Why do African startups fail?

This week’s poll was possibly our most controversial to date. We saw extensive and heated discussions cross the VC4Africa community, Linkedin, Twitter and Facebook. It is not easy to make generalizations and clearly each country, sector and business case is unique. If anything, we facilitate this conversation because we hope to identify trends, help document and learn from what hasn’t worked in the past. Building a successful business is one of the hardest things to do. For many entrepreneurs building companies in different parts of Africa assumes extra challenges. But from all of the different reasons that might cause an African based startup to fail respondents selected poor execution as the leading cause. This point was followed by lack of finance and an unwillingness to adapt to changing market conditions.

So despite often times a challenging business climate i.e. lack of infrastructure, difficulty attracting qualified staff, poor legislation, unfavorable tax climate, etc…. respondents suggested the failure of most startups rested solely on the shoulders of the entrepreneur and their poor performance. This result reflects the findings of a recent study published by the Startup Genome project. Their recently published report found that 90 percent of startups failed primarily because of ‘self-destruction rather than competition.’ The study looked at 3,200 high-growth technology startups and pinpointed ‘premature scaling’ as a key trend. Specifically this idea that the entrepreneur is getting ahead of the game before they actually have the necessary foundations in place first. This ‘skipping’ of steps might give the impression the startup is finding success early, but lacking key pieces in the business model creates much bigger problems later in the business lifecycle. And given these are fundamental building blocks the startup is too often unable to recuperate and is forced to fold the business completely.

There are many ways this occurs i.e. possibly spending money on unnecessary things like an expensive office, hiring too many employees too early, not spending time on proper market research, running expensive customer acquisition or launching the product before it is ready. According to the Startup Genome report bout 74 percent of Internet startups fail because of premature scaling, while those who scale properly typically see growth that’s 20 times faster. Those companies that scale properly end up attracting more capital and servicing more customers. They are also the businesses that end up hiring more employees. But in how far can we compare this study focused on startups in Silicon Valley with the startups in Africa? Growing too fast was also an option in this weeks survey but surprisingly the option only received a single vote. The results of this week’s poll seem to place more emphasis on the inadequate abilities of the entrepreneur (poor implementation) than on their efforts to grow the business too fast.

Marieme Jamme, the founder of Africa Gathering, raised the point that entrepreneurs behind failed startups too often lack a long term vision. Jitesh Naidoo, currently researching the subject for an upcoming book, added, ‘Many of the start ups have very little managment 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 that require specific skills to overcome. Skills also allow a person to separate personal from financial matters.’ He goes on to explain that entrepreneurs behind failed startups lack essential business acumen and forward thinking. He expands, ‘Very often those at the helm of startups lack the business foresight to make decisions that are business based.’ This hints to the second point highlighted in the survey suggesting that many entrepreneurs behind unsuccessful attempts fail to adapt or change their plans needed to meet a dynamic and changing marketplace. Possibly the point also hints to the need for better market research, deeper customer understanding, more prototyping and rapid iterations needed to better close this gap.

Brian Maphosa an entrepreneur currently running a startup countered Jitesh, ‘Is this exclusive to the African continent? Do we have a statistical analysis to back this argument? I am saying this based on my own personal experience running a start up and the issues I see as potential sources for business failure. It takes discipline, personal character, the integrity, the controls/systems, funding, work ethic of those involved, etc… to pull a business through. As far as I am concerned these are universal issues that any startup would grapple with.’ John Priddy concludes the point, ‘Failure is the inherent nature of start ups. It’s about risk-taking and the creative destruction impulse that drives innovation and growth.’

Clearly the African startup process shares many similarities with other parts of the world. In the end, building a successful company is simply one of the most difficult things to do wherever you are located. But for many entrepreneurs in Africa the context does seem more complicated (albeit many times the business is complimented with greater potential). Given the density of Silicon Valley’s startup culture it is reasonable to think entrepreneurs there have an easier time following a beaten path. There is arguably more entrepreneurial infrastructure in place. Can we then say that in the context of Nairobi or Lagos there are simply less success stories and examples to follow? This forces many entrepreneurs to figure it out on their own and that means many entrepreneurs are facing certain odds unprepared. Taking that into consideration respondents to this poll do seem to be asking entrepreneurs to step up their game if they are going to compete on an international level. They are asking for better/smarter implementation and more flexibility/adaptiveness to the changing business climate around them.

So the million dollar question remains. How do we better support entrepreneurs and the development of their startup DNA? What are your thoughts on the subject?