Business

After almost ten years in operation, one of the most funded startups in Kenya – Sendy – recently closed shop. This comes after Sendy ran out of funds. Sounds weird? Yes, the company that was valued at over KShs 10 billion late last year ran out of money to pay salaries, rent, watchman… etc.

This seems to surprise many people who assume that a highly funded startup ought not to fail. Sendy had so far received almost KShs 4 billion from investors and as of mid-2023, it had spent all that money and was not making enough profits to survive without the need for external funding. How and why did this happen? How can a business burn through KShs 4 billion and still not make money?

Sendy is not the first highly funded startup in Kenya (and in the world) to fail. Kune Foods, Notify Logistics, WeFarm, and BRCK are some of the many that have recently met their demise in the rough waters of the Kenyan economy. To understand why all these startups fail, there is one misconception that people need to get rid of; that the death of a business is something strange or unexpected.

Death is Written

One thing is certain in business: death. It can come from natural causes (like Covid) or human causes (like mismanagement), but it will come sooner or later. It’s just a question of when. Death is more certain than taxes because some clever business people can avoid paying taxes. But death. Death is inevitable, and the average business today only lasts 17 years. In 1958, it was 61 years.

If you don’t believe me, try to name three famous companies that have reached their 200th anniversary.

This is especially true for startups, which tend to die faster than other businesses. Worse if they are tech startups. Tech startups have a short and flashy life, like Simon Makonde. They sprout up like mushrooms and in no time, they are worth more than many solid companies (Uber has a bigger market cap than Honda). And then, before the management can take their seats, tech companies disappear and leave no trail. Thus, it should not shock anybody that a tech startup closed shop.

 Big Money, Short Life

Nevertheless, we would at least expect that highly funded startups would be better at escaping death. After all, money can cure a lot of things. Why then does a startup that has received KShs 4 billion end up not taking off? Are you saying that all that funding could not translate to a profit?

To answer this question, we need to understand what funding and valuation mean.

What determines the worth of a startup? It depends on market size and potential, and that is valid if the startup will be able to execute its vision. But even the potential of a startup is very subjective. At the end of the day, if a startup can tell its story very well and convince potential investors, money will rain. Whether that translates to profit is a different story altogether.

Funding is essentially a vote of confidence in the future of a startup, not the current state. Investors make a (calculated) bet and hope that their investment will pay off. When you hear that a startup is valued at x amount of money, it does not tell you how profitable the business is. The simplest deduction you can make is that some people believe that the future of the startup is big. Remember that those investors can (and often) get it wrong. In other cases, investment in startups works like a pyramid scheme where initial investors make their money and exit, and the last person will be left with a dead body in their hands. Only time can validate a bet made by investors.

The investors also know that they are making a gamble. Usually, the strategy is to identify several high-value startups and invest in them. Most will fail, but a few will succeed and earn you more than enough to cover your losses from the failed ones.

Back to Sendy

Sendy had a big dream. Imagine a Kenya where every delivery was done by Sendy. Online shopping, parcel delivery, retail goods, construction materials… that is a big market and if Sendy could hack it, they could have become an elephant (or a unicorn). Imagine the possibility of enabling a trader from Kitui to sell curio to buyers in Kumasi, both by moving the goods and facilitating payment. What a dream!

But in the real world, all dreams are not valid. To achieve that Sendy needed a miracle. They tried, they needed more time to keep trying and make it work, but they ran out of money before the dream could be realized. They were a big plane trying to take off from a short runway, and no one was willing to give them money to extend the length of the runway they had. The only way out was to abort the take-off.

Armchair experts are full of ideas on what Sendy could have done differently, but remember, it is never that obvious.

Tech product engineers consider themselves to be the geniuses of the 21^st century. They have disrupted the world with both hardware and cutting-edge software, and are still working on some cool stuff that you probably have not heard about. Programmers claim that they rule the world and that the solution to every problem facing the world is just a few lines of code away. This fuels the drive to create the next tech startup with the goal of becoming a unicorn.

However, often these dreams never come to be, in some cases, leaving a very demoralized potential founder.

It always starts with a person with an idea; the next big thing. But an idea on paper does not translate into a successful venture, or as they say in Kenya, vitu kwa ground ni different (on the ground things are different). Many software developers who started a venture with a product slowly abandon their pet projects and become resellers of existing products, or go into employment. It does not take long for someone to realize that it is easier to resell a product than to build your own from scratch. Building a product is hard and painful. The worst part is that even a good engineer needs expertise in the specific niche they want to disrupt. If you are building a solution for lenders, you need to fully understand how their business runs.

What are the challenges that keep people from commercializing and making money from their products?

Your Product is not Good Enough

Not everyone can create a product, even if they are good engineers. It is as simple as reading and writing. While many people can become very knowledgeable in a language, and master all the words possible, not everyone can write a thriller story or novel. And once you have written one, marketing is the other challenge that you face. Many great books have failed to fly off the shelf because marketing was not properly done. In a different scenario, poorly written books that have little or nothing to tell can end up becoming bestsellers. Many people have invested in creating products that simply don’t work. To be fair, many products fail even great ones. However, it takes determination, skill, great talent, and sometimes chance to get a good product.

If you have a product that you want to launch, you may consider getting experienced people who can tell you whether what you are doing is nonsense or the next big idea. Mentorship is important, and people with expertise are able to identify what can work, what may work, and what will definitely never work.

Geographical Barriers

In 2012, when I was required to do a final year project, I was looking for the simplest solution that could give me an easy time and a good grade. I came up with a noise meter that could report via SMS, as well as issue alerts on excess noise depending on the set levels. After school, I tried to find a practical application for it but there was simply no market, and thus no motivation to commercialize the project. Three years later, a company was founded in the US to offer the same product. Airbnb hosts love the idea.

The problem was that the geographical location I was in did not have a market for the product. Somewhere in a different country, it would have made sense. When Google launched a Personal Safety app that detects car crashes and calls 911, I saw some people in West Africa who already had done that years earlier, but they never made news, and possibly sales.

Marketing Skills

When a friend actively sold software, he used to marvel at the great opportunity that existed in the market. He had taken time to study the market and the competition, going into detail to understand what it would take to sell. There were many competitors with inferior products to theirs, and he knew that it would be easy. It did not take long for him to realize that some of their competitors were outdoing them in sales, despite the fact that he had a superior product. Today, he still keeps up with the industry and he knows better; in some cases, the sale comes first, and the product comes second.

Marketing is key, and even if you had the cure for cancer but you cannot convince the world to use it, you are as good as without a product. Unfortunately, many people who come up with products have poor marketing skills. A partner with such skills can help.

Lack of Funds

It requires money to make money. You need to have a business idea that can bootstrap, or else you have to turn to angel investors and venture capitalists. Bootstrapping requires a product that will sell easily with minimal input so as to generate the resources that will fund further development. This is hard, and most people would require an external investment in order to push their products out there. Unfortunately, VCs and angel investors are not that easy to come by, and this is where one needs networks that can help build credibility. Most innovators find themselves limited when they start looking for funds. 

It is not just the business funds that may hinder the growth of a product. One other factor to do with money is the background of the would-be entrepreneur. People who have a social safety net such as wealthy parents are able to venture into entrepreneurship more easily because there is always a fallback plan. This helps them to build a form of risk-averseness that encourages entrepreneurship, knowing that they do not risk starving to death.

Conclusion

The world is full of so many people who have great products but cannot make money out of them. It could be due to a lack of entrepreneurial skills, a lack of money to monetize their innovation or simply environmental factors such as geographical location. The best we can do for them is to provide an environment where they can try out their ideas, such as incubation hubs, and also help them to get the right partners who can help jumpstart their ventures.