Layoffs, sales, closures: What is going on with Kenyan start-ups?

The Kenyan start-up ecosystem has for the past few years been ranked among the ‘Big Four’ in the continent in terms of funding as venture capital (VC) firms, as well as angel investors, pour million-dollar investments into local companies.

This has made Kenya an investor destination alongside Egypt, South Africa and Nigeria, with every other week seeing announcements by these start-ups of yet another successful funding round to scale locally and, with some, enter other markets outside Kenya.

At the close of last year, for instance, the Kenyan start-up scene was at a high, topping the 2021 numbers by March. Kenya recorded a 2.5 times growth from 2021, according to data from start-up funding tracker Africa: The Big Deal.

Kenyan start-ups had raised nearly Ksh.144 billion ($1 billion), a remarkable feat for a year characterised by funding constraints all around the continent.

But it seems things are not as glamorous in recent months; announcements of closures, sales and lay-offs are rocking the ecosystem every few weeks.

In November last year, e-commerce and food distribution start-up Twiga Foods sent home its in-house sales team in cost-cutting efforts, affecting 21 per cent of its workforce.

This was exactly a year after the business-to-business (B2B) company raised Ksh.2.3 billion ($50 million) in a series C round to scale in Kenya and expand to neighbouring countries.

Come December, tech credit start-up Lipa Later acquired the troubled e-commerce start-up Sky Garden on the brink of closure following insolvency in October.

The Amazon-style SaaS (Software as a Service) platform had previously raised over Ksh.867 million ($6,000,000) but failed to close a round of financing in September.

The B2B (business-to-business) marketplace’s co-founder and CEO William McCarren cited a funding drought.

Then in May, Twiga fired 130 independent sales agents over poor performance amid rising competition in the food delivery business, saying it was only engaging agents whose sales were showing improvement.

Copia, an e-commerce start-up founded in 2013 by former Silicon Valley maestros, the same month announced it was closing operations in Uganda.

The business-to-consumer (B2C) company scaled operations to Kenya’s western neighbour in 2018 and had in 2021 raised over Ksh.7.2 billion ($50 million) from a Series C equity round to boost its efforts to expand across the continent.

It would, two months later, send home 25 per cent of its workforce, affecting about 350 of its 1,800 workers. Copia said the economic downturn and constrained capital markets had forced it to restructure operations.

And early this month, logistics start-up Sendy announced it was in the middle of an acquisition by an undisclosed buyer, having cut down operating costs for the past year to remain afloat.

The B2B company reportedly ran out of funds in June. Last year, it sent home close to 30 per cent of its workforce and put its expansion plans into western and southern Africa on hold.

Sendy had said it sought to raise Ksh.12 billion ($100 million) in 2022 to expand into Nigeria, Ghana, South Africa and Egypt. At the close of 2022, it announced it had received undisclosed funding to rescue itself.

Less than two weeks later, Twiga announced a fresh round of layoffs in adjustment to the biting economic times which have made people’s purchasing power decline.

The company’s suppliers were late last year granted access to a Ksh.300 million kitty from the state-owned Hustler Fund at lower interest rates. Twiga said the adjustment will, however, not affect suppliers.

FUNDING SLOWDOWN

Generally, the African tech ecosystem has seen a difficult operating environment amid rising inflation, weakening currency, and unfavourable interest rates which have seen foreign investors shift capital from emerging and frontier economies.

Coupled with the March collapse of the U.S. Silicon Valley Bank (SVB) that has rocked tech start-ups globally, start-ups and VC firms have in recent months been going through a so-called 'funding winter'.

SVB was prominent in the tech ecosystem not just in the US but across Europe and Asia because it offered start-ups specialized financial services.

Latest figures from Africa: The Big Deal show that the Big Four jointly raised $4.6bn (Ksh.658 billion) between July 2021 and June 2022, with Nigeria leading at over $2bn (Ksh.286 billion) followed by Kenya at nearly $1bn (Ksh.142 billion), South Africa and Egypt.

But this year, funding shrank 77 per cent in Nigeria, making the giant lose its top spot to Egypt where the fall was the most moderate of the Big Four (25%). In South Africa, funding dropped by 53 per cent while in Kenya, it dipped 69 per cent.

IGNORING MARKET SIGNALS

Benjamin Singh, a venture capitalist with Kenyan-based VC firm Push Ventures says some start-up founders are overlooking the fact that rising global interest rates are affecting how investors determine valuations as they aim to secure funding at higher valuations.

“The cost-of-living pressures are posing a risk to consumer spending, and as job losses become more prevalent, the economy contracts. In essence, the current situation differs significantly from that of two years ago,” he adds.

Singh notes that some start-ups that secured funding but eventually ran out of capital have often failed to heed the market's signals and be proactive.

“Those funds should have been stretched to last twice as long as originally anticipated, and companies should have swiftly adopted a lean approach. It was crucial to anticipate slower sales cycles and lengthier funding rounds. Regrettably, many teams and boards remained oblivious to these realities and believed they could overcome any economic or market challenges,” he says.

“A few years ago, African start-ups were seeking Silicon Valley-level valuations, utilizing Y-Combinator investment terms, and seeking funding amounts that were unrealistic given market size and potential exits. The need for a reality check among founders has become evident.”

On top of the general funding slowdown, it has been an uphill battle for e-commerce firms in particular, who additionally have had a hard time with uptake due to hesitancy and last-mile delivery challenges, as well as the absence of a reliable national courier service which has forced companies to invest heavily in dispatch teams.

For instance, the NYSE-listed Jumia, which is Africa’s biggest e-commerce platform, is still not profitable since its launch in 2012 despite reports of growth in the African e-commerce scene.

'OVER-ENGINEERED' PROBLEMS

Then there is the discussion of some start-ups offering solutions to so-called non-existent problems or trying to solve problems that make sense in other markets but not in Kenya.

Take the case of Kune Food, for example. The start-up sought to disrupt or innovate the ready-to-eat meals industry in the country through a cloud kitchen but closed down in June last year, barely a year after its launch.

Its launch had been shrouded in controversy over comments its French founder Robin Reecht made regarding Kenya’s food culture after closing a Ksh.144 million ($1 million) pre-seed round.

“After three days of coming into Kenya, I asked where I can get great food at a cheap price, and everybody told me it’s impossible,” he told TechCrunch. “It’s impossible because either you go to the street and you eat street food, which is really cheap but with not-so-good quality, or you order on Uber Eats, Glovo or Jumia, where you get quality but you have to pay at least $10,” he told American outlet TechCrunch at the time.

The comments received heavy backlash, with many equating it to the common “White saviour” mentality that many Western, mostly White, people have whenever they land in Africa.

It also opened a discussion about founders promising to be innovative and unique during the funding stage then later realising their ideas are not novel in the local market and struggling to beat established competitors.

According to Singh, some early-stage founders often don't invest sufficient time and effort in validating their target customers, only prioritising securing funding.

“It's imperative for a founder to have a clear understanding of their customer base and ensure that their product aligns with customer needs. When founders prioritize fundraising over building a sustainable business model, they can encounter difficulties along their entrepreneurial journey. While you can't serve everyone simultaneously, it's crucial to serve someone effectively,” he says.

And for financial technology (fintech), the venture capitalist and investment podcaster says while numerous players exist, there is a prevalent issue of over-engineering problems, products, and services.

“In Kenya alone, we've evaluated more than 50 fintech start-ups, but after careful evaluation, we chose to invest in less than a handful. This sector displays significant redundancy within a relatively small market, especially with the presence of a well-established global fintech standard like M-Pesa,” Singh says.