Africa's Startup Demise: Inadequate Governance Exacerbates High Failure Percentages Among Emerging Businesses
A growing number of African startups are facing significant hurdles, with 17% of them failing due to regulatory challenges, according to a recent report. These challenges, rooted in governance gaps, founder misconduct, and operational malpractice, are exposing systemic cracks in the African startup ecosystem.
The report highlights several key factors that contribute to these failures. Weak enforcement of laws and regulations allows for operational malpractices, fraud, and deceptive behavior to go unchecked. Inadequate oversight and transparency lead to poor investor confidence and corruption risks. Regulatory complexity and unpredictability increase operational risks for startups, while capital market and investor dynamics favour pedigree and safety over innovative but riskier ventures.
Moreover, the report suggests that debt financing growth, with an expected increase from 33% in 2024 to 45% in 2025, raises concerns about long-term sustainability. This trend reflects a challenging environment for securing equity funding under the current regulatory and governance frameworks.
These challenges create an environment where startups struggle to scale or survive due to limited trust, insufficient accountability frameworks, burdensome regulatory environments, and a misalignment between investor expectations and actual market needs.
Omobola Johnson, Senior Partner at TLcom Capital, emphasizes that governance is about mitigating risks, not control. She encourages founders to view governance as a driving force for growth, not a limitation. A board with expertise in regulatory matters can help startups address compliance issues proactively.
Unfortunately, poor internal governance has led to the downfall of several startups. For instance, Dash, a Ghanaian fintech startup that raised $85 million, collapsed due to lack of robust governance structures. Regulatory crackdowns have also resulted in the closure of fintech startups like LazerPay and BuyCoins Pro.
The report does not discuss any potential benefits or advantages of poor governance in the startup ecosystem. However, it is clear that lack of robust governance structures is a critical factor in the failure of many African startups. In fact, 58% of African startups fail due to financial difficulties, while 27% fail due to operational issues.
As the startup ecosystem in Africa matures, it is crucial for startups to prioritize good governance practices. Regulatory oversight is intensifying, and a well-organized board can offer a competitive edge by providing strategic direction, promoting financial discipline, and ensuring adherence to regulations.
In conclusion, weak governance structures, regulatory inefficiencies, and an investor ecosystem that can perpetuate systemic biases and overlook foundational sectors are key drivers of startup failures in Africa. For startups to thrive, they must address these challenges head-on and prioritize good governance practices.
Venture capitalists and financiers could potentially find it challenging to invest in African startups due to the high failure rate attributed to weak governance, regulatory challenges, and complexities, operational malpractices, and operational malpractices gone unchecked. To prevent such failures, prioritizing good governance practices and establishing robust governance structures could be crucial for startups to secure equitable funding, scale, and survive in the competitive technology-driven business environment.
