More African startups risk closure due to the problem of the economy

The newest African startup to closed shop It is Notify Logistics. why? You guessed right, we ran out of money too.

The company whose business model is very similar to that of Adam Newman WeWorkOffice space leased to small businesses in Kenya. Founded in 2018 to support the cost of retail stores for small businesses. Whereas retail stores can cost as much as 40,000 shillings ($330) with traditional renters, Notify has been offering them for 20,000 shillings ($165) with store attendants as an added bonus. At her mall in Nairobi, she was paying Sh800,000 ($6,600) a month for the three floors she occupies, but the businesses she was renting were unsustainable.

In August 2021, Notify raised 45 million shillings ($370,000) but it wasn’t enough to help save the startup. In the end, it was closed due to the high cost of operation.

This is just the latest in a long line of startups failing due to high operating costs. Take, for example, Kune Foods, an on-demand food delivery company Closed In June this year after only 18 months of operation. Kune launched in December 2020 with a proposal to provide customers with affordable, ready-to-eat meals for $3, in a market with delivery giants like Uber, Glovo and Jumia offering a similar product for $10, and local food vendors selling food for even less. By March, the company was serving 600 meals a day at a total margin of 48%. But while that margin might sound good, it wasn’t. Connie would spend $1.56 to prepare each dish and turn in a gross margin of $1.44.

It is important to note that in June 2021, Kune raised $1 million in venture capital (VC) funds. This year, it sold 55,000 meals, for the equivalent of $165,000. When the company eventually collapsed, French CEO and co-founder Robin Richt said selling at $3 a meal “wasn’t enough to sustain our growth.”

One thing is clear: Kune should have sold more and possibly raised the price of its meals rather than relying solely on VC funds. According to Jumia Kenya Food Index 2020 ReportIn Kenya, Jumia users were spending an average of 2,000 shillings ($16) per meal.

Before Kuhn’s demise, according to a personal account, Reecht contacted hundreds of investors but was unable to raise funds from any of them. “With the current economic downturn and tightening investment markets, we were unable to raise our next round. Combined with rising food costs leading to deteriorating profit margins, we were unable to continue.” If Kune, who was already in a precarious situation, had raised her prices, she might have been able to rise above the increase in food costs.

Last month, Kenyan e-commerce company Sky.Garden announced that it will be so after five years of operation Close After a failed financing round. Agritech startup WeFarm, which raised $11 million in July 2021, close WeFarm Shop, its application that helped farmers get agricultural products online. The product, which was launched 9 months ago, according to the company’s director of growth, Sofie Mala, has been closed because “current market conditions have made it difficult for the company to scale.”

These failures raise questions about technological disruption on the African continent. Usually startups are created to improve the brick-and-mortar process or disrupt existing tech companies, but instead, they end up shutting down. They are unable to replicate the austerity for which traditional companies are famous, and thus sustain themselves, despite raising millions of dollars in venture capital money.

There are many reasons for this failure. On the other hand, doing business in Africa is challenging. Businesses have to deal with consumers with low purchasing power, an unstable policy environment, political instability, and inadequate infrastructure.

Another reason for these successive failures is the drying up of venture capital financing such as The global technological downturn Insist – stick to his opinion.

Startups are built to scale quickly, but in the process of doing so, they are hiring more hands and acquiring more resources than they can afford. Instead, they rely on the generosity of investors, whose absence forces them to cut their coats according to their size. Take, for example, the Kune Company, which still refuses to raise prices or cut costs even when sharp increases in food and other operating costs bring its gross profit margin down to 5%. Instead, she chose to raise money and failed. It is now clear that in Africa’s unpredictable markets, companies with models that cannot withstand social and economic shocks risk failure and closure.

In the startup world, rapid expansion is the norm, because most startups try to solve big problems in a short time, while building an efficient product and making profits. But rapid expansion has its downsides. When scaling rapidly, startups recruit and hire at breakneck speed, but neglect to adjust their conditions to fit the current stage of development. This means that what works when you have 10 employees, may not work when you have 50 employees.

Rapid expansion can mean increased revenue, yes, but it also means rapid growth in users, adding internal processes and management levels, and more fires to be put out. These quick changes require attention to prevent the quality of your product from suffering, keep your employees happy and make sure you don’t run out of money. In fact, it is advised that startups hit the brakes regularly so that they can scale faster and safely.

Austerity, in this sense, means that startups create products with a strong value proposition and adopt profitable business models. Without these, they would not survive.

Last month, when Tekkapal Digging into the books of neobank Kuda Revealing that the startup accumulated losses of JPY 6,092,554,866 ($14,214,681) (mostly in the form of unpaid loans) in 2021 alone, the defense stated that such high losses are common for for startup companies. A month ago, news came out that Koda had a Dismissed – Temporarily released 23 workers or 5% of 450 employees. But the question now is: As an African startup, do you need to scale in ways that lead to loss during the global economic downturn?

The unprecedented $5 billion that African startups attracted last year is not enough to change the game for startups on the continent. Meanwhile, electric car company Rivian alone raised $5 billion last year.

The Silicon Valley startup culture of “fail fast, fail often” that glorifies failure as a stepping stone to success does not apply in Africa. This is because failure is costly in Africa’s growing technology ecosystem. This mindset worked best in 2018 when the Nigerian tech ecosystem was in its infancy and startups were failing so often that they were encouraged to. just survive. As investors look to the continent as the next source of fat returns, continued failure could cause them to reconsider investment that could harm the ecosystem as it still mostly depends on funding from outside the continent.

Startups around the world are at risk of failure especially as the downturn is destroying the tech world, but the unstable business conditions on the continent require a certain kind of wisdom that will help extend the life of African startups.

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