News from different sources revealed that Kenyan e-commerce startup, Sky. Garden had been purchased by another Kenyan startup, LipaLater. This exit comes after a TechCrunch story in September 2022 where Sky. Garden issued termination letters to its employees as it faced closure after failing to close a fresh round of financing. Sky.Garden also filed insolvency in the Danish Holding Company Sky.Garden ApS in October 2022.
Sky. Garden, founded in 2015, is an e-commerce marketplace startup. It operates the third-party vendors' marketplace model that was made famous by Amazon. Thousands of businesses and merchants sell their products/merchandise on their platform. Sky. Garden ensures end-to-end fulfillment of orders, that is, delivery from the merchant to the buyer within 24 hours, and charges an 8% commission on all purchases. The startup has raised a total of $5.2m across two funding rounds.
How did Sky. Garden reach the bottom?
To understand how this happened, we need to understand the strategy of startups. As revealed by Paul Graham in his essay, Startups = Growth, startups are built and designed to grow fast. In order to do this, they turn to outside investments from venture capitalists and other investors. These investors flush them with the funds they need to expand their offerings, products, and services and make key hires or expand to new markets among others, instead of bootstrapping.
From time to time, startups raise funding, use the funds and then meet some metrics then go back into the venture market to raise more funding. But Sky. Garden found out that the taps in the funding markets were closed.
In an interview with Tech Crunch, founder Martin Majlund revealed that despite his best efforts, he had failed to raise funding to keep the startup afloat. The struggle to raise funding in 2022 has not been a reserve for Sky.Garden alone.
Per Crunchbase, global VC funding totaled $81bn in Q3 2022, a drop of 53% ($90bn) year over year. The looming economic crisis and the uncertainty of the Russia-Ukraine war have sent funding into a tailspin.
Under economic uncertainty, investors focus on startups that are building toward profitability rather than growth or simply survival. Also, the majority of investors double down on existing portfolio companies that are doing well or have a chance to become profitable rather than take on new investments. And the metrics needed by an investor to write a check become more stringent in an economic downturn.
For example, if a VC could fund a startup with just 1,000 users and growing revenue at 2x per month with projections of breaking even in 4 years last year, the same VC will want 5,000 and a revenue x of 10x per month with break-even projections of a year in 2022. And this will most likely come at more preferable terms to the VC than the founder.
Investors look at the public markets which have suffered horribly in 2022. By just May, more than $7 trillion had been wiped out from the stock market. Remember, the goal of investors is to make money, and exiting a company through an IPO is one of the most common ways (in the West, at least), for investors to make a return on their investment (and have some liquidity).
If the public markets are not doing well, then investors tighten their grip on their wallets because the exit options are not so attractive. So startups raising money now might have to settle for a down-round (raising at a lower valuation), an investor-friendly deal, or have magnificent metrics.
The fact that Sky.Garden had sent termination letters to employees that could signal that it had a short runway left. A sale to another startup like LipaLater that has raised way more funding ($13m to be exact) was a timely relief.
Why would LipaLater buy a startup running out of cash?
LipaLater is a Kenyan Fintech. Its main product is Buy Now Pay Later (BNPL). You can purchase a product from multiple partners in installments. The beauty of it is that you leave with your product after the first installment and it is interest-free. Lipalater makes money by taking a commission off each item sold by its partners.
Lipalater's purchase of Sky. Garden makes sense. They will tap into Sky.Garden's third-party vendors can start offering the BNPL model to their customers. But that is where the easy work ends.
Will Lipalater also continue Sky.Garden's model of taking care of the fulfillment as well? Essentially, if you buy a product from a Sky. Garden third-party partner, Lipalater has to ensure that the product reaches you. So they will source it from the vendor, and then deliver it to you. This will be new territory for Lipalater.
And the problems that plagued Sky.Garden will still persist. Last-mile delivery is not so straightforward in Africa. We don't have courier services that have nationwide coverage. We also lack addresses that make the deliveries easy. So, the majority of e-commerce companies have to build their own or rely on a few companies in that space like Sendy to make the deliveries.
And finally, the majority of people shopping online prefer cash-on-delivery. This makes e-commerce in Africa very difficult because startups like Sky.Garden have to get trusted courier agents who will be able to collect the cash on their behalf and deliver it back.
LipaLater has decided to enter new territory. It is a gamble that has a massive upside. But like Jumia has shown us, e-commerce in Africa is a game that you play, even though you don't know when you will win, and that is if you win.
The writer is a retired founder, and now Editor-in-Chief at Digest Africa. You can reach him at +256771162922 or firstname.lastname@example.org
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