Four takeaways of why some startups fail to scale
The African startup ecosystem is replete with stories of success, 10x growth trajectories, and life-changing exits.
But what about the exits that never happen and the startups that ultimately “fail” to scale? According to available global ecosystem data, up to 9 in 10 startups fail, with Africa not immune to this high failure rate.
As active participants within the continent’s startup ecosystem and working closely with numerous startups, the possibility of venture failure is a common denominator that unites all founders. Some of the most successful founders worldwide and in Africa failed before they met success, with failure providing founders with valuable lessons they can apply in future ventures.
Over the last couple of years, we’ve contended with our share of disappointments. The recent closure of Ghanaian healthtech startup Redbird, for example, has reemphasised the importance of asking, “Why did this startup fail?”
In Redbird’s case, as noted by Co-Founder and CEO Patrick Beattie, a lack of funding proved to be the leading cause, with its growth prospects impacted by the broader investment market. This is a startup that raised $1.5 million in 2021 and was named among HolonIQ’s 50 most promising healthtech startups in Sub-Saharan Africa in 2022. By its closure, it had partnered with over 600 pharmacies serving hundreds of thousands of patients in Ghana.
Funding is a significant (yet complex) reason why startups fail. With failure a feature of the tech ecosystem, below are four other takeaways about why startups fail, drawn from our observations at Founders Factory Africa and our conversations with ecosystem players, partners, and founders.
Take 1: Equity is a delicate balancing act between feast and famine
Equity is a vital bargaining chip for any startup, representing the perpetual returns founders can receive if their venture takes root and becomes commercially successful. When a venture is at the pre-seed or seed stage, equity is an attractive carrot to entice an investor with vital capital that can make or break a startup’s future.
In a way, equity is the most vital resource a startup can trade for capital, given its long-term ramifications, with any equity-for-cash conversation needing to be carefully handled. One startup that FFA has worked with made the error of allocating over 30% of its equity to an investment partner. As a standalone figure, 30% is a high number, but with the venture’s other equity divided between its founders and other early investors, less than 20% remained that the venture could exchange for capital.
The venture’s restrictive cap table made it harder to entice new investors. Potential partners broadly noted that any investment would lead to them immediately becoming minority shareholders that lacked the authority and weight to influence the startup at the board level. Conversely, founders that overvalue their venture may become resistant to exchanging the equity funders expect for capital, inhibiting their ability to raise runway.
Take 2: Selling an intuitive product
Startups rise and fall on their ability to solve a specific pain point or challenge. Yet, offering a service that solves the problem it intends to solve is very different from solving a problem that customers know needs solving.
Our interactions within the ecosystem show that the amount of time a startup spends educating its customer base on why it needs its product directly impacts the startup’s ability to scale. Market education is a vital exercise, especially if you offer a new or unique service from competitors. However, the journey is eased significantly if the product itself is to some degree intuitive to the customer, i.e. they have an immediate sense of the problem it solves, regardless of whether the product is B2B or B2C.
In financial terms, an intuitive product lowers customer acquisition costs and can increase sale speed since less time needs to be spent on market education. This reality within an AIDA model, for example, sees the customer placed closer to Desire and Action since they will spend less time in the model’s Awareness and Interest phases, where market education (and marketing) has its most significant impact.
Take 3: Selling to the right audience and diversifying revenue
A pitfall any startup faces is that they position their business to be attractive to potential investors first, with customers coming second. This hierarchy is natural and understandable since it takes investor capital to get a startup off the ground. However, if a venture leaves it too late to pivot to a broader customer base, the capital to build a robust customer acquisition funnel and its supporting systems may not be available to execute as needed.
This pivot is especially vital if a venture initially relies on a single customer for its revenue. Many startups have collapsed because they became over-reliant and complacent on the support provided by a single, large customer. Worse, these types of ventures may change their proposition by stealth to suit that customer’s needs until the venture no longer recognises itself.
Take 4: No one else is going to sell your product
One of the most dangerous things that can happen to a startup is that they secure a large customer early. Beyond the risk of over-reliance, the venture’s founders may believe that they can sell their service or product by leveraging the large customer’s commercial network.
Wrong. Without caution, a large customer can become a chimera, a pair of golden handcuffs that can increase a startup’s future opportunity costs.
When this happens, the person you typically try to sell through via the customer is the wrong person to speak to. Instead of procurement or someone directly connected to the department you want to sell to, you are running the long way around to make a sale. The proposition that the startup is trying to deliver may never reach the right person, or when it does, the lead goes so cold that the moment or customer need has moved on.
The leadership team of a startup generally has positions such as CEO, CTO, COO, and CFO. A founding team assuming that their responsibilities stop at the water’s edge of their official job title can be a deadly mistake. Everyone in a venture is in sales. It does not matter how good a product may be if resources and time aren’t dedicated to selling it.
