Startups that go into administration are basically dead

First published on July 07, 2024

There is a running joke in the Kenyan startup scene right now that once a startup goes into administration, which is technically a form of bankruptcy, it will never recover. A winding-up usually involves the directors selling assets to repay creditors, and the founders have nothing but a series of explanations to offer.

“Few companies in Africa go out of business,” more than five industry experts have told me.

But is it always like this? What leads to such failures, especially when the founders have poured their heart and soul into the product and survived wary investors demanding closer scrutiny?

The reasons why running a startup sometimes leads to business closure are fairly common for those familiar with the startup landscape.

First, it is worth understanding that the startup world thrives on innovation and calculated risks. But with high risk, there is a possibility of failure. While it may be a dream to breathe new life into a struggling startup from closing up shop, the reality is that for most people, management spells the end of the road.

For lack of a softer term, a “failed startup” that chooses to go into management is subject to many financial obligations, including but not limited to overdue invoices, debts owed to suppliers, and legal liabilities. Unlike sole proprietorships, startups are usually separate legal entities. This means that the responsibility of these debts lies with the startup itself, not the founders.

Creditors, mainly venture capitalists/investors and service providers, want to recover part of their capital. According to their legal agreement, there is always one party that must be paid first. Creditors secured by a lien have priority, like lawsuits, and take ownership of assets before anyone else.

Unfortunately, and through no fault of their own, investors and shareholders often find themselves at the back of the line. In many cases, their entire investment disappears. Shares become less valuable because the startup’s assets are not enough to cover their initial funding.

Sometimes, amid the rough management process, there may be salvageable assets. Intellectual property (IP) such as patents, copyrights or even original technology can have value. The company may try to sell these assets to recoup some of the losses, but these sales rarely come close to covering the entire remaining financial gap—and in some cases, given that buyers typically don’t want the assets. If they have “dead”, the sale will not take place. .

Why does the government hit in terms of numbers?

According to a study by Founders Factory, two of the biggest barriers include financing and market fit. Another 2022 study by Skynova found that lack of funding kills almost half (47%) of startups. Economic uncertainty and declining investor confidence only make this issue worse.

The same Skynova study also found that 58% of founders regret not doing more in-depth market research. There are cases where startups enter a market that is not yet receptive to their offering, which ideally shows that these companies are oblivious to customer needs. In some cases, some startups fail to fully see the importance of adapting to changing consumer preferences.

What is happening in Kenya

Kenya’s startup scene could be a strong case study for successful startups, but recent major failures raise questions about navigating the path to success. Three big start-ups – Sendy (e-procurement), iProcure (an agritech) and Copia (B2C e-commerce) – all went into administration despite recording growth at the start.

A closer look reveals a common trend: these startups raised significant funding (tens of millions of dollars, in fact), but struggled to adapt to changing market conditions.

For example, Copia serviced loans and suffered heavy default losses.

Even after securing more funding in 2022 and pivoting to just fulfilling orders, Sandy was unable to turn the business around and eventually shut down in August 2023.

iProcure, another Spark Fund recipient, eventually went into administration due to undisclosed debt.

The trend worsened as, in an effort to revive itself, Copia laid off its entire workforce and sought more investment but found no takers. It has since begun liquidation processes, meaning it is on its way to a permanent exit from the market. Sandy has also failed to report significant progress in over a year.

The fate of iProcure is not yet known. While the administrative process continues, the process indicates the possible closure of the business.

Let’s not forget that these companies raised a lot of money: iProcure raised $17.2 million from investors to expand and develop its technology stack. Despite raising $20 million in a January 2020 investment round by Atlantica Ventures, Sandy went into administration after failing to find a buyer. Copia raised more than $123 million.

The PR surrounding these companies has always been about how much they invest, not what they do and the impact they have. A few weeks ago, serial entrepreneur and startup commentator Ali Ghasem told me: My hope and prayer is that we focus more on important metrics, not useless metrics.

And what are these important criteria?

He clarified: the path of profitability.

Focusing on profitability makes sense because it makes the difference between sustainable growth and burning investor capital on high salaries or launching products that are likely to fail.

Finally, note that I’m not yet talking about startups burning through investor funds through high salaries or launching products they know are likely to fail. That’s a post for another day.

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Ken Abuya, Senior Correspondent – East Africa

Email kenn[at]bigcabal.com, with your comments on this NextWave release. Or just click reply to share your comments and feedback.

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