In 2023, the venture capital (VC) funding crisis for African startups has intensified, with H1 2023 fundraising plummeting by 46% compared to the same period in 2022. This trend has led to the closure of startups worldwide, exemplified by cases like Lazerpay in Nigeria and Dash in Ghana, raising concerns about the need to analyze financial indicators predicting startup failures.
Chioma Daniel, Head of Finance at TalentQL, delves into early signs of financial distress, strategies for stability, and the crucial role investors play in a startup’s survival.
Oluwanifemi Kolawole (OK): Can you share the early signs founders should be vigilant about regarding their startup’s financial health?
Chioma Daniel (CD): Not having viable revenue streams, especially if a significant portion is tied up in receivables. Watch out for long receivable collection days and high cash burn on operating expenses. Calculated risks are key—plan thoroughly, invest in working systems, and ensure sustainable growth.
OK: What financial metrics should founders monitor for a clear picture of their startup’s financial sustainability?
CD: Key metrics include Monthly Recurring Revenue (MRR) and Annual Run Rate (ARR) for revenue, understanding expenses and profit margins, monitoring net burn, assessing cash runway, and considering Customer Acquisition Costs (CAC) and Lifetime Value (LTV). Additionally, founders should evaluate assets, goodwill, liabilities, time to break even, Return on Investment (ROI), and regulatory compliance.
OK: Are there strategies or best practices for founders to extend their startup’s runway during financially challenging times?
CD: Ensure a viable revenue model for regular inflow, with subscription-based models being popular. Budget carefully to balance recurring expenses with revenue and set aside a reserve fund for unforeseen circumstances. Consider market conditions and the business model before raising additional capital.
OK: What role do investors play in a startup’s financial health, and when should founders seek additional capital?
CD: Investors should be trusted partners, holding founders accountable with detailed financial reports. Funding supports growth, but startups must demonstrate worthiness through track records and plans. Seek additional capital when achieving product-market fit, in the growth stage, or facing a short cash runway.
OK: Why is a contingency plan important for startups, and how can founders prepare for potential financial setbacks?
CD: A contingency plan ensures business continuity during disruptions. Identify risks, assess severity, and create response plans. Diversify revenue streams, expand to different markets, and, with calculated risks and proper planning, founders can mitigate the likelihood of financial setbacks. Taking financial reports seriously and being transparent about performance is crucial.
