There’s a dark joke circulating in the Kenyan startup scene right now that once a startup enters administration, which is technically a form of bankruptcy, it will never recover. The end usually involves administrators selling off assets to repay creditors, leaving founders with nothing but a series of explanations to make.

“Few companies in Africa emerge from administration,” I have been told by over five industry experts.

But is this always the case? What leads to such failures, especially when founders have poured their heart and soul into the product and survived increasingly cautious investors demanding rigorous due diligence?

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

First, it is worth understanding that the world of startups thrives on innovation and taking calculated risks. But with great risk comes the possibility of failure. Despite that the dream might be to bring new life to a struggling startup from closing shop, the reality is that for most, administration marks the end of the road.

For lack of a softer phrase, a “failed startup” that chooses to pick the administration way becomes subject to many financial obligations, including but not limited to outstanding bills, debts owed to suppliers, and legal liabilities. Unlike sole proprietorships, startups are typically separate legal entities. This means the startup itself, rather than the individual founders, bears the responsibility for these debts.

Creditors, mostly venture capitalists/investors and service providers, want to recoup some of their investment. Based on their legal agreement, there is always a party that needs to be paid first. Secured creditors with collateral like legal claims take priority and take ownership of assets before anyone else.

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

Sometimes, amidst the rough administration process, there might be salvageable assets; intellectual property (IP) like patents, copyrights, or even core technology could hold value. The company might attempt to sell these assets to recoup some losses, but these sales rarely come close to covering the total financial crater left behind—and in some cases, the sale does not materialise considering buyers usually do not want to own “dead” assets.

According to a study by Founders Factory, two of the biggest hurdles involve funding and market fit. Another study in 2022 by Skynova revealed that a lack of financing dooms nearly half (47%) of startups. Economic uncertainty and dwindling investor confidence only make this issue worse.

The same Skynova study also showed that 58% of founders regretted not conducting deeper market research. There are cases when startups enter a market not yet receptive to their offering, which ideally shows that these companies are neglecting customer needs. In some cases, some startups fail to fully see the importance of adapting to changing consumer preferences.

Kenya’s startup scene can make a solid case study for successful startups, but recent high-profile failures raise questions about navigating the path to success. Three major startups—Sendy (e-logistics), iProcure (an agritech), and Copia (B2C e-commerce)—all entered administration despite recording growth at the start.

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

Copia, for instance, ventured into loan services and suffered heavy losses from defaults.

Even after securing more funding in 2022 and pivoting to order fulfillment only, Sendy couldn’t turn its business around, and it eventually shut down in August 2023.

iProcure, another Spark Fund recipient, ultimately chose administration due to an undisclosed debt.

The trend worsened because, in an attempt to revive itself, Copia laid off its entire workforce and sought further investment but found no takers. It has since started liquidation processes, which means it is on the path to a permanent exit from the market. Sendy, too, has failed to report any significant progress in over a year.

The fate of iProcure is not clear yet. While the administration process is ongoing, the trend suggests a likely business closure.

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 January 2020 in a funding round led by Atlantica Ventures, Sendy went into administration after failing to find a buyer. Copia raised over $123 million.

“The PR around these companies was always about how much they have raised, not what they are doing and the impact they are having. My hope and prayer is that we start focusing more on the important metrics, not the vanity ones,” Ali Kassim, a serial entrepreneur, and a regular startup commentator, told me a few weeks ago.

And which are these important metrics?

“Path to profitability,” he clarified.

The focus on profitability makes sense since it determines the difference between sustainable growth and burning through investor funds on high salaries or launching products that would likely fail.

Lastly, note that I have not yet discussed startups burning through investor funds through high salaries or launching products they know are likely to fail. That is a post for another day.

Kenn Abuya, Senior Reporter – East Africa

Feel free to email kenn[at]bigcabal.com, with your thoughts about this edition of NextWave. Or just click reply to share your thoughts and feedback.

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Regulators around the world are in a race against time to come up with rules to govern the artificial intelligence (AI) space. The warnings that computers could soon have the level of human intelligence has raised a new regulatory headache for most governments. However, proponents warn that over-regulation could kill innovation and cut its benefits.

Innovations around AI have been moving so fast that regulators appear lost in formulating frameworks to govern the sector. The European Union (EU) is among the first to come up with a treaty, meant to make AI ethical and trustworthy. The treaty spells out global standards for responsible AI development and deployment and will influence other frameworks developed in different countries.

What will be the place of Africa in this fast-developing technology? At the beginning of 2024, there was a lot of talk about this being the year that most countries will pass AI regulations. Halfway through the year, nothing much has happened on the continent. Possibly this is why the African voice is missing in the drafting of the EU AI Treaty.

The treaty was drafted with input from countries outside the EU including the US, Argentina, Israel, Japan and Uruguay. While non-EU members are welcome to sign the legally binding agreement, the non-involvement of an African player could mean it does not contain local perspectives. All signatories to the treaty, which will be ratified on September 5, 2024, must ensure responsibility and accountability for the impacts that AI has on human rights.

The exclusion of Africa in the development of the treaty raises challenges for a continent burgeoning with innovation. Without Africa on the table, the new treaty risks worsening the data dependency that has plagued the continent in technological developments. Much of the current AI development relies on foreign technology and data housed outside the continent. With Africa not involved in the treaty process, it is unlikely that the companies involved in AI development would consider setting shop on the continent. This raises a serious concern, algorithms trained on non-African datasets may further existing racial biases, resulting in unfair outcomes.

The lack of diversity in datasets raises serious ethical challenges that could hamper the adoption of AI on the continent. AI has been touted as a technology that can be used to bridge existing societal gaps such as increasing financial inclusion among marginalised groups. But without proper safeguards, biased data used to develop AI algorithms could disproportionately affect African populations and other minority groups. For example, a surveillance algorithm developed without diverse data could inaccurately target certain communities.

Many African countries still lack comprehensive AI regulation. The Malabo Convention ratified by the African Union (AU) in 2023 guides the AI policy on the continent. This is not sufficient. Only Mauritius and Egypt have formulated AI laws while South Africa, Nigeria and Kenya have initiated plans to create regulatory frameworks. There lies a risk that the AI regulatory gap in Africa will widen if the continent does not sit at the same table with other countries. This exposes most African states to unregulated AI developments that could pose negative economic and social impacts.

Despite being excluded from the negotiations over the future of AI, Africa still has a role to play in shaping the treaty. The treaty is pushing for international cooperation, and with over 1.4 billion people, African states advocate for inclusive discussions to have local perspectives considered. By participating in global AI forums held by the United Nations (UN) and OECD’s Global Partnership on Artificial Intelligence (GPAI), the continent can reclaim the position it has been denied on the table.

African nations can collaborate and build a regional framework, picking lessons from the EU AI Treaty. This collaborative approach could promote a unified voice in the AI discourse and ensure that regulations are tailored to local needs. Regional economic blocs like the East African Community (EAC) or the Economic Community of West Africa (ECOWAS) can consider regional frameworks. For instance, it makes little sense for Kenya to develop an AI regulation, when EAC is advocating for further regional integrations including a monetary union.

The EU AI treaty represents the first step towards a global ethical AI standard. While there is a long way to go for Africa, there are some promising initiatives that show commitment to responsible AI development. Mauritius has developed a national AI policy that puts human beings at the centre. It emphasises fairness, transparency and accountability, ensuring the technology benefits everyone. Nigeria and Kenya are in the process of doing the same. The African Institute for Data Science (AIDS), a pan-African organisation, is promoting responsible data practices and has programmes to help African states build capacity for AI.

Adonijah Ndege, Senior Reporter – East Africa

Feel free to email adonijah[at]bigcabal.com, with your thoughts about this edition of NextWave. Or just click reply to share your thoughts and feedback.

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Psst! Down here!

Thanks for reading today’s Next Wave. Please share. Or subscribe if someone shared it to you here for free to get fresh perspectives on the progress of digital innovation in Africa every Sunday.

As always feel free to email a reply or response to this essay. I enjoy reading those emails a lot.

TC Daily newsletter is out daily (Mon – Fri) brief of all the technology and business stories you need to know. Get it in your inbox each weekday at 7 AM (WAT).

Follow TechCabal on Twitter, Instagram, Facebook, and LinkedIn to stay engaged in our real-time conversations on tech and innovation in Africa.

If you liked this edition of Next Wave, please share with your friends. And feel free to reply with thoughts and feedback. We welcome those.