Building successful startups involves raising capital financing and developing innovative products or services with rapid growth potential. Success often means achieving a liquidity event, such as selling the company or going public, providing returns to investors, founders, and employees. However, globally, approximately 75% of venture-backed startups fail, with a similar trend in Africa, where the failure rate is estimated between 85-89%. [1]
While lack of capital is commonly cited as a reason for failure, recent analyses suggest deeper-rooted challenges. Although there has been a notable surge in funding, exemplified by the 2023 statistics where 406 startups collectively raised US$ 2,406,914,000, marking the third-best year for funded ventures and the second-best for total capital secured[2], startup failures remain prevalent. In Kenya, in just the last two years, eight startups collapsed despite absorbing a combined total of US$ 76,216,400 in investor funding.[3]
This highlights the necessity of investigating additional factors influencing success or failure, particularly given Africa’s distinct geopolitical environment. These factors encompass:
Ability to leverage technology
The ability to leverage technology is crucial for startups in Africa, especially considering the challenges posed by limited internet connectivity. Despite an increase in mobile broadband coverage, regional broadband penetration remains below 40%, leaving a significant portion of the population without access to the internet. For founders, this presents a key consideration in developing products and business models. To address this challenge, startups have turned to technology, particularly artificial intelligence (AI), to create products and user experiences that function independently of internet connectivity. This inclusivity not only ensures usability in remote areas but also expands the target market and enhances scalability for increased revenue generation and sustainability.
For instance, Nigerian-owned Ubemwa has developed a mobile app embedded with AI models, enabling it to work offline and remotely. This innovation allows infant caregivers in the most remote regions of the country to access and utilize the app effectively.
Moreover, considering Africa’s linguistic diversity, with over 3000 tribes speaking diverse languages, startups must also develop products and user experiences that cater to various languages. For example, Cameroon-based Agrix Tech and Kenyan-based SunCulture have incorporated AI to include various local African languages in their products. By operating offline and integrating diverse languages, these startups ensure accessibility and usability across different regions, thereby enhancing their market reach and potential for success.
Strategic orientation beyond solving a need
African startups often follow a common approach: identify a problem, develop a solution, and implement it. However, they often overlook whether their solution will truly resonate with their target market.
More critically, they should ask themselves: What unique problem are they solving that global giants haven’t addressed? Only a few locally-developed products have succeeded, primarily because they addressed a local need that Silicon Valley companies overlooked due to market conditions or regulatory constraints.
For example, Safaricom’s M-Pesa revolutionized mobile money transactions by operating on its GSM cellular network, bypassing the global internet infrastructure dominated by Silicon Valley firms. Similarly, other telecom companies like MTN Group and Airtel adopted similar models, capitalizing on regulatory advantages to offer mobile money services where global giants couldn’t penetrate.
Rocket Internet, through Africa Internet Holding (AIH), excels at replicating successful western products in emerging markets. Jumia, Africa’s largest online mall, is a prime example. Rocket strategically avoids competing directly with Western giants like Amazon, understanding the challenges such as limited credit card penetration and high shipping costs that hinder Amazon’s success in Africa. Instead, Rocket invests in local e-commerce platforms like Jumia, tailored to the unique needs of African consumers. As a result, Jumia offers a seamless shopping experience, resonating with local consumers and outperforming global competitors in Africa’s complex market landscape.
[1] Research Briefs, 452 Startup Failure Post-Mortems, CB INSIGHTS (Apr. 18, 2023), https://www.cbinsights.com/research/startup-failure-post-mortem/ [perma.cc/AEZ5-D7TF]; Faisal Hoque, Why Most Venture-Backed Companies Fail, FAST COMPANY (Dec. 10, 2012), fastcompany.com/3003827/why-most-venture-backed-companies-fail [perma.cc/JGS8-3VN5].
[2] https://disruptafrica.com/wp-content/uploads/2024/01/The-African-Tech-Startups-Funding-Report-2023.pdf
[3] https://www.businessdailyafrica.com/bd/corporate/technology/puzzle-of-kenyan-startups-in-trouble-after-sh34bn-funding–4364714
Sound corporate governance
Corporate governance encompasses the rules, policies, and systems governing an organization’s processes and activities. It aims to balance the interests of various stakeholders, including founders, employees, customers, investors, the community, and the government.
However, in Africa, founders often overlook business management and corporate governance when establishing startups. Many startups are founded by young tech-savvy individuals who excel in innovation but lack the skills to navigate complex business environments effectively. Recent cases, such as the financial impropriety allegations against the founders of “Dash” and “Flutterwave,” highlight the consequences of poor corporate governance. These incidents underscore the need for robust accountability, systems, and procedures to uphold best practices in business management.
To ensure startup success, implementing a strong corporate governance system is imperative. This involves initiatives such as: founders’ capacity – providing founders with training to understand and implement corporate governance principles effectively, enhancing their management skills; staffing – recruiting skilled personnel committed to upholding accountability, transparency, and ethical leadership; systems and processes – establishing clear procedures for fund management, key decision-making, and personnel recruitment to prevent misconduct and foster company growth; third-party advisors – engaging independent advisors to provide additional compliance oversight and valuable feedback for improving internal governance practices.
In conclusion, achieving startup success in Africa demands more than just funding and innovation. Despite increased capital, failures persist, urging exploration of additional factors. Key considerations include leveraging technology for accessibility and scalability, strategic orientation toward unaddressed local needs, and robust corporate governance to uphold accountability. Success hinges on understanding Africa’s landscape and strategically integrating technology, market insight, and governance to navigate challenges and seize growth opportunities.
This marks the initial installment of several articles tailored for individuals navigating the startup landscape. If this resonates with you, stay tuned for more. Should you have inquiries or seek legal consultation on this subject, feel free to contact Nelson Otiende at notinde@gvalawfirm.com, or Joy Impano at jimpano@gvalawfirm.com.
