Startups that go into administration are basically dead

Unfortunately, startups that go into administration are basically dead

There’s a dark joke circulating in the Kenyan startup scene right now that once a startup enters administration, which is technically a form of bankruptcy, it will never recover. The end usually involves administrators selling off assets to repay creditors, leaving founders with nothing but a series of explanations to make.

“Few companies in Africa emerge from administration,” I have been told by over five industry experts.

But is this always the case? What leads to such failures, especially when founders have poured their heart and soul into the product and survived increasingly cautious investors demanding rigorous due diligence?

The reasons why the administration of a startup sometimes leads to the closure of a business are fairly common for those familiar with the startup landscape.

First, it is worth understanding that the world of startups thrives on innovation and taking calculated risks. But with great risk comes the possibility of failure. Despite that the dream might be to bring new life to a struggling startup from closing shop, the reality is that for most, administration marks the end of the road.

For lack of a softer phrase, a “failed startup” that chooses to pick the administration way becomes subject to many financial obligations, including but not limited to outstanding bills, debts owed to suppliers, and legal liabilities. Unlike sole proprietorships, startups are typically separate legal entities. This means the startup itself, rather than the individual founders, bears the responsibility for these debts.

Creditors, mostly venture capitalists/investors and service providers, want to recoup some of their investment. Based on their legal agreement, there is always a party that needs to be paid first. Secured creditors with collateral like legal claims take priority and take ownership of assets before anyone else.

Unfortunately, and through no fault of their own, investors and equity holders often find themselves at the back of the line. In many cases, their entire investment disappears. Shares become less valuable as the startup’s assets are simply not enough to cover their initial contribution.

Sometimes, amidst the rough administration process, there might be salvageable assets; intellectual property (IP) like patents, copyrights, or even core technology could hold value. The company might attempt to sell these assets to recoup some losses, but these sales rarely come close to covering the total financial crater left behind—and in some cases, the sale does not materialise considering buyers usually do not want to own “dead” assets.

Why does the administration come knocking, per numbers?

According to a study by Founders Factory, two of the biggest hurdles involve funding and market fit. Another study in 2022 by Skynova revealed that a lack of financing dooms nearly half (47%) of startups. Economic uncertainty and dwindling investor confidence only make this issue worse.

The same Skynova study also showed that 58% of founders regretted not conducting deeper market research. There are cases when startups enter a market not yet receptive to their offering, which ideally shows that these companies are neglecting customer needs. In some cases, some startups fail to fully see the importance of adapting to changing consumer preferences.

What is happening in Kenya

Kenya’s startup scene can make a solid case study for successful startups, but recent high-profile failures raise questions about navigating the path to success. Three major startups—Sendy (e-logistics), iProcure (an agritech), and Copia (B2C e-commerce)—all entered administration despite recording growth at the start.

A closer look reveals a common trend: these startups secured significant funding (tens of millions of dollars actually) but struggled to adapt to changing market conditions.

Copia, for instance, ventured into loan services and suffered heavy losses from defaults.

Even after securing more funding in 2022 and pivoting to order fulfillment only, Sendy couldn’t turn its business around, and it eventually shut down in August 2023.

iProcure, another Spark Fund recipient, ultimately chose administration due to an undisclosed debt.

The trend worsened because, in an attempt to revive itself, Copia laid off its entire workforce and sought further investment but found no takers. It has since started liquidation processes, which means it is on the path to a permanent exit from the market. Sendy, too, has failed to report any significant progress in over a year.

The fate of iProcure is not clear yet. While the administration process is ongoing, the trend suggests a likely business closure.

Let’s not forget that these companies raised a lot of money: iProcure raised $17.2 million from investors to expand and develop its technology stack. Despite raising $20 million in January 2020 in a funding round led by Atlantica Ventures, Sendy went into administration after failing to find a buyer. Copia raised over $123 million.

“The PR around these companies was always about how much they have raised, not what they are doing and the impact they are having. My hope and prayer is that we start focusing more on the important metrics, not the vanity ones,” Ali Kassim, a serial entrepreneur, and a regular startup commentator, told me a few weeks ago.

And which are these important metrics?

“Path to profitability,” he clarified.

The focus on profitability makes sense since it determines the difference between sustainable growth and burning through investor funds on high salaries or launching products that would likely fail.

Lastly, note that I have not yet discussed startups burning through investor funds through high salaries or launching products they know are likely to fail. That is a post for another day.

Credit: Kenn Abuya, Senior Reporter – East Africa