The past six years have been an immersive journey in Africa’s startup ecosystem as 7 companies’ valuations soared to $1 billion to become unicorns.
Moreover, during the Covid-19 pandemic and its ensuing lockdown, the fintech and e-commerce sectors became front liners in driving the continent’s economy forward.
These sectors needed to maintain the digital culture they created when physical meetings and traditional solutions were not viable. And to do this, funding was needed.
Image credit: Statista
Competition increased as innovators and entrepreneurs discovered a thriving sector fueled by the deficits in traditional sectors.
- For instance, fintech challenged traditional banks with fast, seamless and less expensive costs.
- E-commerce startups disrupted the traditional market with seamless technology that collates orders and makes doorstep deliveries.
- The health sector plunged into tech to offer virtual consultancies, conduct tests in nearby labs and deliver test results virtually to better serve patients.
In 2021, African startups raised over $4 billion, thrice the amount raised in 2020. Investors turned the green light on the continent resulting in massive funding. Ventures, Grants, and Incubators have been a well-serving fuel for the smelting ecosystem.
In H1 2022, African startups defied this forecast when they raised $3 billion, more than half the total amount raised in 2021. However, the reality is beginning to stagger the turbo-charged growth of startups given the funding downtrend in H2.
A funding slump
The World Bank forecast predicts an economic recession among emerging markets and developing economies, stating that growth is also projected to fall from 6.6% in 2021 to 3.4% in 2022—well below the annual average of 4.8% over 2011-2019.
In seeking to find solutions to the zombie attack on funding, CRESTHUB spoke with Caleb Maru, General Partner at Proximity Ventures, an Africa-focused Venture Capital firm.
According to Maru, “factors, like inflation and the war in Ukraine are big contributors to the funding drought in Africa. Moreso, the US is experiencing the highest inflation since the 1980s; oil prices have spiked due to the war and in response; central banks are raising interest rates to combat high inflation.
“This has a flow of effect on capital markets, with global equities in growth sectors like technology most affected. Now that there is less optimism, people have taken their money out of the market,” he said.
He added that “a lot of limited partners who invest in funds make their money in other places, like public markets. When public markets go down, there is less money to go around for venture capital funds. This makes some investors more cautious and less likely to invest in companies.”
He also warned that funding rounds from series A upwards could drop even lower than the existing status.
This implies that pockets, wallets, savings, funds and wherever an investor can source money from have been adversely affected. However, startups will, regardless of a recession, be asked to prove their value and sustainability in the competitive market.
In response to this global recession, companies around the world have begun laying off staff to cut costs. Maru attributed this to the culture that encouraged it to grow quickly because money was available.
“Now startups are focused on becoming profitable and sustainable so that they don’t die. This means reducing burn (money spent) and increasing revenue. Startup’s biggest costs are people, so they are the first to be cut when there is a downturn,” he said.
Several giant firms have begun exploring firing measures for staff.
- US Automotive company Tesla laid off 229 members of its data annotation team.
- Microsoft also traversed this path with the job cuts of 350 staff working with its news-related products.
- Netflix, the global video streaming giant, reduced its headcount by 450 this year.
Layoffs in Africa
Africa, which has begun joining global books in making strides as a unicorn holder, is currently more volatile than other long-standing companies around the world. The days to come will test the sustainability of the nascent startup ecosystem in Africa.
- Marketforce laid off 9% of its 600 staff in a July freeze, as part of a ‘reorganization strategy.’
- Egypt’s Swvl in May announced plans to lay off 32% (400) of its workforce.
- Nigerian challenger bank, Kuda, laid off a little below 5% of its 450 teams.
- Francophone Africa’s Wave, had frozen the appointments of 300 of its staff.
- Nigerian genomics startup, 54genes reduced its headcount by 95 in August.
- Healthcare startup Vezeeta lessened its 500 teams by 50 persons in June.
- Meanwhile, Kenyan food delivery startup, Kune Food also shut down operations in May barely after a year of launch.
And this is no continent-specific problem. It is global. A global layoffs tracker holds the disclosed number of layoffs worldwide at 120,567 from 761 companies since January.
The only fresh breath of air amid the dismal job cuts is the recent hiring of 200 persons to join Flutterwave’s workforce.
Maru added that employee retention ought to remain a culture of startups. “Good culture is important all the time, not just during bad,” he said.
Acquisitions:
Acquisitions which entail obtaining most or all of a company’s shares are well-known for leading companies into existing markets rather than growing a user base from scratch.
For instance, MFS Africa has acquired a good number of companies to become a pan-African payments service provider. Liquid intelligent Technologies has also been riding the crest of acquisitions to drive software solutions across Africa. Nigerian Business-to-Business platform, TradeDepot earlier in February acquired its Ghanaian competitor, Green Lion to venture into the existing market.
It is usually easier to acquire a company than to start a new one but what could this mean for the acquired company? Maru said that mergers and acquisitions could become prevalent in this economic phase to retain existing staff for one year before dismissal.
“Startups with a lot of capital can now buy other companies that were previously too expensive before,” he confirmed.
To brave these difficult times, Maru stated, “If you need to reach profitability and cut costs, do it as soon as possible. And treat your team well. Culture is the most important in hard times like this,” he concluded.
