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Why many African startups fail and close shop

African startups are without doubt growing steadily across the continent. However, a number of them face significant hurdles and slump along the path to success. According to Startup Genome (2019), over 9 out of 10 startups fail globally. Failory (2020) further offers us a figure of 7.5 out of 10 for venture-backed startups. This is, at first, distressing news for anyone looking to venture into the ecosystem. This is especially true for Africa where the heavily challenging business and socio-political environment offers great difficulties for startups looking to grow and succeed.

Image Credit: Nairametrics, 2020.

It is noteworthy, however, that over five African startups, namely, Jumia, Interswitch, Flutterwave, Fawry, and much recently, Chipper Cash, have successfully attained the coveted $1 billion unicorn status. OPay and Paga stand expectantly on the bylines looking to claim this same status in the nearest future, to raise the number to seven. These successes are proof of the opportunities that the African market possesses, in spite of challenges. Still, as David S. Rose highlights, one undeniable truth of startups is that most startups will fail. And yet, no one knows which startup is NOT going to fail.

Recently, the foundering of the crypto and blockchain startup, KuBitX, highlights the need for sustainability planning for African startups. After over 3 years of operations, by a diverse and experienced team of professionals from Nigeria, Angola and Ghana, the startup is presently unable to hold fort, with the CEO’s resignation on May 31, 2021. For African startups, therefore, the challenges that they face, are not just significant but weighty.

Some of these challenges are identified thus:

  1. Lack of good market research: Because many African founders of startups are in a hurry to starting something, they often fail to conduct their due diligence on market opportunities before venturing into innovating solutions. Instead of innovating backward from a problem to possible solutions, they are often working forwards, by creating products and searching for markets for them. Lack of proper technical know-how on certain product types, and market strategies can push a startup down a treacherous path to failure.
  2. Team disagreements: The success and achievements of any startup are hinged on the dynamism and drive of its team. Disagreements dampen team spirit and resolve, and create fissures that reduce effectiveness. The case of Etop Ikpe’s resignation as CEO of Cars45 as well as 11 top executives, and how this breakaway weakened Cars45 in the prelude to its acquisition by Jiji, is most relevant here. For startups to succeed, they need to retain team cohesiveness.

Image Credit: BusinessDay, 2021.

  1. Poor execution and inflexibility: Every startup should be ready to fail fast and iterate considerably to arrive at a market fit. To be able to do this, the startup should be clear on its execution strategy. Through a lean framework, the startup minimizes the risk of heavy operational costs and failure with product models.
  2. Lack of finance: Many African startups are searching for funding for their innovative ideas. Even with the increase of funding and funding opportunities across Africa (African startups are projected to raise between $2.25 – $2.8 billion by the end of 2021), a number of startups in Africa are ignorant of the opportunities to access funding and mentorship, in order to scale their solutions. Likewise, the inability to properly and accountably manage funds while scaling can adversely affect the growth and survival of the startup.
  3. Government bottlenecks: Harsh government policies, generally, can cripple the activities of startups. Without the flexibility to iterate and adapt to situations, the startup can be adversely affected, as government policies can be quite unnerving. The devastating Central Bank of Nigeria (CBN) ban on cryptocurrency use in the country, in February 2021, hit hard many startups, particularly Patricia, with its CEO, Hanu Agbodje, quoted as saying, “The recent ban by the CBN is unhealthy for crypto Businesses in Nigeria, if this ban continues, I’m moving to Kenya”. This is just a single case from a multitude of cases where government intervention and bureaucracy may impede startup growth.

As startups, Clayton Christensen emphasizes that there should be constantly the goal of finding white spaces, which identify the subjective value that the startup offers. Tomi Davies points out that African startups are expected to grow rapidly at a rate of 10% and 20% per month in their growth stages. This puts a lot of pressure on the necessity of managing effectively this growth phase. African startups should be clear on how to create value (innovation), how to capture value (how money is made), and how to communicate that value in and out of the company. It is through these means that the startup can remain viable and sustainable, not merely for the short haul, but for the long run.

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