Analyzing the Involvement of Venture Capitalists in the Failures of African Startups.


The recent closures of adequately funded African startups, such as Dash fintech in Ghana, have ignited discussions about whether unrealistic demands from venture capitalists are a factor in these shutdowns.

Despite raising $86.1 million and touting rapid user growth, Dash suddenly ceased its operations. This recurring trend of startups being overvalued but failing to meet expectations has led to questions about the misalignment between the aspirations of venture capitalists and the actual circumstances of African startups.

There’s a perceived conflict between venture capitalists seeking substantial returns through skyrocketing valuations and the challenges that emerging African companies encounter in unstable markets. These startups often feel compelled to exaggerate their performance metrics to attract funding based on growth expectations that the local environment cannot sustain.

When struggling startups find it challenging to meet these requirements, they might change their core mission or employ unsustainable tactics to create the illusion of profitability and rapid scaling, as per the investors’ desires. However, these questionable practices tend to catch up with them, and when growth falters, closures become inevitable.

On the other hand, venture capitalists argue that it’s reasonable to apply traditional investment models to Africa’s potential. High expectations for startup growth exist worldwide, and local difficulties should not exempt companies from setting ambitious goals.

However, individuals like David Adeleke popularly know as Davido,

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who is associated with the startup Zeeh Africa, believe that some venture capitalists have a short-term perspective, pressuring startups to expand prematurely without considering market volatility. They suggest that a longer-term perspective, combined with realistic communication, is essential.

Founders also share some responsibility in this scenario, occasionally exaggerating their user engagement and revenue figures to secure funding at desired valuations. Instances like Dash’s situation reveal that numbers were inflated by a factor of 5 within a few months to give the appearance of sudden high growth. However, this growth illusion eventually unravels.

Some think VCs accepting questionable data at face value during due diligence enables this behaviour. But VCs believe founders should justify valuations transparently without fabrication.

Structural issues exist, like VC preference for startups reporting in dollars rather than the local currency, even if customers transact in local tender. This can further incentivise embellishing finances to meet expectations.

Overall, Kenya’s Jason Njoku argues founders must play to strengths and acknowledge shortcomings to build sustainable firms. The product itself should solve real problems, not just pursue funding and rapid expansion unchecked.

Ultimately, better alignment between VCs and startups is critical for Africa’s tech ecosystem to thrive. Investors must appreciate unique local challenges and adjust return expectations accordingly, providing patient capital for startups to deliver on their missions sustainably.

Likewise, founders should ensure valuations accurately reflect on-ground realities without exaggeration. With transparent communication, realistic goal-setting and a long-term outlook, African startups can live up to their immense potential without compromising viability

Source: Techinafrica