Why Start Ups Fail and What Can Be Done To Avoid This.
By Trevor Ncube, Abuja, Nigeria. September 6,2016.
Start Ups represent the process by which we turn our passion and ideas into businesses that create jobs and wealth for individuals and the society as large. They are a vital component of a vibrant economy. They unleash citizen’s creativity and imagination and fire up economic activity that expands the tax base.
Start Up’s are a product of an economic, political and social culture. Start Ups tend to succeed in democratic environments where people are free to think and create. Start Ups succeed where inclusive policies and inclusive institutions support vibrant education, freedom of thought and expression. They flourish in environments that encourage a robust market place of ideas where idea sharpens idea and the best ideas emerge to create amazing enterprises.
Successful Start Ups result in prosperous societies and it is true that prosperous societies are also a hot bed for creativity. While it is true that “necessity is the mother of invention” it is equally true that it’s a tall order being creative in an environment where basic human needs are still to be met. So how do we get Start Ups in Africa when we are still battling with basic needs such as freedom of speech, health services water and electricity?
For a continent that has been playing catch up over the past two decades, Africa may seem to be the ideal breeding ground for Start Ups and yet some of the factors above stand in the way. And indeed some of the world’s most successful ideas/start ups have emanated from Africa. Think of Kenya’s Mpesa or South Africa’s Please Call Me. But for many who want to build a Start Up into the next big thing, there are many obstacles that lie in the way of their success, particularly access to funding.
I think that with proper funding in place, there would be no limit to the number of Start Ups that would flourish on this continent. What we need are not awards ceremonies for entrepreneurs but systematic ways of funding them.
Africa’s young minds regularly graduate top of their classes at the world’s best universities, but unlike their US or Chinese counterparts, they rarely go on to found globally successful Start Ups. I think that much of this is linked to the difficulty to raise funding for many of the ideas that in early form must seem truly outlandish.
Imagine a young African entrepreneur approaching a funder in Lagos, Nairobi or Johannesburg asking for seed funding for a taxi company that actually owns no cars. Or a hotel entrepreneur requesting financial backing for a hotel company that owns no hotel rooms. But these crazy ideas are the very ones that give you the Start Ups that create multi-billion dollar companies like Uber and AirBnB.
If you look at opportunities in media and film, I think Africa represents one of the most untapped opportunities in the world. Put it another way, Nollywood is but one small platform that is telling Africa’s stories in film. Imagine the success of the Start Up that harnesses the opportunity across a number of African story regions and then exports this content to the diaspora.
Many entrepreneurs tell harrowing stories about their difficulty in getting funding for their Start Ups, especially at critical stages of their business. This has acted to discourage others from becoming entrepreneurs as they don’t think the risks are worth it. Think for a moment of the number of jobs that have been lost as a result of a brilliant enterpreneur holding back. We should not forget that young people are highly impressionable and a group of successful entrepreneurs can inspire the next generation of entrepreneurs when they get together within an angel investor network.
The Africa Rising narrative may have receded somewhat over the past year, but that has not changed the fact that Africa is seen as one of the most vibrant economic regions. Investors have realized that returns far outperform those in developed markets. But many of the returns accrue to ‘international’ investors as they have the capital to pursue the best opportunities globally. There is an urgent need to develop Africa’s own network of early stage investment and within South Africa, the angel investment model represents a promising route. For the entrepreneur with a killer idea, nothing is more important than taking the shortest possible route from prototype to finished product.
I know it is easy to repeat the statistics of how many Start Ups fail within 18 months of being established. And that sobering statistic is certainly worth bearing in mind for those who wake up one day wanting to risk everything on an idea they are convinced will change the world. But it is also important to remember that when an idea hits the sweet spot, most of the economic upside goes to those who had the capital to invest in the first place.
Angel investors bring financial certainty to the dreamers who create some of the companies that traditional financiaers would simply laugh off. But angel investors also provide a bridge between the equity gap from what is raised when entrepreneurs dip into their own funds, take a second mortgage on their house or beg or borrow from family and friends.
Right now the biggest opportunities in Africa lie in sectors such as energy, particularly clean renewable energy. Telecoms continue to provide incredible opportunities. But infrastructure, water and transport are ripe for disruption by a smart Start Up. The engineers are there, the entrepreneurs are there, the Social Capital ideas are also there. So why is our continent, particularly Sub Saharan Africa still registering such a low success rate of Start Ups?
I would like to call on individuals with deep pockets to look at investing in Start Ups not as Social Responsibility, but as hard need self interest. Sure enough some of these investments will back dud ideas, but for every 9 duds, the returns on one excellent Start Up are worth it. That is because the amounts required are relatively small. I think it is best to think of the amounts that angel investors throw into the kitty of a Start Up as no more than a catalyst for entrepreneurship in Africa.
Perhaps one of the reasons why I am an advocate for an angel investment model is that for the African with the means to enter the angel investment market, there is an opportunity to maximize returns but also reduce the risks involved in investing given the ‘mentoring’ that normally comes with the angel investment model. For Start Up entrepreneurs this represents a win-win situation as they gain invaluable insights that would not be available if they had no access to the angel network. We must remember that one of the main reasons why Start Ups are not funded by traditional banks is because of their high rate of failure.
It is easy to suggest solutions on paper that do not work well in the real world. Let’s look at the role that Africa’s governments can play by introducing a set of policies to unlock angel investment. My own observations are that developing economies are uniquely suited for Start Ups because of their population and market dynamics. If you look at a country like South Africa, it has the financial infrastructure to create one of the most sophisticated angel investor environments in the world. But its young and growing population in a highly connected market also presents a unique opportunity for entrepreneurs. The same can be said of Nigeria and in many respects Kenya and Ghana.
I’m always wary of talk-shops that do not lead to tangible solutions, But in this instance angel investors and entrepreneurs with kick ass ideas need to sit down and talk. A lot. Not quite in the form of Dragon’s Den, but Africa needs to create a series of events where investors can receive proposals from entrepreneurs and help finance the launch of their businesses. This would simplify access to opportunities for angel investors and the Start Up entrepreneurs would benefit from reduced lead times. It is well known that traditional financiers take a very long time to make up their mind about anything because they are naturally risk averse. By that time the idea could already be implemented by someone else.
With the right policies in place and a decent awareness campaign in place, it would be possible for Africa’s angel investors to set themselves up in angel network groups to achieve economies of scale and also share market knowledge. I’m truly excited by the thought of a start-up or early stage business having the means to present a single proposal to a wider set of investors in a network group.
I am by no means suggesting that increased access to angel investors will make Stat Up entities less risky or even increase their success rate. But it will ensure that the right ideas do not dissipate because of poor access to funding and support. Perhaps the South African situation shows how much work still has to be done to fully nurture a culture of angel investment. This sector is still very much in its early stages and angel investors are still being asked for amounts as low as R1 million.
You do not need to be a socialist to understand that fairness is an important aspect of the future we are trying to develop. But it can no longer be the case that certain sectors are dominated by those whose families had Trust Funds. That is because it is expensive to fund and nurture a truly brilliant idea. Everytime you marvel at Elon Musk’s Tesla, think of the cash he had to burn to make Tesla a success. Our job is to provide a similar level of opportunity for the next generation of Elon Musks. Without a credible, well developed transparent angel investment network, many of the dreamers will have to take 8 to 5 jobs and forget about their Start Ups.
One of the big problems associated with venture capitalists is that they are known as the cowboys of the finance sector. They are known for ‘taking over’ businesses. But angel investors do not bring this tarnished reputation to the table and this is an important assurance for nervous young entrepreneurs.
I do not pretend to have the magic formula for turning all Start Ups into success stories, but I do believe that a network of angel investors operating independently in Africa’s cities can play a key role in boosting entrepreneurship. Angel investors can also support a start up’s management prepare itself for access to traditional finance.
If our continent does not fully develop the various models of funding, the real danger is that our continent will fall further behind other parts of the world when it comes to innovative companies that are developing commercial applications for emerging technologies. I believe that One of that development finance institutions (DFIs) like the African Development Bank should also be active in this space and they can play an important role in promoting innovation across the continent.
Some practical considerations:
Provide financial and non-financial support to angel investors seeking to establish angel network groups to assist in professionalizing the industry
Implement tax incentives to promote investment in start-up and early stage ventures through angel capital; and
Provide matching funding through DFIs and other agencies to complement the capital committed by angel investor networks.
Given its huge potential to boost business success by financing and supporting entrepreneurs transform their start ups from unproven ideas, especially in new technology, it is important that as much as possible be done to develop Africa’s emerging angel investment market.
Perhaps the last word should go to angel investor Permjot Valia who has has said “Entrepreneurs and democracies feed off each other. Entrepreneurs need democracy, and democracies need entrepreneurs,”
He adds “Entrepreneurs spread wealth. True entrepreneurship, on the other hand, is a great leveller: while it creates opportunities, it destroys old businesses and creates new ones. In an emerging, vibrant, democratic society, you need more opportunities so that more people can share in new wealth. What governments should and can do is to create tax systems whereby angel investing is rewarded in terms of the risk-taking.”
Allow me to suggest a radical idea that would help identify, fund and incubate Start Ups. Why not create government depart or ministry to focus on creating the right environment for Start Ups, put in place appropriate legislation and ensure funding is in place for innovative ideas. I would say kill the ministry of information and propaganda and create a ministry for Start Ups that will see the emergency of innovative businesses across all sectors of the economy. This is a much more sustainable way of creating business that would do far much better than the business of profiting from government tenders.
The challenges are there, but if our continent is serious about entrepreneurship, it will see angel investment as an important market to develop and in this way promote startups in the most coherent way.
Thank you Ladies and Gentleman.