Africa as a continent is blessed with creative and industrial individuals who possess both the ability to develop innovative solutions to problems and the entrepreneurial spirit to convert the solutions into profitable business ventures. As a result, Africa is currently home to numerous nascent companies providing interesting solutions to needs across the continent and beyond.
Yet despite the abundance of these qualities, Africa still grapples with a sobering reality: it has an alarming failure rate for startups. While the exact figures vary, estimates suggest that 70-80% of African startups fail within their first five years.
So, what’s responsible for the high failure rate? Here are some of the common reasons startups operating in Africa fold up quickly
Wrong Strategic Orientation
You may have heard that “If you fail to plan, you plan to fail”. The rhetoric gives the impression that all you need to do to avoid failure is to make a plan. But what if you make an ineffective plan that doesn’t account for all the parameters and elements involved in the project you’re starting?
Many African startup founders commit this error when setting up their ventures. They often have plans and strategies that do not consider salient factors, especially, the peculiarities of the markets they operate in.
The typical African startup operates with this approach; “ Identify a problem or pain point, think of a solution/iterate solution ideas from other places or companies, build and implement said solution.” They seldom carefully consider if said solution will have the envisaged success with their target market or if the market will take well to the solution.
They ignore crucial questions such as
- What happens when the market doesn’t accept the solution as anticipated?
- What could cause the market not to accept the solution?
- What could undermine the effectiveness of said solution?
- How will they deal with competition?
- How will they manage funds properly?
- How can they get the maximum result while expending the least resources possible without compromising on quality?
These questions provide a strategic direction and also prepare the venture for obstacles that may show up along the way.
But since most founders plunge head-first into the business without getting the strategic direction right, they struggle whenever they face challenges related to these questions and that may kickstart a chain of events that will eventually lead to their downfall.
Limited Access to Capital
This is the biggest assassin responsible for the death of numerous startups in Africa. Great ideas need great funding to come alive. Sadly, many early-stage startups that are yet to cut their teeth in the market find it extremely difficult to secure funding.
This is such a significant problem that a whopping 38% of startups were reported to have failed due to a lack of cash flow. Expectedly, that makes capital scarcity the leading cause of African startup failure. Regardless of how well you plan, and how spot on your strategy is, not having money for execution will make it ineffective
Then again, traditional financing options are either not readily available or the repayment plan is too steep for the businesses to consider taking those options. In cases where startups seek support from other sources such as government initiatives, grants, or angel investors, the requirements are often stringent, plus they usually have to compete with numerous other startups, jumping through hoops to emerge as the sole winner in winner-takes-all pitching competitions.
Moreover, attracting foreign investments tends to be even more challenging due to factors such as exchange rate fluctuations, policy uncertainty, insecurity, political instability etc.
In many cases, startups have to bootstrap a long way through their growth stages and those who don’t have the reserves to do that often have to fall out of the race.
Lack of Product Market Fit
A common error several startup founders make is setting up ventures to address problems and challenges that they “think” exist in the market they’re targeting. Due to poor market research, they do not get ample proof that their solutions are needed in the market they’re targeting.
Consider this;
An individual may notice what seems to be a common problem in Europe and identify a solution to the issue, however, due to some challenges, he might not be able to implement the solution in Europe. So, he brings the solution to Africa.
Unfortunately, the African market may not be ready for or need the solution as they currently need to experience the challenges it addresses. As such, the founder would bring the solution to Africa and it would fail because it’s not needed.
Primarily, several African founders develop startups around solutions to non-existent or wrong problems. As a result, there’s no natural market need or demand for the solution. According to CB Insight, a lack of market need attributes to 42% of the startup failure rate.
The effect of no product market fit is usually low demand, poor feedback, and high customer turnover rates which will severely undermine the company’s returns in time.
Similarly, in a rapidly evolving African market, solutions can quickly lose product-market fit and become obsolete if they’re not consistently improved upon – A classical evolve-or-die situation.
Then again, several startups attempt to target anyone and everyone as their customer demographic, which is impractical. This often causes them to expand their resources unnecessarily and they might end up spreading themselves too thin in the process – A recipe for failure
Stiff Competition
A growing trend in the startup ecosystem is that several new companies spring up regularly. And they all provide similar solutions with very little modifications to the same problems in the ecosystem. The problem that results from this phenomenon is that it increases competition in the space.
A prime example of this situation is the Nigerian fintech industry where numerous financial service providers are offering more or less the same services to the same audience.
With so many startups providing similar solutions to the same audience group in the same location, there will be intense competition to acquire customers and startups that can’t keep up will be forced out of the race.
Of course, there’s nothing wrong with some healthy competition. It is necessary to encourage continuous innovation and growth. However, when a field gets saturated with too many similar businesses providing the same solutions, it creates problems for the players.
As a result, the businesses may begin experimenting with different approaches such as undercutting prices, or other attempts that contribute little to nothing to their profit, just to stay relevant. Naturally, a startup cannot maintain this tactic for long before its cash flow is affected beyond recovery, leading to a fold-up.
Team/Talent Disconnect
Running a startup is a team sport, and in any sporting competition, the level of a team often determines how far it will go. Solid teams get the best results while weak or disorganized teams fall off early.
Note that a solid team doesn’t necessarily need to have a lineup of superstars, instead, it can make do with a group of average players who are well coordinated, organized and working in 100% synergy. In such teams, each individual understands his role and plays it to perfection.
Sadly, this is something several startups in Africa get wrong. Oftentimes, the team assembled by the startup’s management is based on availability and not proper fit. As a result, members usually lack proper synergy. Understandably, founders sometimes fail to find people who share the same vision as them which would result in constant struggles within the team.
Then again, a chain is only as strong as its weakest link. Similarly, a strong team can be undermined by its weakest member. So, when startups fail to employ competent, reliable and skilled individuals for their projects, they struggle.
That said, startups don’t need to assemble an avenger-level team to create world-saving solutions. Instead, they should be more particular about getting the best people who will give their best for the venture’s vision and mission
Poor Business Management/ Corporate Governance
Business management involves all the processes and responsibilities that go into planning, organizing, coordinating, and utilizing all available resources (including manpower) to achieve business goals.
Corporate governance involves the laid down rules, policies, and systems that regulate processes and activities in an organization. It provides a framework that enables the company to balance and address the interests of stakeholders such as founders, employees, customers, investors, the host community and the government.
Business management and corporate governance are two areas often neglected when founders in Africa go about establishing their startups. That’s because many African startups are founded by relatively young tech-inclined individuals who haven’t developed their business management capabilities properly. Such individuals may excel in developing quality solutions but lack the dexterity to run operations in complex, unpredictable business terrains.
Similarly, a lack of proper corporate governance often creates loopholes for misconduct and abuse by malignant parties. As such, poor business management and corporate governance expose startups to risks that can undermine their long-term viability
Lack of Proper Financial Management
Cash flow is the lifeblood of any business. A human body won’t function properly if the right supply of blood isn’t maintained in specific areas of the body and the body will die if it bleeds out. In the same way, if a business’s cash flow isn’t being channelled into the right places, the venture will develop problems that can lead to its failure. Then again, if the business is bleeding out money, it is certain to collapse after some time.
This analogy describes the situation that led to the fall of several African startups. It’s not uncommon to discover issues of misplaced financial priorities with African startup founders which often results in misguided investments or spending that do not have tangible positive contributions to the business.
A popular Nigerian fintech company had to sell out 9 months after obtaining $3m funding in 2023, thanks in part to misplaced financial priorities of the founder who was rumoured at the time paying himself a whopping $15,000 monthly salary amongst other benefits.
Several such cases are common in Africa and contribute significantly to the failure rate of startups on the continent.
While Africa holds immense potential for entrepreneurial success, startups on the continent grapple with a myriad of challenges that contribute to high failure rates. Addressing these issues requires collaboration between governments, investors, and the private sector to create a more conducive environment for innovation and sustainable business growth. By tackling issues such as those identified above and additional problems such as infrastructure development, and regulatory uncertainties, stakeholders can contribute to nurturing a thriving and resilient startup ecosystem in Africa.
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