal with multiple investors, due diligence requirements, legal agreements, and valuation negotiations.
- The utilization of funds is often inefficient, ineffective, or inappropriate, as startups may lack the financial management skills, market intelligence, or strategic guidance to allocate and spend their funds wisely and optimally.
- The alignment of interests and expectations between startups and investors is often lacking, as startups may have different goals, visions, or values from their investors, or may face pressure to deliver short-term results or scale prematurely.
These issues according to Segun, can lead to poor performance, wasted resources, missed opportunities, or conflicts and disputes, which can ultimately result in the failure or closure of startups.
Some investors have also argued that African startups are overvalued, however, Segun believes that there is no definitive answer to this notion, as valuation is a subjective and relative concept that depends on various factors, such as market size, growth potential, competitive advantage, revenue model, profitability, and risk.
Also read, Foreign VCs are Disproportionately Investing in Local African Founders – Segun Cole
Segun nevertheless highlighted the following reasons some investors may argue that African startups are overvalued:
- The market size and growth potential of African startups are often overestimated, as they may not account for the low consumer purchasing power, the high customer acquisition cost, or the fierce competition in the market.
- The competitive advantage and revenue model of African startups are often unclear, unproven, or unsustainable, as they may rely on copying or adapting existing solutions from other markets, or on offering free or subsidized services without a clear path to monetization.
- The profitability and risk of African startups are often underestimated, as they may not factor in the high operating cost, the low margin, or the high uncertainty and volatility in the market.
“If African startups are overvalued, the implications for the long-term health of the ecosystem are negative, as it may create a bubble that can burst or a mismatch that can discourage future investments.
Overvaluation can also distort the incentives and behaviours of startups and investors, leading to unrealistic expectations, irrational decisions, or unethical practices.” Segun expressed.
Still, on the funding issue, Segun affirms that there is a disconnect between funding allocation and actual market needs in the African tech sector.
The majority of funding in the African tech sector goes to four sectors: fintech, e-commerce, logistics, and health, according to a Briter Bridges report, however, Segun explains that these sectors may not reflect the most pressing or relevant market needs in Africa, such as education, agriculture, energy, or sanitation.
Moreover, the funding allocation is also skewed towards a few countries, such as Nigeria, South Africa, Egypt, and Kenya, which account for 81% of the total venture funding in Africa.
However, these countries may not represent the most diverse or inclusive market opportunities in Africa, as there are many other countries with different needs, challenges, and potentials.
Stating further, the disconnect between funding allocation and actual market needs in the African tech sector can have negative consequences, such as:
- Missing out on untapped or underserved market segments, niches, or opportunities that can offer more social impact, innovation, or differentiation.
- Creating an oversupply or saturation of similar or competing solutions in the same or crowded market sectors, segments, or geographies, can reduce the value proposition, differentiation, or profitability of startups.
- Excluding or marginalizing other market sectors, segments, or geographies that can benefit from or contribute to the development, growth, or diversity of the tech ecosystem.
With all these challenges aforementioned, there are qualities and skills still required to stay afloat in a challenging economic climate for tech founders. Segun listed them as follows:
- Resilience: the ability to cope with stress, adversity, and uncertainty, and to bounce back from setbacks, failures, or crises.
- Adaptability: the ability to adjust to changing market conditions, customer preferences, or competitive dynamics, and to pivot, iterate, or innovate as needed.
- Customer-centricity: the ability to understand, empathise, and serve the needs, wants, and pain points of the target customers, and to deliver value, satisfaction, and loyalty.
- Financial literacy: the ability to manage, monitor, and optimize the financial performance, health, and sustainability of the startup, and to make informed and prudent financial decisions.
- Strategic thinking: the ability to define, communicate, and execute a clear, compelling, and coherent vision, mission, and strategy for the startup, and to align the goals, actions, and resources of the team and stakeholders.
- Leadership: the ability to inspire, motivate, and empower the team and stakeholders, and to foster a culture of collaboration, learning, and excellence.
Beyond the required skills, Segun also stated how African startups can adapt their business models to become more resilient in the face of economic uncertainty which includes:
- Diversify their revenue streams, customer segments, or market geographies, to reduce their dependence on a single or volatile source of income, demand, or opportunity.
- Leverage their core competencies, assets, or networks, to create new or complementary products, services, or solutions, that can enhance their value proposition, differentiation, or scalability.
- Partner with other startups, corporates, or organizations, to access new or existing markets, customers, or resources, that can increase their reach, impact, or efficiency.
- Optimize their cost structure, operational processes, or resource utilization, to improve their margin, cash flow, or profitability, and to reduce their waste, risk, or vulnerability.
- Experiment with new or alternative pricing, distribution, or marketing strategies, to test, validate, or refine their assumptions, hypotheses, or value propositions, and to learn from feedback, data, or insights.
Segun also addressed the criticism that investors in African startups are too focused on short-term gains and are not providing enough support to help startups build sustainable businesses.
According to Segun, the criticism is partly valid and unfair. On one hand, some investors may indeed have unrealistic or unreasonable expectations or demands from African startups, such as:
- Seeking high returns in a short period, without considering the long-term potential or impact of the startups.
Imposing strict or rigid terms or conditions, without allowing flexibility or autonomy for the startups.
- Interfering or micromanaging the operations or decisions of the startups, without respecting or trusting the founders or teams.
- Withholding or withdrawing support or funding, without providing feedback or guidance for the startups.
“These behaviours can undermine the growth, innovation, or sustainability of African startups, and create a misalignment or conflict of interests or values between startups and investors,” Segun explained.
On the other hand, Segun emphasized that it is also unfair to generalize or blame all investors for the challenges or failures of African startups, as many investors are supportive, helpful, or constructive, such as:
- Providing mentorship, coaching, or training, to help startups develop their skills, capabilities, or networks.
- Offering access, introductions, or referrals, to help startups reach new or existing markets, customers, or partners.
- Sharing insights, advice, or best practices, to help startups overcome obstacles, solve problems, or seize opportunities.
- Giving feedback, recognition, or encouragement, to help startups improve their performance, confidence, or motivation.
“These behaviours can foster the growth, innovation, or sustainability of Africa’s tech ecosystem, at the end of the day, Top VCs aren’t trading blame on social media, they are taking notes and taking responsibility,” Segun noted.
To mitigate the impact of the economic downturn, Segun African startups to diversify their revenue streams and optimise their operations.
“African startups should partner with established corporations that can provide them with access to capital, customers, infrastructure, and expertise. I would also recommend that startups focus on solving local problems, leveraging local talent, and building trust with local stakeholders.
“There’s also the M&A option, like the recent Wasoko and Maxab merger to create a Category King.”, he added.
On their efficiency and being cost-effective in their operations, Segun noted that startups need to adapt to changing customer needs and preferences.
“This is a time that calls for startups cleaning up and improving their operational areas, such as communication, collaboration, automation, delegation, and feedback, which can enhance their productivity, quality, and satisfaction.”
Despite the current challenges, Segun’s hope for the future of the African tech ecosystem remains high, “As a global talent hub, Africa’s tech-centric vision has gained considerable attention(Good and Bad). Its dedication to fostering a thriving startup ecosystem has attracted venture capital investments and caliber talent pool. I don’t expect any of this to wane off any time soon.”
According to Segun, the changes needed within the ecosystem to create a more supportive and enabling environment for startups to thrive include:
- Reducing the fragmentation and complexity of regulations across different countries and sectors.
- Increasing the availability and affordability of data communications and internet access.
- Enhancing the quality and quantity of digital talent and skills development.
- Fostering a culture of collaboration and innovation among stakeholders.
- Addressing the social and environmental challenges that affect the continent.
In light of the current economic climate, Segun advises aspiring entrepreneurs and young startups in the African tech ecosystem to:
- Conduct thorough market research and validate your product-market fit before launching your venture.
- Seek feedback and mentorship from experienced entrepreneurs and industry experts.
- Be flexible and agile in responding to customer needs and market trends.
- Focus on solving real problems and creating value for your customers.
- Be resilient and optimistic in the face of difficulties and uncertainties.
These lessons according to Segun can enhance the preparedness of future startups for challenges and uncertainties by assisting them in identifying and prioritizing the most critical issues for their business.
They offer practical and actionable guidance, enabling startups to learn from both the best practices and mistakes of others.
Additionally, these lessons inspire innovation and encourage startups to differentiate themselves from the competition, empowering them to overcome obstacles and seize opportunities.
As mentioned earlier about Maasai, the platform also helps investors who are looking for profitable and scalable online businesses in Africa, giving them access to a pool of vetted and verified sellers.
Maasai is a win-win solution for both buyers and sellers, as it creates value for both parties and supports the growth of the African tech ecosystem.
If you are an online business owner or an investor who is interested in joining Maasai, you can sign up today and explore the opportunities that await you.
Maasai is more than just a marketplace, it is a community of passionate and innovative entrepreneurs who are committed to making a positive impact in Africa and the world.
Featured Image: Segun Cole, Managing Partner, Maasai
Don’t miss important articles during the week. Subscribe to techbuild.africa weekly digest for updates