It’s been a challenging year for tech startups globally, with many facing layoffs, down rounds, and even complete shutdowns due to various factors such as market conditions, mismanagement, and fraud. Recently, two high-profile cases in Africa have brought the issue of due diligence to the forefront.
Key Takeaway
The recent failures of African tech startups highlight the importance of thorough due diligence in the investment process. Stricter evaluation of founders, financial operations, and sustainability metrics can help prevent fraud and mismanagement. Collaboration between local and international investors is crucial for conducting comprehensive due diligence in the African tech ecosystem.
Dash’s Closure and IRL’s Fraud Case: Lessons Learned
In Africa, Dash, a fintech startup founded in 2019, experienced rapid growth and secured significant investments. However, it eventually shut down after revelations of financial impropriety and misreporting by its CEO. Similarly, IRL, a social media platform backed by SoftBank, faced a fraud case when it was discovered that the majority of its reported users were fake.
These cases highlight the need for stricter due diligence in African tech startups. Both local and international investors must take a more comprehensive approach when evaluating opportunities and conducting background checks on founders and their financial operations.
Repercussions and Ripple Effects
The demise of startups due to mismanagement and fraud can have ripple effects on the African tech ecosystem. Global venture capital investors, who were once excited about the African growth story, may become more cautious and retrench to markets they are more familiar with. This could result in a decrease in funding availability for African startups.
However, it’s essential to note that these failures should not define the entire ecosystem. Africa has a solid track record of successful startups and investment opportunities. Instead of focusing on the negative hype, the emphasis should be on building an ecosystem based on openness, trust, and rigorous due diligence.
The Role of Local VCs and Lessons for Startups and Investors
Local venture capital firms play a crucial role in conducting due diligence on African startups. With their knowledge of the local market, networks, and relationships, they can provide valuable insights and conduct in-depth checks. International investors should collaborate with local VCs to navigate the unique challenges and dynamics of the African market.
Furthermore, startups and VCs should learn from the failures and implement stronger governance processes from early stages. Ensuring the presence of financial operators in core team members and establishing robust financial management practices can help mitigate the risk of fraud and mismanagement.
