Kizito Okechukwu | Sep 28, 2023
One of the most prevalent problems in startup ecosystems across developing markets is the seemingly shortage of investable startups between Seed and Venture Capital (VC), or series stage of funding.
This can mainly be attributed to a number of innovative ideas unable to progress beyond the ideation stage, due to a lack of adequate support structures dedicated to the validation and, ultimately, the commercialisation of these concepts or ideas. This naturally results in a limited pool of startups that are investor-ready. The scarcity of investible deals, combined with the increase in VC allocation, has led to inflated valuations – as there is too much capital chasing after too few deals. Inflated valuations typically lead to portfolio underperformance for investors, as these startups fail to live up to their inflated valuations. The result could be capital flight, as investors pull out – or refuse to provide follow-on funding. This would then leave the startups stranded before they break-even, or become cash-positive.
With the global economic downturn, investment into VC deals has taken a sharp decline the world over, with emerging markets being the hardest hit. Africa for example, experienced a record-breaking year in 2022 and gained significant VC funding momentum in the past 5 years, then its stock started looking quite grim this year, seeing half-year VC investments falling by 43% year-on-year, according to the African Private Capital Association’s half year report. South America has faced a much tougher year with numbers from Crunchbase reporting that VC investments into South American startups fell by a worrying 83% from the previous year, while deal volume fell by 53%.
I read a piece written in 2011 by Paul Graham, co-founder of Ycombinator, in which he framed the role of startup hubs so aptly. I won’t delve too much into the detail of his piece but basically, he kept wondering why startups in a particular town or area fail, while others succeed in another area. He concluded this thought saying that the problem is with the town, the area or the hub. A couple of weeks later, he figured out that he framed the question incorrectly, saying “the problem is not that most towns kill startups. It’s that death is the default for startups, and most towns don’t save them. Instead of thinking of most places as being sprayed by ‘startupicide’, it’s more accurate to think of startups as all being poisoned, and a few places being sprayed with the antidote”.
Startups do what they naturally do, which is to fail. Yet then what’s saving startups in other places/towns? It’s all about having the right support structure, mentality, being at a place where it’s OK to fail, where it’s OK to meet the coolest mentors, experienced CEOs, and guess what, even being in a place where it’s OK to bump into well-networked and experienced individuals, who will give you the opportunity and chance you needed.
While investment into startups is considered a risky asset class, there should still be a concerted effort by respective ecosystems to build an adequate pool of sustainable and investable startups at pre-seed and seed stage, to ensure a healthy deal flow across the various funding stages.
At 22 On Sloane, we aim to do just that and, at last week’s Global Entrepreneurship Congress in Melbourne, I was honoured to have shared the stage with key ecosystem builders that are bullish about supporting innovative, ingenious and resilient startups.
So let’s quite literally start taking the bull by the horns!
Kizito Okechukwu is the Executive Head of 22 On Sloane, Africa’s largest startup campus; and co-Chair of the Global Entrepreneurship Network (GEN) Africa.
22 On Sloane is the largest startup campus in Africa. The campus offers disruptive startups and innovative SMEs a complete turnkey solution to scale, from the initial idea all the way to commercialisation, funding opportunities and access to markets. Its aim is to nurture the entrepreneurial mindset, ensure their sustainability, and explore development of new industries and contribute towards job creation in Africa.
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