How market realities expose weak business models, growth illusion

There is a growing unease within the global startup ecosystem as the once celebrated “unicorns” (privately held companies valued at $1 billion or more) are increasingly facing existential threats occasioned by unfavourable regulatory environment, difficult business climate, harsh macroeconomic conditions, and inadequate funding, among others. Once symbols of innovation and disruption, many of these high-flying ventures appear to be eating up their seeds or burning out their substantial funding reserves without achieving sustainable profitability or market dominance. This trend raises critical questions about the sustainability of the unicorn model and the wellbeing of the startup landscape. ADEYEMI ADEPETUN writes.

Last August, Quizac, a fast-rising startup focused on enhancing learning experiences through interactive quizzes, shut down its operations in Nigeria.
While it was reported that the startup, closed shops a few months after it turned down a $250,000 investment offer from a venture capital firm, a move initially viewed as a testament to the team’s confidence in their vision, what later emerged, however, raised questions about the sustainability of the business model and the challenges faced by startups in a competitive landscape. Founded in 2021, Quizac came to revolutionise the educational sector by providing a platform that allows users to create, share, and participate in quizzes.
  
The platform garnered huge traction from the students and educators’ ecosystem, with its user-friendly interface and engaging content.Findings then showed that one of the reasons it rejected the $250,000 was because the team prioritised maintaining their independence and focusing on long-term growth rather than short-term financial gains.
  
Beyond this, issues of market competition, user retention, funding shortages, mismanagement, and operational costs were also identified as some of the reasons for its shutdown.
  
In 2023, among the startups that went down was 54gene, a genomics research company that had raised $45 million across three funding rounds.  Less than four years into its creation, the company fell into disarray, and Dr Abasi Ene-Obong, its CEO, was replaced in October 2022. Over the past year, 54gene has had three CEOs, including Teresia Bost and Ron Chiarello, who took office in March 2023. Chiarello left the role in July 2023.
   
Sources within the ecosystem said 54gene shut down primarily due to financial mismanagement, having earlier raised $45 million from investors, including the Bill Gates-Melinda Foundation and Y Combinator. While this helped establish adequate infrastructure, the outfit faced competition from long-standing industry players like Pfizer and GlaxoSmithKline (GSK).
   
A fintech company, Zazuu, founded in 2018 by four Nigerian entrepreneurs, Kay Akinwunmi (CEO), Korede Fanilola (COO), Tosin Ekolie (CTO), and Tola Alade (CDO), shocked the tech and finance industry when it announced on November 17, 2023, that it was shutting down operations.
  
According to the report, the firm’s management attributed the shutdown to its inability to secure additional growth funding from investors.The company, an end-to-end money transfer marketplace that facilitated remittance payments into Sub-Saharan Africa, had in July 2023 raised $2 million to deepen its cross-border payment offering and also build the world’s first non-biased payment platform.
   
Angel investors that participated in the fundraising round were Babs Ogundeyi, CEO of Kuda Bank, and Jason Njoku, CEO of Irokotv. Other angel investors include Launch Africa, Founders Factory Africa, HoaQ Club, and Tinie Tempah.
  
In the wake of Zazuu closing shop abruptly, the question within the ecosystem then was, “Is it Nigeria that happened to Zazuu, or a pure case of mismanagement?
   
These startup mortalities have remained a sore thumb in startup communities in Nigeria, Africa, and the global ecosystem. While the companies shut down under different circumstances, Venture Capitalists argued that many of the failed startups received funding without sufficient due diligence. The VCs are also of the opinion that past investment decisions were rushed, emphasising the need for startups to demonstrate stronger viability and meet higher standards before securing investment in the future.
  
According to them, there is a constant need to understand startup success and failure, given that various statistics indicate that the failure rates, especially those in the first five years, are around 90 per cent.
  
Africa is not doing badly when it comes to enthroning startups, but sustainability beyond the first five years has always remained a major challenge. The continent has a tech-savvy population, which comprises mostly young people. Over the last decade, the continent has witnessed a rise in the launch of startups across several sectors. Entrepreneurship has taken hold of the commerce sector, driven by rising unemployment rates.
   
Starting new businesses is the norm and occurs mainly as informal businesses. Startups that receive operational licenses and are registered with the appropriate agencies are poised to receive more funding from investors than their unregistered counterparts. Startups in Africa are focused on providing accessible and affordable solutions to existing and recurrent problems in specific sectors. These key sectors include finance, e-commerce and retail, healthcare, agriculture, education, and logistics.
 
Nigeria, home to Africa’s highest startups 
NIGERIA, Egypt, and Kenya have been listed as countries with the highest startup activities. However, Nigeria tops the list with 3,360 startups, followed closely by Egypt with 2,112 startups, while Kenya has 1,000. These countries have equally thriving capitals and cities, which have attracted and retained investment opportunities.
  
Other countries with reasonable startup activities include Ghana, South Africa, Algeria, Tunisia, and Tanzania.In October 2021, The Guardian reported exclusively, how fintechs shunned the Nigerian Stock Exchange for $876.5 million funding overseas through grants and equities. They got these funds from VCs in countries such as the United States, the United Kingdom, Switzerland and Belgium.
   
According to research done by Disrupt Africa from 2015 to 2022, Nigeria is the most popular investment destination, while the popular physical locations for startups are Lagos (where Africa’s first startup, Interswitch, is headquartered), Abuja, and Ibadan.
   
It further revealed that startup activities took off in 2011 and peaked in 2019, with fintech leading in business and funding, followed closely by e-commerce.
   
In Disrupt Africa’s report on Nigeria’s startup ecosystem, 383 tech startups raised $2.07 billion in funding within the stipulated time, higher than in any other African country. The fintech sector (36 per cent) took a large chunk of this figure, with Flutterwave receiving $250 million in Series D funding. Other sectors closely following the fintech space are e-commerce (12.1 per cent) and ed-tech (9.4 per cent).
 
Giant of Africa as industry pioneer
A 2024 Startup Graveyard report noted that between 2000 and 2010, two notable startups that continuously impacted the African startup ecosystem were InterSwitch and M-Pesa.
  
In 2002, Mitchell Elegbe founded Interswitch, a Nigerian-based transaction processing company. Over the years, the company has clinched several partnerships and launched a $10 million Interswitch ePayment Growth Fund in 2015 to support African startups in the fintech space.
    
By 2019, Interswitch was valued at $1 billion, making it Africa’s first unicorn, after receiving massive funding of $200 million from Visa. In 2022, they raised $110 million in a private equity round led by Tana Africa Capital. In 2023, the company celebrated its 20th anniversary, and the Central Bank of Nigeria issued the payment platform a Payments Service Holding Company (PSHC) license.
   
By September 2024, Interswitch had been named Fintech of the Year at the African Fintech Summit Awards. The following month, it partnered with the Nigeria Inter-Bank Settlement System (NIBBS) to enhance payment transactions.
    
Kenya’s M-Pesa was a pilot project by Safaricom and Vodafone in 2005. By 2007, it was made public as Kenya’s first mobile money service provider. Its services included micro-loans, airtime purchases, and bill payments by 2010. Between 2011 and 2013, M-Pesa expanded its services to Tanzania, South Africa, and India. By 2014, it partnered with Western Union to enable international money transfers, and by 2016, M-Pesa Global was introduced to enable global remittances.
   
Between 2018 and 2024, M-Pesa expanded its reach to other African countries, rebranded to M-Pesa Africa, and celebrated its 15th anniversary in business. The firm has also served up to 66 million users and recorded $314 billion in yearly transactions.

Today, with the visible successes that Interswitch and M-Pesa have been credited with, other startups have begun taking root in several African countries. Paystack and Flutterwave, headquartered in Lagos, Nigeria, were founded in 2015 and 2016, respectively, and both aim to simplify digital payments.
 
Difficult business environment, existential challenges stunt growth 
WHILE there has been significant growth in the startup ecosystem, existing and newfound problems have affected startups and their functionality. The common problems that startups have faced and continue to experience include a challenging business environment that leads to unsustainable business practices.
  
In addition to unhealthy regulatory practices, high tax rates when companies go fully public, inadequate government support, a lack of efficient digital infrastructure, and a scarcity of competent talent have also led to startup shutdowns.
  
According to the Startup Graveyard Report, Nigerian-based startups had the highest shutdown rates, with 18 startups reported to have the highest decline in funding after retaining the top position as the most funded African country in 2021 and 2022.
  
This development pushed Nigeria behind Kenya, Egypt, and South Africa. In 2022, Nigerian startups raised $976 million in funding, which contrasted sharply with the figure raised in 2023 – $399 million.
  
Some of the startups that shut down in 2023 included 54Gene (Nigeria), Lazerpay (Nigeria), Vibra (Nigeria), Pivo (Nigeria), Zazuu (Nigeria), Hytch (Nigeria), Kippapay (Nigeria), Bundle Africa (Nigeria), Pillow (Nigeria/Ghana), Okadabooks (Nigeria), Jumia Food (multiple countries), Zumi (Kenya), Sendy (Kenya), PrivPay (Kenya), Dash (Ghana), Redbird (Ghana), WhereIsMyTransport (South Africa) and Capital (Egypt).
  
In 2024, 11 startups shut down, hibernated, or entered administration. These include ThePeer (Nigeria), HerRyde (Nigeria), Chopnownow (Nigeria), Cova (Nigeria), BuyCoinsPro (Nigeria), Quizac (Nigeria), Gro Intelligence (Kenya), Copia Global (Kenya), RejaReja (Kenya), iProcure (Kenya) and LetsChat (multiple countries).
 
More case studies on startup shutdown
ACCORDING to findings, LazerPay, a blockchain-based payment processing platform that businesses use to accept cryptocurrency payments, also went down unceremoniously. In 2021, Njoku Emmanuel co-founded the company with Abdulfatai Suleiman and Prosper Ubi.
  
LazerPay raised $1.1 million in funding and reportedly helped up to 3,000 businesses receive payments in cryptocurrency. However, the company suffered a massive loss when its lead investor pulled out and ran out of funding. The core team reportedly used their savings to keep the company afloat, but this approach was unsustainable, as they eventually announced their shutdown on Twitter in April 2023.
  
 Another Nigerian fintech player, Pivo, co-founded by two women, Ijeoma Akwiku and Nkiru Amadai-Emima, which offered financial services such as credit loans, digital banking, and insurance to small and medium-scale African businesses, also went down after raising $2.6 million in seed funding.
  
Checks revealed that sudden regulatory policies, such as the Central Bank of Nigeria’s redesign of currency notes, tightened cash flow and caused economic turbulence, which Pivo suffered from. To reduce this loss of funds, Pivo strengthened its credit loan requirements, earning it a 98 per cent repayment rate. 
  
Pivo shut down in December 2023 due to a conflict between co-founders. Investors revamped the business guidelines to ensure functionality, but this did not work, and the company eventually closed.
  
Another operator, Cova, a fintech startup founded by Oluyomi Ojo and Yomi Osamiluyi in 2021 to enable users to aggregate their financial portfolios in one application, also collapsed. The platform provided a unified dashboard showing users’ assets, ranging from landed properties to bank and crypto accounts. Users were required to pay a $10 monthly subscription fee to access Cova’s services. While Cova received $800,000 in funding from investors led by Olumide Soyombo, the company shut down in January 2024 due to financial instability.
 
Shutdown not a Nigerian thing
AS established, rising cases of the shutdown are not a Nigerian thing as other African countries have had their fair share of the crisis. For instance, Kenya’s Sendy was a logistics company founded by Meshack Alloys, Evanson Biwott, and Don Okoth in 2021. It provided seamless logistics services and started operations with registered motorcycles and autorickshaw riders, who delivered goods on demand. In 2016, Sendy launched Sendy Ride, an online taxi order app, and in the following years, it launched Sendy Transport and Sendy Supply, establishing itself in Kenya’s transport and logistics sector.
   
In 2022, Sendy experienced a downturn in business, a ripple effect of the funding drought, and expensive lending rates by developed countries. They transitioned from offering B2C services to B2B solely and slashed up to 50 per cent of their workforce.
   
They also ceased operations in Nigeria to retain their profit streak. Sendy relied heavily on external funding and sought to raise $100 million, but it only succeeded in raising $26.5 million. Spurred by its unsustainable burn rate and an investor’s exit during negotiations for asset sales, the company’s valuation dropped from $80 million to $60 million in 2022.
  
By 2023, Sendy’s CEO announced the company’s acquisition. Shortly afterwards, it went into administration. RejaReja was a Kenyan B2B e-commerce platform founded by Mesongo Sibuti and Tesh Mbaabu in 2018. Sheltered under MarketForce, the company provided retailers with goods at wholesale prices from FMCGs within a 24-hour range. They also provided loans for shop owners. Market Force raised $64.1 million in funding from over 13 rounds.RejaReja expanded its operations across five African countries, processing over $160 million in transaction volume.
 
Factors that trigger startup shutdowns
WHILE mismanagement and deep corporate governance gaps featured prominently, the report revealed that in 2023, lack of funding contributed to 39 per cent of shutdowns; macroeconomic factors accounted for 17 per cent; 11 per cent were regulatory issues; 11 per cent were operational issues, and six per cent were on customer acquisition costs.
   
According to Startup Graveyard, in 2024, lack of funding remained a major factor. However, a new problem emerged. Some startups expanded beyond their original product offerings to offer novel services, as seen with JumiaFood and BuyCoins Pro. These services were discontinued due to a lack of product-market fit, with the startups announcing a pivot to focus on their core services.
 
Peculiarities of failures across the continent
THE startup ecosystem challenges differ across countries due to their disparity in socio-cultural and economic settings. For instance, the South African start-up ecosystem is riddled with large corporation domination, inequality, gender disparities, limited access to market opportunities, monopolistic competition, and a lack of financial and social capital. Most of all, the ecosystem is directly impacted by high load-shedding incidences, which result in possible delays in technological development updates and releases.
   
In Kenya, the startup ecosystem is heavily concentrated in urban areas, which reduces fair play. Existing and potential startups also face limited access to funding, inadequate risk capital, lack of coordination, weak start-up culture, me-too businesses, an unskilled workforce, lack of robust learning and monitoring system, insufficient policies and guidelines on incubation and commercialisation.
  
Gender disparity is also a prominent challenge, as male-led startups receive more funding than women-led startups. Men-led startups raise funding through equity, grants, and loans, or an unequal mix of the three, while women-led startups raise funding mostly from grants and loans.
  
For Nigeria, the startup ecosystem is rife with peculiar reasons for startup failure. They include political instability, lack of access to finance, lack of power supply, as well as swift and unexpected changes in regulatory policies.
  
As of 2018, 24 per cent of existing fintech startups cited an unfavourable regulatory environment as a top business challenge. Consequently, some startups in the region have changed their business models and developed innovations to suit current regulatory policies, which have also hindered potential international investment.
 
Africa as huge investment risk zone
STUDIES have shown that investing in Africa carries more risk than investing in Asia and Latin America. Investors have openly complained about the loss of liquidity after investing, stating that startups need to become profitable in record time or show signs of significant revenue streams to retain investor interest.
  
While the region is plagued by uncertainties that are not investors’ fault, they also significantly widen existing gaps. As stated earlier in this report, the fintech sector is the most established tech sector in the African startup ecosystem, with the highest number of mergers and acquisitions. Its continued expansion and revenue growth are due to steady investment streams.
  
This has gradually led to preferential investment streams, just as other sectors do not get as much funding. Other reasons startups fail within five years of starting up include a lack of market alignment, poor infrastructure, and poor business management. It is important to note that the reasons why startups fail vary greatly across countries.
 
Inflation, fundraising, others wear out startups, spike morbidity rate
AMONG the top two factors that stress out startups in Nigeria and Egypt are inflation and fundraising challenges.For instance, 66 per cent of founders in Nigeria listed inflation as a top stressor, while it is 57 per cent in Egypt. In Kenya, it is 17 per cent.
  
This was contained in a report, titled “Passion and Perseverance: Voices from the African Founder Journey,” by Flourish, which noted that Africa is home to a burgeoning startup community with a rapidly growing number of early-stage founders, investors, accelerators, and other stakeholders from across the venture capital ecosystem.
  
According to it, founder motivation and drive are high, and the potential for success is immense, but so is the pressure. Navigating the fast-paced startup environment can also be gruelling as founders face high stress, challenging macroeconomic conditions, and long hours.
  
Flourish said that it conducted this survey, with responses from more than 160 startup founders across 13 African countries and more than a dozen interviews, to deliver the first-ever, wide-scale research on the founder wellbeing journey in Africa, spotlighting founder voices and shining light on the experiences of early-stage entrepreneurs across the continent.
  
The report noted that in facing global economic shifts and local volatility, founders are navigating a landscape that is fraught with stress and uncertainty. The top three sources of stress come from external, macroeconomic challenges, and while the founder journey is always challenging, prioritising well-being is even more pressing amid difficult market conditions.
  
Within the sub-region, external challenges took centre stage, where 59 per cent of founders pointed towards the challenge of raising funds as topmost; 44 per cent said inflation and currency devaluation, and 40 per cent pointed in the direction of other macroeconomic challenges.
   
According to the Co-founder of Andela and Flutterwave/Founding Partner, Future Africa, Iyinoluwa Aboyeji: “The external stressors – factors largely outside our control – are big contributors to stress and burnout for most entrepreneurs. As an investor, I try to help my founders focus on what they can control and let go of what they cannot.”
 
Success stories also abound in African startup milieu
  WHILE many African startups have not passed the ideation stage and the first decade of business operations, some have endured despite unfavourable regulatory policies, harsh macroeconomic conditions, and inadequate funding.
  
Reports revealed that nine startups in the African startup ecosystem achieved unicorn status as of December 2024. This means they are privately owned companies valued at over $1billion. They include Interswitch, Flutterwave, Opay, Wave, Andela, Chipper Cash, MNT-Halan, Moniepoint, and TymeBank.
  
Flutterwave was founded in 2016 by Iyinoluwa Aboyeji, Olugbenga Agboola, and Adeleke Adekoya to provide payment solutions for individuals, small businesses, and large enterprises. In their debut year, they raised $230,000 in a seed funding round backed by Y-Combinator.
   
In 2017, they received $50,000 in non-equity assistance from Google’s Launchpad Accelerator Programme and $10 million in Series A funding from Green Visor Capital and Greycroft. Series B funding – $35 million, came from Greycroft and Headline in 2020. Series C funding amounted to $170 million, with Avenir and Tiger Global Management leading a dozen other investors. This development made Flutterwave achieve its unicorn status in 2021.
  
After this, the company raised $250 million in series D funding in 2022, increasing its valuation to $3 billion. Since its inception, Flutterwave has acquired and invested in two companies and raised $474.5 million in funding.
   
There is also Moniepoint, formerly known as TeamApt, a financial technology company that provides loan offers, digital banking services, and business management tools for individuals and small and medium-sized enterprises (SMEs) in Africa.
  
Founded by Felix Ike and Tosin Eniolorunda in 2015, the company’s most popular service is the Moniepoint Point-of-Sale (POS) terminal, which is housed under Moniepoint Microfinance Bank (MFB). 
  
In 2022, Moniepoint MFB received its license to operate from the Central Bank of Nigeria. South Africa also boasts of TymeBank, a digital bank founded by Coen Jonker, Rolf Eichweber, and Tjaart van der Waalt in 2012. The company offers financial services such as buy-now-pay-later options (MoreTyme), diverse account options, and debit card services for the lower-income market.
 
Facilitating clement startup environment with N10b funding
 THE Federal Government of Nigeria is committed to ensuring that the startup ecosystem thrives in the country despite challenges. It demonstrated this practically by urging developers to access the N10 billion startup capital, which it set aside.          
  
The National Coordinator, Office for Nigerian Digital Innovation (ONDI), a Special Purpose Vehicle of National Information Technology Development Agency (NITDA), Mrs. Victoria Fabunmi, emphasised the government’s commitment to ensuring a thriving startup ecosystem by providing financial support, regulatory clarity, and strategic partnerships that empower businesses to scale as fast as possible.
   
She harped on the synergy between the private sector and the government in ensuring that the provisions of the NSA positively impact the innovation ecosystem.
   
According to her, there are lots of interventions to encourage more participation in the NSA, saying that there is also the Startup Portal that will serve as a one-stop shop for all ecosystem players and activities.
 
Survival strategies for startups
 A venture capitalist, Olumide Ahmadu, noted that some founders started out with good intentions, but along the way, the need to survive pushed them towards unethical practices.
  
He added that a significant portion of startups fail because of insufficient demand for their products or services, saying that approximately 42 per cent of failures are attributed to this fundamental issue.
  
According to him, broader economic conditions, such as inflation, rising interest rates, and decreased investor confidence, can put significant pressure on startups that rely on external funding.
   
“However, the current trend serves as a crucial reminder that high valuations and substantial funding do not guarantee long-term success. Sustainable growth, a strong understanding of market needs, and prudent financial management remain essential for survival in the dynamic and often unforgiving landscape of new ventures,” he stated.
  
To stay afloat, the Startup Graveyard report listed survival strategies to include collaboration, market acceptance of products or services, continuous founder-customer interaction, ensuring product visibility in the market and outsmarting competition.
  
The report further stressed the need for startups to avoid problematic investors, noting that most investors enter the Nigerian startup scene with high expectations for the business founders. 
  
While founders need money to fund their business ideas, investors want to make a profit as quickly as possible. This visibly strains the startup owner and their mode of operation after contracts have been signed.