The celebratory pronouncements of funding rounds, once a near-weekly fixture in Africa’s rapidly growing tech ecosystem, have given way to a more sobering narrative. As the tide recedes, revealing the vulnerabilities beneath the surface hype, a growing number of African startups are confronting an uncomfortable reality: failure. And in a move previously considered anathema in the high-stakes world of venture capital, some founders are exploring a radical and ethically complex solution — returning capital to investors.

The year 2024 had already witnessed a grim roll call of closures. Nigerian wealthtech platform Cova, lauded e-commerce venture Copia Global, agricultural data pioneer Gro Intelligence, and B2B marketplace MarketForce, are among the fallen, joining mobility startups like WhereIsMyTransport and fintech Zazuu, both of which opted for creditors’ voluntary liquidation in 2023. These are not isolated incidents. From Lagos to Nairobi, the dream of building the next African unicorn is colliding with harsh economic realities, over-ambitious expansion plans, and the perennial challenges of operating in emerging markets. Investors, who poured hundreds of millions into the continent’s tech promise, are now facing significant write-downs. Kobo360, once hailed as the “Uber of trucks” after raising nearly $80 million, saw investors sell their shares back to a co-founder in a deal marking a “significant write-off”. The failure of Edukoya, an edtech startup celebrated for raising a record pre-seed round, serves as another stark reminder of the headwinds.

In the wake of such failures, the focus inevitably shifts to damage control. For some founders of African startups, this means taking the unprecedented step of returning capital. Thepeer, a Nigerian fintech that shut down in April 2024, offered a stark illustration, refunding approximately 23% of the $1.35 million seed funding it actually received to its investors. Similarly, Edukoya, upon ceasing operations, confirmed it would return capital, a move lauded by at least one anonymous investor as demonstrating “an ability to recognise when market forces make VC-scale outcomes unviable”. 

This trend towards capital return, while still limited, stands in stark contrast to the more acrimonious failures that can plague the startup world. The contrasting case of Gokada, the Nigerian mobility startup currently navigating Chapter 11 bankruptcy in Delaware, highlights the potential for disputes and protracted legal battles. Court documents reveal liabilities exceeding $5 million, with Nigerian creditors bearing a significant brunt. The appointment of a Subchapter V Trustee in the Gokada case suggests heightened scrutiny and potential concerns around financial management, a far cry from the relatively amicable closures seen with Thepeer and Edukoya.

Voluntary liquidation, as pursued by WhereIsMyTransport and Zazuu, represents another instrument for managing startup demise, offering a degree of order and legal compliance. These processes, overseen by insolvency practitioners, prioritize asset realization and debt settlement, providing a structured framework for winding down operations. However, even voluntary liquidation can be a painful process for all involved, marking the formal end of a once-promising venture.

The decision to return capital, to pursue liquidation, or even a fire sale of assets, presents a complex calculus for founders and investors alike. On one hand, returning capital, even a portion, can be viewed as a responsible and ethical move, preserving investor confidence and demonstrating accountability. As one investor in Edukoya noted, it can “uphold investor confidence”, crucial for a nascent ecosystem seeking to attract further investment. It signals a maturity within the ecosystem, where failure is not necessarily synonymous with opacity or malfeasance. Moreover, for founders contemplating their next ventures, acting ethically in the face of failure can be invaluable for reputational capital.

On the other hand, critics might argue that returning capital sets a potentially unsustainable precedent, especially given the inherent risk associated with early-stage startups. Venture capital, by its very nature, is a high-risk, high-reward game. Investors understand that a significant portion of their portfolio will fail, and returns are expected to come from a small number of outliers. Demanding capital back from struggling ventures, particularly when funding is often deployed rapidly in pursuit of growth, could disincentivize risk-taking and stifle innovation. For one thing, returning capital has been possible in recent African cases mostly because (1) most of the startups have unspent runway, (2) they discovered in time that they lacked a clear path to scale, and (3) the investor relations they maintained were (mostly) amicable enough to facilitate a structured wind-down.

The mechanics of capital returns are complex, particularly because most early-stage investments in African startups are made through Simple Agreements for Future Equity (SAFEs). SAFEs are designed for speed and simplicity in early funding rounds, but they are not equity and do not guarantee a proportional return in liquidation scenarios. These instruments do not typically require repayment, as they are structured to convert into equity if a startup succeeds. In the case of Thepeer, the $2,280 refund on a $10,000 cheque translates to a return of roughly 22.8%. The actual return percentage in investment agreements can vary significantly depending on the specific terms, valuation caps, and liquidation preferences outlined in the agreement. Generally, in liquidation scenarios, particularly when assets are limited, investors holding SAFEs often find themselves at the back of the queue, behind secured creditors and sometimes even ahead of common shareholders depending on the specific terms negotiated. Calculating and distributing proportionate returns in a fair and legally sound manner becomes a significant logistical and legal undertaking.

While returning capital may foster goodwill for founders of African startups, the process must be handled transparently to avoid disputes over how much should be returned and to whom. Additionally, partial returns can introduce complications — investors receiving only a fraction of their investment may still be dissatisfied, particularly if financial records raise suspicions about fund mismanagement.

Legally, the path of voluntary liquidation offers a clearer framework for founders. Engaging an authorized insolvency practitioner ensures compliance with legal requirements, asset realization, and a structured debt settlement process. For founders considering returning capital outside of a formal liquidation, seeking legal counsel is paramount. Understanding the nuances of SAFEs, convertible notes, shareholder agreements, and local insolvency laws is crucial to navigate this complex terrain ethically and legally.

For founders considering capital returns, several factors should be weighed:

• Transparency: Engage with investors early and openly about financial realities to prevent later disputes.
• Legal Guidance: Work with legal advisors to structure returns in a way that protects both the company and its stakeholders.
• Strategic Timing: Evaluate whether winding down is truly the best option or if alternative strategies such as mergers, acquisitions, or pivots remain viable.
• Investor Expectations: Consider how capital return decisions may impact future fundraising efforts, as investors may perceive it as an early sign of capitulation rather than a strategic move.

The rising instances of African startup failures and the rising cases of capital returns raise critical questions about the nature of startup investment in Africa and the ethical responsibilities of founders and investors alike. While some founders are taking a proactive and arguably responsible approach to returning capital, these instances are often born from necessity and indicate the inherent risks and complexities of building ventures in emerging markets. Whether this trend will ultimately strengthen investor confidence, create a chilling effect on future investment or complicate matters remains to be seen. What is clear is that the African startup landscape is entering a new era of reckoning, demanding greater scrutiny, transparency, and a more nuanced understanding of both risk and responsibility.