Nigeria has emerged as a frontrunner in Africa’s startup ecosystem, boasting the highest number of funded startups in 2021-2022, a testament to the nation’s vibrant pool of talented and innovative youth. However, the euphoria of this achievement was dampened in 2023 by a concerning trend: a surge in the number of Nigerian startups facing failure, casting a shadow over the once-thriving ecosystem. While the reasons for startup failures can be multifaceted, poor corporate governance emerges as a key culprit.
It is evident that many Nigerian startups lack effective corporate governance systems, often relegating governance to the back burner in the early stages of development. This oversight is understandable, as founders are typically preoccupied with gaining market traction and meeting targets amidst limited funding and an uncertain economic climate. Moreover, the blurred lines between ownership and management further exacerbate governance challenges.
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Conversations with founders reveal a common apprehension towards relinquishing managerial autonomy with the introduction of new board members. There is a fear that additional layers of decision-making could hinder agility and lead to decisions that diverge from the founders’ vision for the company.
The ramifications of poor corporate governance have been starkly illustrated in the mismanagement and closures of several startups. Payday, for instance, saw its CEO embroiled in allegations of self-payment following a significant fundraising round, accompanied by staff salary reductions and customer fraud claims. Similarly, genomics startup 54 gene faced internal turmoil, marked by the departure of three CEOs in 2023, resulting in legal battles and internal discord. Pivo’s demise stemmed from conflicts between the CEO and COO, eroding trust and impeding growth. These instances underscore the detrimental effects of weak governance practices on startup sustainability and success.
The prevalence of “out of control founders” poses a chilling reality for many venture capital firms, who have encountered instances of founders engaging in legally questionable activities due to a lack of financial acumen and burnout management strategies.
It is evident that many Nigerian startups lack effective corporate governance systems, often relegating governance to the back burner in the early stages of development.
Weak governance structures, characterised by undefined processes, create fertile ground for financial mismanagement, fraud, and internal conflicts. Such opacity raises red flags for investors, jeopardising funding prospects and tarnishing the company’s reputation. Unprofessional conduct fueled by inadequate governance erodes public trust and confidence. Without diverse perspectives on the board, decision-making becomes myopic, risking inefficiency and jeopardising the company’s long-term viability.
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In light of the pervasive governance challenges faced by Nigerian startups, it is imperative to reassess the effectiveness of the legal and regulatory framework in promoting and enforcing good governance practices.
The Nigeria Startup Act, 2022 and the Companies and Allied Matters Act, 2020 are the two primary pieces of legislation governing startups in Nigeria. While the Startup Act does not explicitly address corporate governance, it indirectly encourages ethical practices through the establishment of a regulatory sandbox and emphasises transparency and accountability. Similarly, CAMA 2020 promotes good governance through provisions such as transparent financial reporting and responsible directors’ duties.
Moving forward, strong corporate governance must be prioritised at every stage of a startup’s journey. Founders must align visions, finances, and contributions to foster trust and ensure fair recognition. Transparent equity structures and performance tracking mechanisms are essential for maintaining accountability and fostering a culture of integrity.
Moreover, adherence to legal and regulatory requirements, including timely financial reporting and internal controls, is paramount for building investor confidence and sustaining long-term growth. Venture capital firms must play an active role in educating founders about the importance of governance and providing mentorship to ensure compliance with best practices.
Read also: Maintaining investor confidence: The corporate governance imperative for Nigerian startups
Ultimately, robust corporate governance serves as the foundation for a startup’s success, instilling confidence in investors, fostering accountability, and setting the stage for sustainable growth. As Nigeria’s startup ecosystem continues to evolve, prioritising good governance will be critical in shaping a prosperous and resilient entrepreneurial landscape.
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