In the world of startups, there’s been a relentless pursuit of unicorns—companies valued at over $1 billion. Unicorns, once rare, now number around 1,200 worldwide. But with recent challenges, including the impact of COVID-19 and a market reset in Africa that has stripped some startups of their unicorn status, the debate resurfaces: should African startups aim for unicorn status, or should they adopt a more sustainable approach akin to camels?
Unicorns, known for their rapid rise to billion-dollar valuations, captivate attention and are well-hailed in this ecosystem. Camels, on the other hand, prioritize steady and resilient growth. As the African venture market undergoes a transformation, the question arises: Which path—unicorn or camel—will guide startups toward survival in this challenging landscape?
Unicorns, with their mythical allure, have been the poster children of the startup world. These companies achieve billion-dollar valuations, often propelled by massive funding rounds and exponential growth. The Unicorn path appears tantalizing, promising vast riches and market domination. In the past, many African startups sought to emulate this trajectory, chasing hefty valuations through rapid scaling.
“Growth at all costs is luxury and only doable if you can raise with ease and in Africa, that has never been the case,” says Peter Oriaifo, principal at Oui Capital to thecondia. “Our ecosystem requires a strong focus on unit economics. Growth at all cost to unicorn was never a thing in Africa, rather it was something folks saw in the US and convinced themselves that it can be replicated in Africa.”
On the other hand, Camels are the unsung heroes of the ecosystem. These companies prioritize sustainability and resilience over rapid expansion. They aren’t driven by sky-high valuations but focus on staying profitable and maintaining steady growth which is the approach many believed Jumia should have taken rather than trying to be the “Amazon of Africa”. Camels are known for their ability to endure harsh conditions, much like the African startups navigating challenging funding landscapes.
When we asked Gbenro Dara, CEO of Octamile about the unicorn ambition and if it still holds sway over their business decisions, he said: “We honestly are not thinking about it at the moment. We are just focused on building a long-term business that adds value by simplifying access to insurance for more than 600 million Africans.”
The venture market reset
The African startup ecosystem has experienced a shift in recent times. The venture market once flooded with cash and exuberance, has recalibrated. VC funding plunged by 47.7% in the first half of 2023 revealing the state of the ecosystem. Investors are scrutinizing startups more meticulously, paying more attention to certain levels of traction demanding profitability, and reassessing valuations. The era of easy funding has given way to a more cautious and discerning approach.
Unicorns are not immune to this reset. The pressure to maintain sky-high valuations has led to reckless spending and unsustainable growth pursuits. When the tide of easy funding recedes, Unicorns can find themselves vulnerable, facing difficulties in justifying their valuations and sustaining their business models. The race to reach a billion-dollar valuation may come at the cost of long-term viability.
Chipper Cash recently lost its unicorn status, from a $2.2 billion valuation to between $250 million and $500 million representing a 70% slash, here’s what Ham Serunjogi, the CEO had to say about their blitz scaling strategy “I was fully aware that we were living in a time when capital was cheap. And when capital is cheap, that’s when you want to do the capital-intensive things”
Chipper’s situation reflects a common scenario across the continent. Many, driven by a desire to achieve unicorn status, embarked on an ambitious journey, seeking rapid growth and expansion across markets. Yet, such endeavors come at a hefty price. The market reset and funding winter have shifted the landscape, causing investors to pause and prioritize profitability over unchecked growth.
Camels, in contrast, are well-prepared for challenging environments. Their emphasis on profitability and sustainable growth positions them favorably in the current funding landscape. They are built to weather storms, making them resilient to market fluctuations and economic downturns. Camels prioritize customer value, operational efficiency, and a strong foundation over chasing rapid, unsustainable growth.
In a thread of tweets, Dr. Ola Brown shared that Camels are built for the long haul, they understand that the barrier to growth is a function of a product reflecting its market position and quality rather than price. She went on to share that successful camel startups only expend resources on activities that are self-reinforcing (where lessons from successes or failures support the business as a whole) and self-balancing (when one piece of the business naturally hedges another).
Survival Strategies for African Startups
In this reset venture market, African startups must consider Camel-like strategies to ensure survival and long-term success:
Profitability over valuation
Prioritise profitability and sustainable growth over sky-high valuations. Profitable businesses are better equipped to weather funding fluctuations. In speaking with Collins Iheagwara, Co-founder and CEO of Simpu about the unicorn dream, he said “Unicorn is a tall dream right now. We are more focused on profitability and staying alive.”
Diversify funding sources
Reduce reliance on traditional venture capital by exploring alternative funding sources such as grants, corporate partnerships, and angel investors. Diversifying funding sources has to become a crucial strategy for sustainability. Startups can look to accelerator programs, which offer not only financial support but also mentorship and valuable industry connections.
Additionally, paying customers can play a pivotal role, as revenue generated can also help startups reduce their reliance on venture capital funding. This approach not only strengthens their financial foundation but also demonstrates product-market fit, attracting more investors in the long run. By embracing a multi-pronged funding strategy, African startups can weather the funding winter and build a resilient path to success.
Customer-Centric Approach
To ensure sustainability and growth, startups would have to focus on delivering genuine value to their customer base. This way, you foster customer loyalty, turning satisfied users into vocal advocates. This approach not only helps in retaining existing customers but also attracts new ones through positive word-of-mouth.
Understanding customer needs and pain points becomes paramount in such lean times. Startups should actively think about ways to engage with their customers, seeking feedback and adapting their products or services accordingly.
This proactive approach ensures that startups remain relevant and aligned with market demands, ultimately driving long-term growth even in the face of funding challenges. In essence, a customer-centric strategy acts as a solid foundation for startups in the ecosystem to weather the funding winter and emerge stronger on the other side.
Operational Efficiency
Amidst a funding winter, operational efficiencies have become important for startups. Navigating a tighter financial landscape, it is necessary to optimize their operations to preserve resources and sustain growth. Streamlining processes, resource allocation, and cost management have to become critical strategies to weather the current situation of the market. The focus on operational efficiencies not only enhances financial stability but also demonstrates adaptability and resilience in the face of uncertainty.
Ultimately, startups that effectively manage their operations can position themselves to navigate the funding winter and emerge stronger in an evolving market like this.
“Operational efficiency is not negotiable for us, we have been generating revenue from the very first trip and intentionally paying attention to keeping our burn as close to net revenue as possible as we try to make the most magic with the limited resources at our disposal,” said Williams Fatayo, Cofounder and CEO, Truq told Bendada. “As it stands, we should break even and become profitable in Q1 2024, to show how intentional we have been.”
Resilience and flexibility
Develop resilience to adapt to changing market dynamics. Flexibility allows startups to pivot when necessary and seize emerging opportunities. Adaptability is crucial for African startups following a reset as this. The ability to pivot and explore new avenues can be their lifeline, allowing them to navigate uncertain times and discover fresh opportunities.
Flexibility in adjusting strategies and embracing change is paramount to weathering the funding winter successfully. A prime illustration of this is when OurPass, formerly an e-commerce one-click checkout platform, underwent a strategic shift toward business banking.
Samuel Eze, the company’s CEO, revealed the pivot from offering one-click checkout services to providing comprehensive banking solutions for businesses. Eze emphasized that the altered market conditions in the post-COVID era compelled OurPass to adapt and better cater to customer needs. He explained that, as they started scaling their product, it became evident that the dynamics of the market had transformed, rendering a one-click checkout solution less relevant for businesses.
Long-term vision
Adopt a long-term perspective. Camels prioritize sustainability and resilience, recognizing that the journey to success may be gradual but enduring. A long-term perspective will force you to have solid foundations. “Focus for us been on being more efficient and data-driven,” Gbenro Dara told Bendada.
Network and collaboration
Build strong networks within the startup ecosystem. Collaborative efforts can provide access to resources, mentorship, and strategic partnerships. Partnerships are a vital lifeline during times of market upheavals. It could take the form of collaborative alliances that bring fresh perspectives, resources, and opportunities to the table, fostering innovation and resilience.
By strategically leveraging partnerships, startups can diversify their capabilities and reach, unlocking access to new markets and customer bases. These alliances will enable the pooling of expertise, sharing the burden of challenges, and collectively chart a course through turbulent times. In essence, partnerships are not merely a survival tactic but a potent strategy for sustainable growth and success amid market uncertainties.
Uwem Uwemakpan, Head Of Investments, Launch Africa VC believes the unicorn dream was a path forced on founders by VCs because they wanted these companies to grow and scale fast so as to look attractive to other investors thereby raising the valuations and opportunities to exit at a later stage.
“Typically, the goal of an investor is to make money for the LPs. What ended up happening was akin to a Ponzi scheme, they put a lot of unrealistic pressure on the founder to grow too fast, too soon, without actually focusing on the fundaments of the business – margins, growing profits, etc,” he said.
We saw Investors force founders into hyper-growth, hype an investment, and then exit at each funding round thereby leaving the ‘bad bag’ for the investors who come in at the later stages. Was this the right way? no. Is this how VC typically works? Yes. — Uwemakpan Akpan
As the African venture market resets, the pathway to survival for startups becomes clearer. While the allure of Unicorn status is undeniable, the Camels’ steady stride and resilience offer a promising approach for navigating the current challenges.
“Founders should embrace building Camels, these $500m, etc companies create more investor confidence because they create liquidity in the system from M&As, secondaries, etc,” Uwemakpan said. “There’s a healthy balance of profitability, growth, sustainability, and impact.”
African startups that embrace sustainability, profitability, and long-term vision are well-positioned to not only survive but thrive. In the end, it’s not just about reaching a billion-dollar valuation; it’s about building businesses that endure harsh conditions and make a lasting impact on the continent.
