Ayodeji Ayenuwa
In a turn of events for African startups, the first half of 2023 witnesses a 46% decline in venture capital (VC) funding. This crisis, which originated towards the end of 2022, has sent shockwaves globally, compelling most startups to halt operations.
Notably, Nigeria’s Lazerpay, a crypto and Web3 company, became a casualty of this funding drought. The company ceased operations earlier this year due to a lead investor’s withdrawal from an almost finalized seed round. Similarly, Dash, a five-year-old Ghanaian-founded fintech startup, closed its doors after struggling to sustain its business.
Finance expert Chioma Daniel, Head of Finance at TalentQL, sheds light on crucial financial warning signs for startups, emphasizing the need for a closer examination of key financial indicators. She points out, “Not having viable revenue streams with consistent income” as a red flag, along with “long receivable collection days” and “high cash burn on operating expenses.”
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In an interview, Chioma shares insights into early signs of financial distress, strategies for financial stability, and the role investors play. According to her, “Subscription-based models are a popular one” for startups to ensure a steady inflow of revenue. She advises startups to focus on a sustainable revenue model, budgeting, and setting aside a reserve fund.
Chioma underscores the importance of careful spending on growth activities, stating, “While startups would typically burn cash on expansion and growth activities, it may be prudent to set aside a reserve fund that will only be used when there is no other source of cash.”
Turning to the role of investors, Chioma advocates for a partnership beyond funding. “Investors should act as trusted partners, not just funders. They should keep the founders accountable by requiring detailed financial reports from the early stages,” she notes. Funding, according to Chioma, is crucial for growth, but startups must show worthiness through track records and solid plans.
Ultimately, Daniel stresses the significance of a contingency plan for startups to navigate potential financial setbacks. She recommends assessing risks, diversifying revenue streams, and expanding from B2C to B2B/B2G.
The overarching message is a call for strategic planning, calculated risks, and proactive measures to weather the financial challenges faced by startups in 2023.
Techrectory with Agency Report.
