With the recent Shutdown of Fast, a US-based start-up that provided online checkout products, after closing a fund raise of $120 million dollars, experts in the Nigerian tech space have explained why a company will fail after raising such an amount.
Fast announced the shutdown recently in April, 2022, relating it to slow growth and precluded fundraising options.
Many Nigerian start-ups are raising funding experts have highlighted possible precautions to ensure continuity after fundraising.
Taiwo Adeleke, CEO of Vesseltrust Limited and 81 Wolves Investments, linked it to poor feasibility study on new market, mismanagement of fund by funders, designing marketing model to favour market share over profit, generating laws that does not favour the company and internal power tussle between co-founders.
“If the feasibility study is not properly done the company can encounter some challenges down the line which could lead to bankruptcy. Secondly, if the fund given is not properly management, could lead to a major catastrophe and when the market model is designed to favour market shares over profit, meaning that if the founders are not focused more on profit driven approach that might affect the company in a long run because they will not have capital to further the future,” Adeleke said.
Adeleke noted that if the co-founders do not align with the company’s policy with intentions of moving the company forward, it will definitely lead to a shutdown despite the amount raised.
He spoke on the impact of shutdown on investors, disclosing that most times investors take hold of the company management and operations to avoid this happening when they see that co-founders are not capable, which also include new capital infusion to keep the company afloat.
The Start-up CEO also stated that most times investors allow the company if there is a serious reason to go bankrupt in order to get their invested capital back and mostly, only the preferred shareholders are compensated while the other investors don’t get paid and the process usually takes a while.
He encouraged start-ups to ensure funds are properly used according to the use of funds given to investors and set up an advisory board that would keep them on check on key issues along the way.
Jessica Anuna, CEO of Klasha, stated that poor execution would be the biggest reason why a start-up would shut down after fundraising.
“Typically, before a fund raise, the investors and start-up come to a consensus on expectations and milestones to be achieved within a period of time and if the team is unable to execute planned deliverables successfully, there is a likelihood of having wastage of resources and investment which may inadvertently lead to failure.
Jessica encouraged start-ups to have a mixture of financial investors to carry out financial processes of the business effectively and Strategic investors who will handle the business strategically as the name implies.
“When trying to raise funds, find investors that will support both strategically and financially to ensure a good balance. I really think the success of the business lies in the hands of the entrepreneur or business owner as the investors are just there to support in the aforementioned ways. Obviously, no investor will get involved in the day to day running of the business. However, they can proffer advisory and carry out checks periodically,” she added.
However, she urges founders to know the major motive of founding the business whether to build and sell over time or to build a lasting investment, which will also allow them to ensure continuity.
Jumoke Dada, Founder of Taeillo, explained that raising money does not guarantee the success of a start-up.
“90% of startups fail, founders raise money in the hopes that the company will be successful and investors take that risk when they invest. It’s imperative as a start-up to find product-market fit as soon as possible, but even with significant funding it can be difficult.
A startup may have a viable idea but getting enough users or customers to prove the model at scale can be challenging. For some startups it could take years to get product-market fit and during those efforts cash is being burnt on hiring, marketing and product development,” Jumoke said.
According to Jumoke, If the company doesn’t have enough run rate, then they may decide to shut down in anticipation of running out of cash. Similarly, if they cannot see a route to profitability or product-market fit, then irrespective of the money raised the company may decide to close.
She also urges founders to have a transparent relationship with investors when things are not working well and speak out when necessary, adding that some investors are totally satisfied with a monthly or quarterly update.
“Most start-ups fail, so investors are aware of the different mitigating factors that may come with investing in an early or late stage start. Nevertheless, everybody wants the company to succeed and quite often investors have the resources and network to make things happen. Having a board in place, even at seed stage will give the company much needed structure, guidance, and mentorship and will hold the management team accountable,” she said.
The CEO advised companies to find a product market that is fit from the onset, nurture customers and listen to feedback.