8 reasons why African startups fail (opinion piece)

Today we had a chance to connect with Jitesh Naidoo. He has been involved in many African countries and focuses on project management, project inception, monitoring, electronic auditing systems & trade facilitation. He runs a logistics company called Carthago Import and Export. He also serves as the Chairman of the South African Cross Border transporters Association and assists in micro startups with mentoring + building and finding markets for their products.

Asked about the origin of his research on why African startups fail he explains, ‘Having traversed the African continent for many projects, from working on oil projects in Nigeria to sisal plants in Mozambique, I found that the success rate for most projects was dismal and sought to find out the key reasons for the high failure rate. I am currently writing a book on the subject which hopefully may assist some to redress an otherwise gloomy situation.’ He continues, ‘Funding organisations like the World Bank have pumped in billions of aid dollars into Africa and have seen very little return. As a result some very good projects have been given the thumbs down due to historical risk factors. I hope that we can turn things around and those who are indeed worthy of receiving such aid, will be beneficiary thereof.’

Some of the factors he takes into consideration for his research includes looking at the type of project, its geographical location, economic factors in favour and against, political climate, profile of entrepreneurs, management style, capital on inception and capital on closing & post mortem analysis. He concludes, ‘I hope I can be of some assistance. Through my experience, I have isolated some reasons why many (more than 87%) African start ups fail. It is important to mention these numbers change greatly from country to country and from one geographical basin to another (eg. from E.Africa to W. Africa). But overall a few common factors seem to be emerging.

Here is a summary of some of his research findings:

1) Lack of sustainable financing. Many start ups (the well thought out ones) need continual financing for periods longer than in Europe or N. America simply because they have a higher attrition level. One example is a small company manufacturing soap powder. Their product was of relatively good standard but had to compete against the likes of Unilever who has entrenched market penetration and unwavering brand loyalty. Competing against the quality and marketing machinery of their products can only be done on a sustainable basis, and the initial penetration would have to be conducted on a loss… and the loss capitalised over a longer period of time. Needless to say the venture failed as a result despite the management and product were of an acceptable standard.

2) Lack of management skills. Many of the start ups have very little management skills that would allow them to run a business and grow it on a sustainable basis. They have the initial drive, but become shipwrecked when they encounter problems which would require specific skills to overcome. Skills also allow a person to separate personal from financial matters.

3) Lack of infrastructural support. Many African countries lack the infrastructure that is needed to support startups like access to good communication, logistics, legal, financial and economic support. At the end of the day it all adds up to the demise of an enterprise that might otherwise have had a rosy future had the above factors been in place.

4) Cultural factors. With startups, very often family members are roped in to assist. Very often a complex web of cultural factors come into play and almost always it is disasterous. Family view the enterprise as a cash cow and not a business. If stock is involved they often help themselves to the stock without accounting. As a result the person at the helm is powerless to control it as it is politically incorrect to confront someone helping themselves. Furthermore because it is family, there is very little incentive to work hard and it is not long before the venture fails.

5) Lack of foresight. Very often those at the helm of start ups lack the business foresight to make decisions which are business based. Their decsion making is more often than not based on cultural, political and emotional factors.

6) Illusionary grandeur. A startup business, especially those that were in previously impoverished areas are very often viewed as a panacea. The entrepreneurs become overnight celebrities and status that were previously accorded to chiefs and politicians that are now afforded to them. It is here that the line becomes blurred between business and celebrity. Once the person is now a celebrity, he loses focus on the business and gives more focus to his social status. The outcome is inevitable.

7) Misplaced importance or precedence. Allied to 6 above, the start up is under the illusion that he has to have the best mode of transport eg. A Mercedes instead of a Toyota. He has to show his fellow tribesmates that he is a force to be reckoned with and that the only way they will take him seriously is if there is a Mercedes parked in his yard. The money that is spent on the purchase and upkeep of a Mercedes could well be invested in the business eg. in better machinery or equipment or left in the bank for eventualities. Very soon the order of economic precedence catches up. That money in the bank is worth more than PR in the bush.

8 ) Ethical considerations. Very often startups are given soft loans by banks and aid organisations. The money generally is not employed as it should be and is squandered on trivialities. When the loans become payable and the business fails, the entrepreneurs disappear into oblivion. Repayment ethic is non-existent.

Do you agree with these findings or do you have a different opinion or insight to share with the community?What are your thoughts on the matter?