Partner at TLCom Capital, Eloho Omame, has said that global investors that had injected money into African startups in the last two years failed to do due diligence before committing their funds.
Against the backdrop of the recent failure of some African startups, Omame in a LinkedIn post said most of the deals announced between 2021/2022 were hurriedly sealed.
According to her, some of the startup founders had also expressed concerns that questions were not asked by their investors.
Indicating that most of the recently failed startups were backed by foreign investors and not African VCs, she noted that “in the last couple of years, Africa-focused investors became relatively less popular than our US/global counterparts, many investing on the continent for the first time, often without an Africa mandate per se.”
Fast deals
Attributing the recent failures to the lack of due diligence on some of the startups by the investors, Omame said:
- “We often heard from founders that they weren’t asking ‘so many’ questions. They moved ‘fast’…from a conversation on a Friday to funds in the bank by Monday. It became hard to ask curious questions and to take your time to get to know founders and their businesses before writing a check.
- “Reasonable inquiries were a bother, and reasonable timelines were perceived as a power play. You risked losing the deal. Or you spent a week and a lot of resources doing ‘real work’ only to get a call that the round was full. Now that the dust is settling, I hope we can go back to a better dynamic one that’s grounded in trust, openness, and mutual respect.”
African VCs and founders
She added that the narrative that “African investors ask more questions than US/global investors” would not help the industry. According to her, founders should probably wonder if they really matter if an investor doesn’t take the time to ask good questions.
While advising African founders to see due diligence as a necessary process in their business interest, Omame said:
- “A good due diligence process shoots to understand your business and you as a founder. Good investors aim to balance that with optimizing for materiality, reasonableness, and, yes, pace. The process is also your chance to get to know the character and expertise of the investor. Nobody is helped — not you or the investor — by optimizing for speed.
“Times are tougher, yes, but if nothing else, this fundraising winter is also a good chance to reset and rediscover a healthier, more sustainable long-term dynamic between founders and investors in Africa tech & VC.”
Corroborating Omame’s views, Founding Partner at Future Africa, Iyinolwa Aboyeji, noted that most of the huge startup failures in Africa are from those backed by global VCs and not those led by African VCs.
- “They are imported deals where SV thought they could buy their way to success in Africa with enough capital. I also think we VCs can really help founders by helping them understand what we are looking for in the diligence. Part of the danger of the last two years of cheap capital is that a lot of founders think building a company is a great pitch but there is just so much more to it,” he said.
Failed startups
Just recently, Nigerian genomics startup, 54gene initiated the folding up of its operations after securing $45 million in funding.
This was a fallout of multiple controversies that saw the company having three CEOs in the last year. The last CEO of the company, Ron Chiarello, confirmed the financial struggles that led to the company’s winding down, stating that 54gene could not continue to operate financially, and it began to wind down in July.
In Ghana, Dash, a fintech startup that had raised over $86 million in 5 years of its operations shut down last week.
The company claimed to have handled $1 billion in transactions and added a million users from Ghana, Nigeria, and Kenya. In five months, those figures showed a 5x increase in users.
However, internal Dash data audits showed that the company’s founder Boakye Boampong lied and inflated the number of users.
Soon, he was let go. When Kenneth Kinshua eventually replaced him, it was already too late to save the company.
A second audit of the business’s financial records found an unreported shortfall of at least $25 million. Boampong reportedly earned $50,000 monthly and allegedly diverted at least $8 million.
