Startups have become a cornerstone of economic development, and innovation around the world.
In Kenya and the broader African continent, they continue to hold immense potential for driving economic growth, job creation, inclusive finance, and technological advancement.
However – startup failure rates remain high. Some statistics from a study by Startup Genome are useful to explain why:
- 90% of startups in Africa fail within the first five years.
- The average lifespan of a startup in Africa is 18 months.
- The most common reasons for startup failure in Africa are lack of funding, competition, and poor management.
- The sectors with the highest failure rates in Africa are technology, agriculture, and healthcare.
- The countries with the highest failure rates in Africa are Kenya, Nigeria, and South Africa.
Why are startups failing?
One of the most significant challenges faced by startups in Kenya and Africa is limited access to capital. Access to capital is essential for startups. It is the money that startups need to get off the ground, hire staff, develop their product or service, and market their business. Without access to capital, it is difficult for startups to succeed.
The common sources of funding for startups in Kenya and Africa in general are venture capital and angel investments. According to Crunchbase, there were 1303 newly founded startups in Africa in 2018. The number of new startups has consistently declined since then, with only 594 new startups being founded in 2021. However, there has been a resurgence in startup activity in 2022, with 63 Kenyan startups raising funding so far this year.
While its significant to note that 63 new Kenya startups raised funding in 2022, it is estimated that there are around 1,000 startups operating in Kenya, with the most popular sectors being in fintech, e-commerce, and agriculture.
While its significant to note that 63 new Kenya startups raised funding in 2022, it is estimated that there are around 1000 startups operating in Kenya, with the most popular sectors being in fintech, e-commerce, and agriculture.
While organizations like iHub, The Nailab, The African Enterprise Challenge Fund, and The Tony Elumelu Foundation Entrepreneurship programs are some of the organizations helping startups get on their feet, they are not enough to support the growing number of startups. This lack of funding can hinder startups from scaling their operations, conducting robust research and development, and effectively marketing their products or services.
The complex and often unpredictable regulatory environments can stifle innovation and growth for startups. Startups must deal with data protection, anti-money laundering, consumer protection, cybersecurity, intellectual property, taxation, labor laws and environmental regulations. Navigating through bureaucratic red tape, obtaining necessary licenses, and complying with regulations can be time-consuming and costly.
The “brain drain” phenomenon, where highly skilled individuals emigrate to more developed countries in search of better opportunities, poses a significant challenge to startups in Kenya and Africa. The loss of skilled talent reduces the pool of potential employees, mentors, and advisors, impacting the startups’ ability to execute their business plans effectively.
Startups often struggle to gain access to large, diversified markets beyond their borders. The fragmentation of African markets, characterized by linguistic, cultural, and economic diversity, can make regional expansion complex and challenging. This limitation restricts the potential customer base and growth opportunities for startups.
Is there hope?
Yes, there is!
Despite the high failure rate, there are several successful startups in Kenya and Africa. These startups have been able to overcome the challenges and achieve success by focusing on a few key areas, such as: Building a strong team, developing a sound business model that takes into consideration challenges mentioned like lack of funding, focusing on specific markets, and targeted customers and being adaptable – with the ability and willingness to change the business model based on the evolving startup ecosystem in order to succeed.
Case Study: Twiga Foods
Twiga Foods, a Kenyan business-to-business (B2B) e-commerce platform started in 2014 has gained significant attention for its innovative approach to addressing food supply chain inefficiencies in African markets. Twiga foods mission is to provide affordable, quality produce to urban consumers while empowering smallholder farmers.
Like many startups, Twiga Foods has encountered a series of challenges that offer valuable insights into the complexities of operating in emerging markets. These challenges – like for most startups have forced the organization to announce another round of layoffs. The company has not disclosed the number of employees affected, but it is said to be a significant number.
The layoffs come at a time when the company is facing several challenges, including rising inflation, a slowdown in VC funding, and declining purchasing power among its customers. In a statement, Twiga Foods said that the layoffs were necessary to “ensure the long-term sustainability of the business.”
The company’s CEO, Peter Njonjo, said that the layoffs were a “difficult decision” but that it was necessary to “streamline our operations and ensure that we are best positioned to weather the current economic challenges.”
Some of the reasons for the layoffs include:
- Rising inflation: Inflation in Kenya has been on the rise in recent months, making it more expensive for businesses to operate. This has put a strain on Twiga Foods’ margins, forcing the company to cut costs.
- Slowdown in VC funding: The amount of venture capital funding available to African startups has slowed down in recent months. This has made it more difficult for Twiga Foods to raise the capital it needs to grow.
- Declining purchasing power: The purchasing power of Kenyan consumers has been declining in recent months. This has led to a decrease in demand for Twiga Foods’ products and services.
- Competition: The competition in the B2B e-commerce market in Kenya is increasing. This has put pressure on Twiga Foods to keep its prices low and improve its efficiency.
The layoffs are a setback for Twiga Foods, but the company still has a chance to succeed – especially because it has a strong team and a proven track record.
It is important to mention that Twiga Foods is not the only company that has been forced to lay off employees in recent months. Several other African tech startups have also announced layoffs, including Andela, Flutterwave, and Jumia.
While the startup landscape in Kenya and Africa presents numerous challenges, it is important to note that many successful startups have emerged and are making significant contributions to their economies. These include M-pesa, Fingo Africa, Farm Drive, BasicGo, Kivo, Flutterware, Kuda, Moove, FairMoney and others.
Efforts to address the issues faced by startups in these regions must involve a multi-faceted approach, including increased access to capital, improved infrastructure, streamlined regulations, and enhanced education and mentorship programs. As these challenges are systematically tackled, the potential for vibrant, innovative startup ecosystems to thrive in Kenya and Africa remains promising.