Global Economic Outlook (G.E.O)
Why Some Startups with Huge Investor Funds Struggle. Vol. 99. July 25, 2022
Dear readers, welcome to another edition of the Global Economic Outlook (G.E.O) - our weekly newsletter providing insights on finance, investment and the economy. Today, we explain why some startups are struggling despite raising a lot of money from investors.
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Why Some Startups with Huge Investor Funds Struggle
Startups are companies in the very early stages of growth and they can be found in all sectors of the economy. There has been a proliferation of startups especially in the field of Information and Technology (IT) in recent times with many companies seeking to solve individual and corporate challenges through automation and innovation.
There are many challenges in the developing world which naturally presents opportunities for startups to emerge. It is therefore not a surprise that there is a growing list of startups in the developing markets and investors, including venture capital and private equity firms, are surely taking notice as they are directing funds in that direction. According to a report by Briter Bridges, African Startups raised about $4.65 billion in 2021 with more than 60% of that investment going to the Financial Technology (FinTech) companies.
A report by Techpoint shows that Nigerian startups raised in excess of $1 billion in 2021 with more than 70% representing investment in FinTechs. It has almost become commonplace to read about fundraising for a startup in the media.
Despite the huge investor funds that some of these startups have raised, many of them are running into trouble in almost no time while some others which are still thriving will potentially run themselves aground given their corporate practices. The below are some of the reasons why they are struggling:
· Some Startups are more concerned about Raising funds than making profit - No business can survive in the long run without making profits and while it may be possible to live on investor funds in the short run, it will definitely not continue forever. Investors will not continue to provide funds if they cannot get adequate returns for their investment. It is therefore not very wise to misappropriate funds raised in the hope of being able to raise another. Why not spend that energy building a sustainable business?
· Wrong Priorities – Many startups are quick to seek visibility even when their business model is not strong enough. They spend tons of money advertising a business that still needs to be worked on. The result is that even if they manage to get customers to use their products, they are unable to retain them.
· Poor Compliance and Control – Startups especially in the FinTech space must know that the integrity of the systems built is just as important as the ease of using it. They sometimes put too much energy into designing products that are easy to use but deficient from a risk perspective. In other words, they pay very little attention to compliance, best standards and risk control. Such companies cannot stand the test of time.
· Aggressive Revenue Recognition – In an attempt to prove to investors that their business is doing well, some startups use aggressive revenue recognition mechanisms in all forms to prove it. This too cannot stand the test of time as cashflow is the lifeblood of every business.
Startups must be concerned about building businesses that can stand the test of time rather than seeking to be the darling of the media. Being ‘popular’ cannot be a substitute for an efficient business model and integrity.
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Let us know in the comment section other reasons why you think startups struggle
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The 8th Live Edition of the Global Economic Outlook (G.E.O) was held on Tuesday, 28th June 2022 with experts discussing the state of the Nigerian economy and how Small and Medium Scale Enterprises (SMEs) can navigate the difficult business environment. It is a must watch!
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