Funding Constraints Responsible for High Mortality Rate of Startups

A recent report by Startup companies has revealed that funding constraints continue to plague African startups, with a new and alarming phenomenon emerging in 2024: of failed expansions into new product lines.

The report, which analyzed startup shutdowns across the continent, found that while the number of shutdowns decreased from 18 in 2023 to 11 in 2024, the underlying causes of these failures remain a significant concern for the African startup ecosystem.

According to the report, six Nigerian startups were among the 11 that shut down, hibernated, or entered administration in 2024. These include ThePeer, HerRyde, Chopnownow, Cova, BuyCoinsPro, and Quizac. Other affected startups include GroIntelligence, CopiaGlobal, RejaReja, and iProcure from Kenya, as well as LetsChat, which operated in multiple countries.

The report identifies funding shortages as the primary cause of startup failures in Africa, a trend that persists from 2023. However, a new challenge emerged in 2024, as some startups expanded beyond their original product offerings, only to discontinue these services due to a lack of product-market fit.

Notable examples include JumiaFood and BuyCoins Pro, which were forced to pivot and focus on their core services.

Nigeria’s startup ecosystem faces unique hurdles, including unreliable power supply and sudden regulatory changes. A 2018 report found that 24% of fintech startups cited an unfavorable regulatory environment as a major obstacle. The introduction of government-mandated fees, such as the cybersecurity levy and Electronic Money Levy Transfer (EMTL), has visibly affected fintech startups that gained traction for free mobile money transactions.

The report notes that some startups have changed their business models and developed innovations to suit the current regulatory policies, which has also hindered potential international investment.

This has created a challenging environment for Nigerian startups, which must navigate these obstacles to succeed.

The report cites Crunchbase data, which reveals that only nine African startups have achieved unicorn status (valued at over $1 billion) as of 2024, out of a global total of 1,200. This disparity is attributed to insufficient capital for scaling and an underdeveloped venture capital (VC) ecosystem concentrated in a few key markets: Nigeria, Kenya, South Africa, and Egypt.

African startups receive significantly less funding than their counterparts in developed economies, partly because many VCs apply Silicon Valley business models without adapting to Africa’s unique challenges.

While critics argue that investors should better understand the African market, Startup Graveyard notes that startups also need to demonstrate profitability to attract more funding.

The African startup ecosystem faces significant challenges, from funding shortages to regulatory and structural hurdles. While the number of shutdowns decreased in 2024, the emergence of failed expansions into new product lines is a worrying trend.

To address these challenges, investors, startups, and regulatory bodies must work together to create a more conducive environment for innovation and growth. By doing so, Africa’s startup ecosystem can unlock its full potential and create a brighter future for the continent’s entrepreneurs and economies.