The African continent has seen a surge in the number of startups over the past decade, with many entrepreneurs seeking to solve local problems with innovative solutions. However, despite the potential for success, many African startups fail within their first few years of operation. In this article, we explore ten reasons why African startups fail.
Lack of funding
One of the biggest challenges facing African startups is access to funding. Many startups struggle to secure the necessary capital to get their businesses off the ground, and even those that do manage to raise funding often find it difficult to secure follow-on investment. In 2019, African startups raised a total of $1.43 billion in funding, as reported by Partech Ventures. However, this amount is only a fraction of the funding raised by startups in other regions, such as North America and Asia.
The report also found that a mere 9% of the total funding raised in Africa went to startups in the seed stage. This indicates that early-stage startups in Africa are having a hard time accessing the capital they need to get their businesses off the ground.
According to a report by Disrupt Africa, the number of African startups that received funding actually decreased by 10.5% in 2020 compared to the previous year. This is further evidence of the challenging funding landscape for startups on the continent.
In light of these statistics, it is clear that African start-ups face a significant hurdle in accessing funding, particularly in the early stages of their development. The high risk associated with investing in early-stage startups, combined with a lack of available venture capital firms and angel investors, makes it difficult for entrepreneurs in Africa to start and grow their businesses.
Infrastructure Deficit
The lack of infrastructure in Africa remains a significant issue, with an estimated $90 billion needed annually between 2016 and 2026 to bridge the gap with developed countries. Many Africans do not have access to basic necessities like energy, housing, transportation, and communication.
The Program for Infrastructure Development in Africa (PIDA) is working to close this gap by 2040, with private sector investment, pension funds, sovereign wealth funds, and forex reserves invested offshore being used to quickly bridge the gap. This investment will increase GDP per capita by 1.7% and create job opportunities, particularly in underserved rural communities. Dr. Ibrahim Mayaki, CEO of NEPAD, highlighted that better infrastructure can boost human and physical capital productivity, leading to growth. Despite challenges, the infrastructure gap in Africa also presents opportunities for innovative solutions to emerge, as seen across the continent.
The above image provides an overview of the infrastructure issues on the continent.
Ernst & Young’s report on “Addressing Africa’s Infrastructure Deficit” shows that the biggest infrastructure deficits in Africa are in power and roads. . In a CNN article, it was identified that the whole of Sub-Saharan Africa generates roughly the same amount of electricity as Spain, despite having a population of 800 million people.
Only half of Africa’s population has access to tarred or paved roads, according to Afrobarometer.
Brookings estimates that 620 million Africans lack access to electricity, and around 34% of Africans lack access to roads. In the 2018 Africa Infrastructure Development Index (AIDI), only eight out of 51 African countries scored above average. The lowest-ranking countries were Chad, Niger, South Sudan, and Somalia, with scores of less than 10 out of 100 points.
Having good infrastructure is crucial for entrepreneurs to thrive, particularly in the technology industry. A strong ICT infrastructure is necessary for customer acquisition and business growth, but data costs and poor connectivity still pose challenges in Africa. Inadequate infrastructure can hinder innovation and lead to low innovation density in many African countries.
Entrepreneurs require a conducive environment, which includes good infrastructure, to thrive. Good ICT infrastructure is particularly important for technology businesses, as it is necessary for customer acquisition and growth. However, poor connectivity and high data costs continue to limit the expansion of many internet companies.
Moreover, the high cost of energy in some African countries, where businesses must provide their own power, poses a significant challenge. In Nigeria, mid-sized tech businesses were reported to spend more than $7,000 monthly on power. By eliminating such challenges, entrepreneurs can reinvest their resources in business growth. Improved infrastructure can also free up innovators to focus on solving more complex problems and engage in groundbreaking work, without the distraction of basic needs such as water and power.
Regulatory challenges
Many African countries have complex and often unpredictable regulatory environments, which can be challenging for startups to navigate. Startups may face delays in obtaining necessary licenses and permits, and may also be subject to unpredictable changes in regulations or policies that can impact their operations.
African countries generally perform poorly in the World Bank Ease of Doing Business rankings, and Nigeria is no exception. as it takes a long period to set up a business after dealing with the frustrations that come with each hurdle during the process.
The ban on SIM card registrations by the Nigeria Communications Commission between December 2020 and April 2021 to encourage National Identification Number registration had negative consequences for potential investments, as it prevented travelers from obtaining SIM cards to make calls or use the internet. Additionally, heavy tax rates levied on businesses, including established companies such as MTN and DSTV, can result in higher service rates for customers to generate profits.
Lack of mentorship and support
Africa is known for its youthful population and innovative entrepreneurs who are building solutions to the continent’s challenges. However, a critical piece missing in the puzzle for continued growth and sustainability is mentorship. While there are successful individuals across the continent, there is a lack of mentorship culture in Africa. Mentorship is essential as it accelerates the development of young people by providing guidance, building confidence and helping them identify and achieve their objectives.
Non-Governmental Organizations like VC4A and The Tony Elumelu Foundation have been supporting African startups through mentorship programmes, but there is still a need for more structured mentorship programmes to provide professional guidance to African companies. The benefits of proper mentoring are incremental, including gaining expert advice, support and knowledge, relevant skills, and successfully navigating the down moments of an entrepreneurial journey. With proper mentorship, African ventures have a higher chance of survival and increased sales, productivity and profitability. McKinsey predicts $5.6 trillion in African business opportunities by 2025, and Africa must fast-track its structural reforms and develop a culture of mentorship to reach its full potential and provide a template for future generations to leverage.
The frugality problem
As an entrepreneur operating in Africa, the challenge of sustaining your startup despite securing millions in venture capital funds may be daunting. The shutdown of prominent African start-up WeFarm highlight the difficulty of technological disruption on the continent.
African start-ups often struggle to maintain the frugality that traditional businesses, are known for even after securing substantial investments from venture capitalists. This is due in part to the challenges of operating in Africa. These challenges include serving consumers with limited purchasing power, navigating an unstable policy environment, inadequate infrastructure, all of which could impede your start-ups’ success. Furthermore, the global tech downturn has resulted in a drying up of venture capital funding, making it even more challenging to secure funding for your start-up.
The popular Silicon Valley adage “fail fast, fail often” might not be applicable. While failure is often viewed as a valuable learning opportunity and means of progression in Silicon Valley, it can prove costly for startups in Africa. The growing tech industry on the continent requires a different approach, one that prioritizes longevity and sustainability. This is especially significant since many African startups rely heavily on external funding, and repeated failures can dissuade investors from investing in the ecosystem. Instead, startups can adopt a different approach to testing frequently and quickly, while maintaining a focus on unit economics. This means moving quickly, while being cautious not to disrupt the critical foundations necessary for success.
In startups, rapid scaling is often necessary to tackle large challenges, achieve efficiency and profitability in a short period of time. However, the fast-paced growth associated with this approach can have its downsides. Startups may expand their team and resources without considering their current development stage. Consequently, strategies and methods that work for a small team may not work for a larger one.
Although rapid scaling can result in increased revenue, it can also cause an influx of users, internal processes, management tiers and potential issues that require constant attention. To avoid detrimental effects on product quality, employee satisfaction and finances, it is advisable to apply the brakes periodically while scaling.
Entrepreneurs operating in Africa face unique challenges that make it imperative to adopt a strategic and prudent approach to sustain their businesses. Despite the inherent risks of startup failure, the harsh business environment on the continent calls for quick adaptation to changing market conditions. This is done by making tough decisions that can extend the lifespan of African startups.
Inadequate marketing and branding
Many African startups struggle to effectively market and brand their products or services. This can result in poor visibility, low customer engagement, and ultimately, failure. To avoid this, startups must invest in effective marketing and branding strategies that help them reach their target audience and build brand awareness.
Finally, African startups face a range of challenges that can impact their success. By addressing these challenges head-on and developing strategies to overcome them, entrepreneurs can increase their chances of success. These strategies may include seeking out funding from alternative sources such as crowdfunding, partnering with established companies, conducting thorough market research, developing strong management teams, and investing in marketing and branding. Additionally, entrepreneurs can seek out mentorship and support from industry experts and participate in startup incubators and accelerators.
It is important to note that while there are challenges facing African startups, there are also many opportunities. The continent is home to a growing middle class, an expanding consumer market, and a wealth of natural resources, all of which provide opportunities for innovative entrepreneurs to develop successful businesses. By leveraging these opportunities and addressing the challenges that arise, African startups can play a critical role in driving economic growth and development across the continent.
