HomeBusinessHow African Startups’ Failures Shook Investor Confidence In The Tech Ecosystem

How African Startups’ Failures Shook Investor Confidence In The Tech Ecosystem

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The African tech ecosystem has been hit by a wave of failures and scandals that have eroded investor confidence and raised questions about the sustainability and ethics of some startups.

In the past year, several promising startups that had raised millions of dollars from reputable investors have shut down their operations amid allegations of fraud, mismanagement, and inflated metrics.

Some of the startups that have collapsed include:

  • Payday is a fintech startup offering loans and savings to low-income customers. The company raised $3 million in a seed round led by Moniepoint in 2023 but faced customer complaints of account restrictions and fraud. The CEO, Favour Oni, allegedly paid himself $15,000 per month while slashing salaries of some Nigerian staff. The company is currently in talks with potential buyers.
  • 54gene is an African genomics company that aims to unlock the potential of African DNA for medical research and drug development. The company raised $45 million across three funding rounds in two years but shut down amid controversy and financial challenges. The founder and CEO, Abasi Ene-Obong, was replaced in 2022 after internal disputes and lawsuits. The company had three CEOs in one year, none of whom could save it from bankruptcy.
  • Dash is a Ghanaian fintech startup that claims to connect mobile money wallets and bank accounts across Africa. The company raised $86.1 million in five years from big-name investors such as Insight Partners, Global Founders Capital, and 4DX Ventures6. However, the company was exposed for falsifying its user numbers and metrics, leading to its CEO, Boakye Boampong, being suspended and fired in 2022. An audit revealed that there was a shortfall of at least $25 million that was unaccounted for. Boampong reportedly earned $50,000 monthly and diverted at least $8 million.

These failures have shocked the African tech community and cast doubt on the credibility and viability of some startups. They have also damaged the reputation and trust of investors who have poured money into the continent’s tech sector, hoping to tap into its growth potential and social impact.

According to Partech Africa, a venture capital firm that tracks funding activity in Africa, the continent’s tech startups raised $2.8 billion in 2022, a 12% increase from 2021. However, this growth was driven by a few large deals involving well-established companies such as Flutterwave, OPay, and Jumia. The number of deals actually declined by 9%, indicating a slowdown in early-stage funding.

Some experts have attributed this trend to the lack of due diligence by some investors who rely on hype and herd mentality rather than rigorous analysis and verification. Others have blamed some founders for being driven by greed and ego rather than genuine passion and problem-solving.

Kola Oyeneyin, co-founder and director of Volition Capital, a Nigerian venture capital firm, said on social media platform X that he was horrified by the stories of some founders who paid themselves exorbitant salaries while their companies collapsed.

“I think it’s about time we begin to talk about what it really takes to build successful companies,” he said. “When a founder, owner, or entrepreneur does not understand or practice the principles of ‘delayed gratification,’ the death of whatever they are building is around the corner.”

Davidson Oturu, a venture capitalist based in Lagos, said some founders started with good intentions, but the need to survive pushed them towards unethical practices along the way.

“In the past, some investors have been careless with due diligence. Or when they see that a larger venture capital firm is investing, they relax and presume the other guys have things covered. So due diligence is key,” he said.

Charles Rapulu-Udoh, a tech startup lawyer based in Abuja, described the African startup ecosystem as nascent and said some startups’ failures should not overshadow others’ successes.

“The most obvious implication of this is that the morale of investors will be severely dampened, even more concerning given the precarious situation in the fundraising market at the moment. So this is making matters more difficult,” he said.

“However, this will not completely destroy investors’ confidence in the ecosystem. There are still many startups doing great things and solving real problems for millions across Africa.”

He added that these failures could also serve as a wake-up call for investors and founders to be more diligent, transparent, and ethical in their dealings.

“There is no shortcut to success. It takes hard work, patience, perseverance, and integrity to build lasting businesses that can create value and impact for all stakeholders,” he said.

Source: Business Day

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