Why Do Startups in Africa Fail?
An In-Depth Look
Hello rafiki 😊
Welcome to the Not an Afterthought Newsletter. We lead the conversation on how Africans can leverage technology, trade, regional integration and Pan-Africanism to build an Africa that is no longer considered an afterthought.
The global statistic is that 90% of startups fail.
In Africa, the failure rates are a bit more complex. According to the Better Africa Report, which traced the failure and success of African startups, the failure rates vary across the different African countries.
South Africa and Kenya had the lowest failure rate at 54.39% and 58.73%, respectively. Ethiopia and Rwanda had the highest at 75%. On average, between 2010 and 2018, the startup failure rate in the continent was 54.2%.
The top reasons why startups fail in Africa are:
A shortage of market-creating innovations
Over-reliance on VC money at the expense of a solid business model
Impatience
A team that is lacking
Poor storytelling/marketing
A Shortage of Market-Creating Innovations
The Prosperity Paradox book posits that not all innovations are created equal. It categorizes innovation into three categories.
Sustaining innovations, e.g., smartphone markets that release new versions yearly to sustain demand.
Efficiency innovations, e.g., Uber and Airbnb that improve a sector's efficiency.
Market-creating innovations
Market-creating innovations transform complex and expensive products and services into simple and more affordable products, making them accessible to a whole new segment of people in a society whom we call 'non-consumers.' —The Prosperity Paradox book
Non-consumers are people who are ready and desperate to progress but struggle to do so because solutions that cater to them are non-existent.
One might say a good chunk of Africans are non-consumers. Data backs this up—Africa's consumer market is one of the fastest-growing in the world, but over 420 million people in the continent still live in extreme poverty.
Market-creating innovations serve people for whom existing products are inaccessible and unaffordable for varied reasons or no products exist. The innovations essentially create a new market.
To give you a practical example, think about Mo Ibrahim, the founder of Celtel. Mo is quoted saying that serious people laughed at him when he said he would build a telecommunication network in Africa.
In all fairness, the idea was laughable at the time (over 20 years ago). Fast-forward to today, you realize he made mobile communication—a previously expensive and inaccessible service—affordable and accessible to millions of Africans.
He created a new market with his market-creating innovation.
That should be the focus if founders in the continent want to mitigate failure. It is very difficult to fail after creating an entire market.
Over-Reliance on Venture Capital (VC) Money at the Expense of a Good Business Model
Often, founders forget that it is not about the money you raise but the profit you make.
Mid-2022, Kune Foods, a food delivery startup in Kenya, shut down after only 18 months. A year before closing, Kune raised 1 million US Dollars in VC money.
It was a lot of money but not enough to keep them in operation without the added revenue from profits. In an interview after the shutdown, the CEO—Robin Reecht—noted that selling food at $3 per meal was not enough to sustain their growth.
One cannot help but wonder, what if they had adjusted their business model and sold the food at a slightly higher price? Alternatively, what if they had chosen a different unique proposition?
Another Kenyan startup, Notify Logistics, shut down in 2021 after raising 45 million Kenyan shillings. Again, the founders noted that the high cost of operation was the culprit.
Maybe, the high cost of operation could have been helped if they were making a decent profit or, at the very least, breaking even. The profit would have covered the operations allowing the VC money to help them scale.
The nature of startups is that you need VC money to scale quickly. That is a well-understood practice. The problem comes when you start dipping into the VC money to cover everything else. It is not sustainable.
At some point, you will run out of VC money. What happens, then?
A business model is defined as a strategy for revenue generation and successful business operations. To build a successful startup and mitigate failure, it should be the priority.
Impatience
What is it the English say? "Rome was not built in a day." It is a cliché, but true.
If you have a market-creating innovation and a solid business model, the next step is patience. Give yourself time to grow—slowly but surely.
The startup ecosystem hypes up overnight or microwave success. The truth is that these seemingly overnight successes have spent years building the business before the opportunity that catapulted them to the next level came along.
So, practice patience by setting short-term goals that feed into long-term goals. Your success metric should be achieving both short-term and long-term goals.
To underscore the importance of patience, consider the example of Amazon. It took the company 6 years to record real profits.
The company was still making money before, but they had to wait 6 years to record actual profit.
Patience does not mean operating with zero money. It means you are making enough to keep going, innovating enough to attract bigger markets, and using the VC money to scale strategically.
A Team That is Lacking
A lot of founders underestimate the value of a good team.
Take the example of two farmers—one uses a hoe, and the other a plow. Which of the two will get the maximum yield from the land?
The one with the plow, of course. Why? They have superior equipment.
Your team is your equipment. If your team is superior, you end up with a superior product that offers the maximum competitive advantage.
Beyond that, a great team will:
Accelerate business success and growth. A study by the Rotman School of Management showed that a founder's ability to build a great team determined the venture's success.
Having the right people accelerates growth because their ideas tend to be incredible, and they always follow up with execution.
Attract increased funding. What makes an investor take a second look among all the startups competing for limited funding?
A great team!
It is one of those critical factors that investors look at. If the team is qualified, it reassures investors that they will see a return on investment.
Pivot and adjust as needed. Building a startup is a study in trial and error. Some things you thought would work in the beginning end up not working once you release the product in the market.
That is where a great team comes in. It can quickly scrap what is not working and adjust to the market needs.
Poor Storytelling/Marketing
People will not buy your product because it is the best in the world. They will buy it because of the story you tell about that product.
Nowhere is this more evident than with Apple. Steve Jobs created a narrative that Apple was the best of the best, and until today, people go out of their way to own Apple products for prestige.
Not to say Apple products are not prestigious or of good quality, but compared to some Samsung products, the difference is negligible.
Still, if you put a Samsung and Apple product with exact specifications next to each other, most people will choose Apple because of the story around Apple products—that they are better.
Steve Jobs is on record saying,
The most powerful person in the world is the storyteller. A storyteller sets the vision, values and agenda of an entire generation that is to come.
What story are you telling about your product? How have you made storytelling a core part of your marketing strategy?
These are the core questions you should always ask yourself.
There is a world of difference between ‘my company sells wedding dresses’ and ‘my company makes you feel special on the most important day of your life.’
Takeaway
Now that you have the information, I hope you can avoid the pitfalls and be among the 46.8% of startups that will succeed.
See you on Friday, same place, same time for AfCFTA Friday.
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