Last year presented a tough period for African tech startups. Venture capital was hard to bag (as predicted earlier), bridge and down rounds became the norm, and news of fire sales, layoffs and startup closures reverberated across the continent.

With the overall amount of VC funding raised in Africa dipping significantly across the year, according to initial reports, after steady growth over the last decade (and the windfall of the previous two years), startups and scale-ups in the continent have suffered far-reaching consequences. Unshockingly, while capital became elusive from all fronts, growth-stage companies in Africa bore the brunt of the market correction, hot on the heels of a season of bountiful funding and high valuations.

Companies such as South Africa’s WhereIsMyTransport, a mobility startup, and Sendy, a Kenyan logistics company, shut down after failing to raise fresh funding. WhereIsMyTransport had raised $27 million from VC heavyweights, including Google, SBI Investment and Toyota Tsusho Corporation. Sendy also counted Toyota in its investor lineup, which also had Atlantica Ventures leading its $20 million Series B round in 2020.

Tens of other growth-stage companies found it hard to survive and were forced to scale back operations as investors changed tune from “growth at all costs” to profitability. Scaling down is unavoidable sometimes, according to seasoned entrepreneur Ken Njoroge, co-founder of Cellulant, a payments company.

“If the entrepreneurs hunker down and fix the unit economics and thrive, they can come out of the gates really battle-hardened and have the ability to operate lean. This can be a source of lasting competitive advantage,” said Njoroge.

Chipper Cash, a fintech, conducted more rounds of layoffs as the cash crunch continued with the tough times worsened by the collapse of FTX and Silicon Valley Bank, the institutions that led its $250 million Series C and extension round in 2021 and which would have presumably been of aid in tough times. Cellulant also opted for a leaner, “product-led growth strategy,” dropping 20% of their employees. Ghanaian health tech mPharma laid off 150 people, too.

The carnage extended to B2B e-commerce businesses, including Copia Global, which exited the Uganda market and laid off 700 people. Twiga shattered its sales and in-house delivery divisions, releasing hundreds of employees, while MarketForce exited all but one of its markets. Nigeria’s Alerzo downsized too. Wasoko and MaxAB are exploring consolidation in a bid for survival.

Why the strife?

The aforementioned companies, and many others, have historically sourced their funding outside the continent, with just a handful of Africa-focused funds able to write big checks. Data shows that most venture funding in Africa comes from foreign VCs (about 77%), which is untenable for the ecosystem’s growth. This has been proven true as the well-backed foreign VCs that trooped the continent over the last few years rescinded.

These VCs, with no obligation to invest in Africa, are holding off making new investments to refocus on their primary markets. They have become more selective on who they back, making huge checks hard to come by for African enterprises.

Njoroge said founders need to be aware of the funding gap: “We don’t have an abundance of capital [and] creating customer value and driving revenue is the most reliable source of funding a business. Businesses need to get very good at that to survive all seasons, including the funding winter that is there today and will be for a while.”

What other sources of funding are available?

Andreata Muforo, TLcom partner, says African companies can raise from private equity funds that invest in late-stage VC companies, take up debt or raise bridge financing from their investors. However, she underlines that a bridge round would only be possible in these challenging times if the companies have African investors committed to the ecosystem in all seasons.

“Bridge rounds can also help bring in investors who are interested in investing but cannot lead a round. So, at attractive and reasonable terms, founders can attract them to participate earlier,” she said.

Meanwhile, as founders explore funding options to remain afloat, Mareme Dieng, the Africa lead at 500 Global, highlighted the importance of investor support in ensuring portfolio companies continue to focus on their customers and the path to profitability.

“We should be planning and executing with the assumption that market conditions will not improve. I expect that we will be pushing our portfolio companies in Africa to assume that market conditions are to remain challenging in 2024 and that they should continue the initial course set in 2023 to focus on profitability and value to customers,” said Dieng.

Muforo added that companies must also have an efficient working capital strategy, including ensuring higher margin products or services, renegotiating credit terms with debtors and creditors, and optimizing inventory management.

Litmus test

However, it’s not all gloom for the ecosystem, as the funding downtime acts as a litmus test for what works or doesn’t work in Africa. If anything, the tough times have, for instance, revealed that B2B e-commerce companies have mostly had unfavorable unit economics and high burn rates. This has called for new approaches that guarantee higher margins to make money, like optimizing logistics or selling high-profit margin goods. Huge funding rounds, it has been revealed, cannot be used to cover flawed business models.

Njoroge said founders need to study their markets first to know what works, adding that founders need not be too quick to raise funding and should go for very little of it to get product-market-fit (PMF) and go-to-market fit (GMF). This is to establish profitability first and only raise to grow. He argues that building a large company in Africa takes time, often outside the time span of most foreign funds.

“This is a much gentler, measured and longer process than the time frames studied in more mature ecosystems,” said Njoroge.

Building in Africa also means that to create a large market, operating in multiple countries is inevitable, demanding adaptable business models.

“This typically means that the journey of finding product-market fit and go-to-market fit takes longer than in the U.S. Customer trust takes longer to build. Talent depth and breadth take longer to build because it is a young ecosystem,” he said.

African countries are also diverse and have unique challenges and opportunities. There are specific macroeconomic, operational, social and cultural factors to keep in mind when scaling up, according to Olugbenga Agboola (GB), Flutterwave co-founder and CEO. “Companies growing across Africa should always pay attention to the local aspects in their growth strategies,” said Agboola.

An opportune time

The funding winter means businesses must re-think their strategies, stay lean and pay much focus on business fundamentals. Experts say this is the time to separate the grain from the chaff and the best time for established businesses to thrive. MaryAnne Ochola, the managing director of Endeavor Kenya, believes that the surviving companies now contend with less competition for customers and talent. She noted that it is also the best time to build resilience as a founder.

“Building in a low resource environment forces founders to be scrappy in ways that when the markets turn, it will place them in good stead,” she said.

Besides, the return of sobriety in the VC ecosystem will allow the building of a more sustainable ecosystem, according to Muforo. She anticipates that there will be fewer exits in 2024 owing to the scaled-down growth emanating from the funding crunch.

On the other hand, Agboola expects that “the IPO window could open a little bit.” He foresees a rebound in funding driven by unallocated funding, but he adds that it may not reach the levels of 2020/21. Njoroge, too, anticipates more deployment of African capital, while Ochola expects the market for later rounds to remain sluggish as deal activity for early-stage funding grows.

Thinking about exits

The success of growth-stage companies is often tied to exits through acquisition or going public. Regardless of whether there’s a potential rebound in venture capital or not, African growth-stage companies risk becoming “zombies,” meaning they have substantial revenues but struggle to attract M&A interest or surpass their current valuations. Africa faces challenges in this respect, having the fewest exit options and buyers for tech startups compared to other global VC markets. Despite over a decade of consistent venture capital inflow, the African tech ecosystem has seen only a handful of notable acquisitions, such as Instadeep to BioNTech, Paystack to Stripe, DPO Group to Network International and Fundamo to Visa.

In a scenario where venture capital remains scarce and global companies aren’t stepping to the rescue, growth- and late-stage companies in Africa may consider other strategic moves such as buying out their investors, exploring mergers, diversifying funding sources through options like venture debt and private equity, or opting for an IPO.

Flutterwave, Africa’s largest startup by valuation, has been in the headlines for its IPO plans over the past year, addressing several allegations along the way. Flutterwave’s journey is closely observed, just like its counterpart Interswitch years ago, and as the company actively improves its corporate governance practices, there is heightened anticipation for it to demonstrate that foreign investors’ investment in the continent is well-placed.

So far, the Tiger- and Avenir-backed fintech has displayed intent. It’s trying to make its business more attractive in the U.S. by acquiring 13 money transmission licenses to power its Send app while adding executives from global firms such as Binance, PayPal, Western Union and CashApp to its team.

Navigating founder and investor dynamics

The significance of the investors brought on board by growth-stage companies cannot be overstated, as they can play a pivotal role in either propelling a company to, for instance, go public or bring it down to earth. A notable example is the case of 54gene, an African genomics startup that closed its doors last September.

There were several reasons for 54gene’s demise, ranging from executives commanding high salaries to the capital-intensive nature of the business. However, one that went under the radar was the terms of the bridge deal 54gene struck after raising $45 million. The round saw its valuation drop two-thirds at a 3-4x liquidation preference.

Such terms, once rare during the venture capital boom, have become commonplace in the current fundraising environment. However, cap tables with below-normal ownership for active founders impact future raises and may necessitate restructuring to attract additional capital.

In instances like these, Muforo aptly captures the dynamics at play:

When VCs are aggressive with terms it is most likely that things have gone sideways in the business strategy implementation, use of capital, or the previous terms no longer match the business’ current and expected growth trajectory. If a company is well-run, is operating in an attractive space and has significant upside, a business should have more funding options and unlikely that one investor would prey. Clearly what was happening in 2021/22 was not only sided in favor of the founders but also was not sustainable as we have come to see. We saw high valuations that were not substantiated by company performance, and there was neglect for proper governance structures. That’s not how you build a sustainable ecosystem and many of such companies are unravelling as seen in down rounds, and incidences of bad governance.

According to Muforo, growth-stage founders should conduct thorough research on potential investors before bringing them on board. This involves understanding all investment terms, seeking legal advice, and discussing an ESOP structure tied to milestones. In situations with challenging terms, Muforo advises growth-stage founders to raise the appropriate amount of capital for their next milestones, avoid excess and implement cost-cutting measures to extend their runway.

However, the responsibility goes both ways. When investors are excessively founder-friendly, neglect due diligence or fail to establish internal corporate governance controls, the African tech ecosystem may experience implosions akin to Dash. The Ghanaian fintech raised over $50 million but ultimately shut down due to allegations of the founder misreporting financials and mismanaging funds. Both events underscore the importance of a balanced and transparent relationship between African founders and investors for the health and sustainability of the tech ecosystem.