9 Main Reasons Why Nigerian Start-Ups Fail
I have a bitter pill for you: Most start-ups in Nigeria will fail within five years of launching. The news media is littered with images of elated founders celebrating the birth of a new company. You will also find an equal match of deflated entrepreneurs watching their ‘babies’ die.
An average of 61% of Nigerian start-ups failed from 2010- 2018, according to The Better Africa report, a publication of Weetracker, a digital media company.
This trend is common around the world, with economic superpowers like the US and China recording even higher failure rates. The failure rates seems to be commensurate to how many start-ups get launched in a country.
However, these stats should not deter you from believing in your idea, creating a product and building a company around it.
The key is to be fore-sighted enough to plan well, courageous enough to launch and consistent enough to stay focused on your chosen path.
Failure is inevitable for anybody who aspires to build something as great as a successful start-up. The key is to fail cheaply, learn useful lessons from it and try again more intelligently.
I tried to find out the most important reasons why many Nigerian and other African start-ups fail. Here are my findings:
1.A product or service with low market demand
This is the single most important cause of these failures. Many entrepreneurs make the schoolboy error of creating amazing products before researching their target market.
This is common in many unsuccessful tech companies: build a wonderful software and then discover that no one wants to buy.
Before you build a product or create a service, you must explore your potential market. Enough people have to want or need it, have the purchasing power to buy it and be willing to pay to get it.
Who exactly is your customer? Where do they live? What gender are they? Can they afford it?
Essentially, you must perform a good consumer profiling.
This will save you and your investors the heartache and wastage of producing something nobody wants to buy.
2. Inadequate Funding:
Running a business requires enough capital to operate till it becomes profitable.
Many Nigerian start-ups struggle to raise enough funds to achieve that. A main cause of these, like you will find out later, is inconsistent government policies. This makes many foreign investors reluctant to bet on theses new companies.
Some are able to secure initial funding from Venture Capitalists and angel investors, but then fail to secure follow up funding. This makes them stall: neither able to consolidate nor scale.
So they stay in business for a few years, run out of money and then fold up.
3. Political instability:
This is a major challenge in Nigeria and other fledgling democracies. Founders have to adapt to new government policies after every election season.
These policies and laws are often inconsistent with their precedents. The recent travails of Gokada and Oride, two ride hailing start-ups which primarily operate in Lagos State comes to mind. They are currently on their knees after the state government banned the use of motorcycles and tricycles in the metropolis.
In addition to this, affording the cost of registering companies with the Corporate Affairs Commission could be prohibitive.
For fintech and healthtech companies, the rigors of satisfying various government agencies and professional bodies’ requirements is exhausting.
4. Poor Management Skills
Founding and running a successful company requires more than good technical skills.
Underestimating the importance of this will be fatal for your business.
- a. Finance:
Your financial management acumen must be sound if you intend to succeed. One of the core responsibilities of an entrepreneur is astute allocation of capital. You need to have or develop an entirely different skill sets to achieve this.
You must know your numbers to the latter : where your revenue comes from and what you spent your funds on.
- b. Human resources:
The people you chose to work with will to a great extent determine the degree of success you cannot achieve much without good people skills. You should be capable of hiring the most competent employees for different positions. Secondly, you must have a clear program for their development.
Investing in your people pays the greatest dividends.
5. Lack of Focus and Premature Diversification
Ideas birth companies, ideas also kill companies. You must be disciplined enough to stay true and consistent with your business plan.
You should build your business with singleness of purpose. Stick to one business and your products till your business becomes mature enough for diversification.
Staying focused also helps with branding and boosts your brand recognizability. You do not want people to buy grocery from you today and by tomorrow you have switched to selling shoes. No, you can’t build relationships with customers.
In addition to that, focus helps you penetrate a market or industry you are are still new to. That’s how you can carve out a narrow niche first. When your company’s financial strength grows, you can then safely diversify.
Remember Jeff Bezos’ Amazon used to sell only books? What if he had dabbled into too many products while starting out? Amazon as we know it today might have gone extinct or at best a mediocre company.
Even our beloved Google used to be a search engine company only. Now they’re have a fintech subsidiary too.
So stick to it to you mature enough to diversify safely.
6. Poor Marketing Strategy
If you build a great product, the world will beat a path to your home? Lies.
I am definitely not advocating mediocrity but business does not work that way.
Marketing effectively is as important as creating a great product. Many start-ups have died premature death because founders assumed that building a wonderful product is all they need to do.
To succeed, you must have an effective marketing strategy. It should be able to create awareness for your brand, get people interested and finally prompt them to buy.
Hear Peter Drucker: ” Only two things make money in business: Innovation and Marketing. Every other thing is expenses”
So if you have a great product or service, promote it to your target market repeatedly.
That is what all successful personal and business brands do.
Politicians market themselves to you by campaigning. Professionals market their skills with their resume. Men market themselves by asking girls out.
Now go and do so with your products. If you don’t sell, you are not in business.
7. Poor Leadership and team building skills
Being a founder or CEO comes with massive leadership responsibilities. This cliche still stands true: everything rises and falls on leadership.
You must be visionary enough to chart a course for your company. You should be inspiring enough to convince people to believe in see and subscribe to that vision.
Tough times do arise in a company’s lifetime. That is when your leadership skills will be put to test. Prove your mettle by leading during difficult times.
Steve Jobs had a great knack for inspiring people, even though he sometimes appeared overbearing. However, no one can dispute his superb leadership skills in taking a mediocre personal computer company like Apple into the behemoth that it is today.
A major component of leading is building teams. You must know how to unite a group of people around a common goal.
A great company is simply made up of many great teams. When their efforts are harmonized, you are destined for the top.
8. Vague Business Plans/Models
Building a successful business, as in every other endeavor in life, requires a good plan.
Many entrepreneurs got caught up in the excitement of launching a company that they failed to create good plans. They thus miss out on the clarity of purpose a good business plan brings.
Some have poorly researched plans. If your numbers are inaccurate, you are destined for trouble even before you launch. You need to tell exactly what segment of the population is your market, their character, and how much revenues you expect to generate.
Also, a flawed business plan will make fundraising difficult. Investors demand for clear plans before risking their capital. Not raising enough funds is a major predictor of business failure.
9. Lack of adaptability
Make no mistake about this: Nigeria is a challenging business environment, especially for young companies.
Many harsh realities hit entrepreneurs when they start business. You may realise that you will have to spend more on providing basic amenities like electricity, water and security for your company. This can heap too much financial burden on a fragile start-up.
Inconsistency in government policies also means that you have to regularly adapt to altered business conditions. You will need to be adaptable to survive. Adapting could mean having to pivot; altering your business model or changing your line of products.
Now that you know why a Nigerian start-up can fail
Be careful to avoid these pitfalls, or prepare ahead of time on how to adapt to unavoidable ones. Knowing what not to do is as important as knowing what to do.
You need a business plan backed by good market research, a product that people actually want to buy and a good marketing strategy.
Personally, you must be adaptable, be a good leader and be capable of building effective teams.