Did you know that about 80% of businesses fail in Nigeria within the first 5 years? This post is an expose on why businesses fail in Africa, with examples of such business failures.
Several reasons are attributed to why businesses fail in Africa, especially Nigeria. In summary, some of the widely known reasons are:
- Mismanagement of funds/Showoff
- Government Policies
- Cultural factors
- Poor succession plan
- Black tax
- Lack of Fund
- Lack of Focus
Let’s learn a thing or two from one of Nigeria’s entrepreneurs – here is something from Sheriff, perhaps we might learn a thing or two on why businesses fail in Africa from his experience.
In a 2016 medium post titled “12 Years a Hustler, Time to Go Home”, Sheriff Shittu broke the news to everyone. Barely two years after launching, Showroom.ng was shutting down.
Here is an excerpt from the highly emotional post –
I really felt I could succeed; I have read the right books, the right blogs. But in execution and drafting right business plans, I have fallen short. Maybe it’s time to change things a little, something is quite wrong, I think.
Sheriff founded showroom.ng to serve as a place for people to shop their furniture needs. In other words, it was also a place for carpenters to showcase their works to potential customers (hence the name, showroom).
The showroom story is one of many in recent years. Businesses are getting started really quickly in Africa these days, and so are businesses shutting down at about the same rate. This has been a compeling reason for business owners to want to know why businesses fail in Africa.
USA today said 80% of businesses fail within the first year of operation. That’s a sad one. But it gets even more painful knowing how bad things are for companies in Africa.
Now, there are generic reasons why businesses fail everywhere in the world. However, there are some peculiar reasons why businesses fail in Africa.
Contents
In this Article
Let’s try to explore all of them together, and in the end, you’d do the sorting yourself. Shall we?
Reasons Why Businesses Fail in Africa
Mismanagement of funds/Showoff
Mark Zuckerberg and Jack Dorsey, CEOs of Facebook and Twitter, have both visited Nigeria in recent years. Mark came first in 2016, and Jack followed suit three years later.
There was so much buzz on social media about each of the two visits, and one of the topics discussed then was how simple they looked. Their appearance made news because it didn’t fit into the flashy appearance of typical African CEOs that we are used to.
In this part of the world, once a business witnesses some level of success, the next thing most CEOs start to think about is how to make sure it reflects in their lifestyle. Never mind that they still owe investors. The unnecessary showoff from business owners in Africa has been attributed to one of the major reasons why businesses fail in Africa.
The first obvious way this affects the business is that it draws from the capital. This new expensive lifestyle is not going to pay for itself.
Secondly, this sends the wrong message to potential investors. No investor would want to put their hard-earned money in the hands of a lavish spender. Without doubt, most investors know that the mismanagement of funds is one of the main reasons why businesses fail in Africa.
Government Policies
Africans are not so lucky in terms of political leadership. The kind of people we have as leaders here would fold their hands and let you toil your way to success on your own. The moment your business starts to show signs of success, then you see them associating with you.
The Lagos state government was quick to congratulate Flutterwave after their latest funding. But the question is what role did the state government play in this success. That’s by the way. At least this is a success story. Let’s talk about how the same state government killed about 3 to 4 startups with just one policy.
It’s a familiar story. Lagos state government shocked everyone when they banned motorcycles from plying most Lagos roads. This meant about 3 to 4 startups (Gokada, Max.ng, Oride) were forced to innovate or shutdown.
The above example is only an example of when a government policy comes directly for a business or an entire industry.
There are also times when the effects of such policies are not felt instantly but over time. For instance, the cancelling of auto-renewal in the mobile VAS industry.
Cultural factors
We, as Africans, hold our culture in high esteem. It’s one of those things that easily distinguish us from the rest of the world. But could it also be a significant contributor to business failures in this part of the world? Well, it seems so.
When people in other parts of the world say “no credits”, they mean “no credit for anyone irrespective of your relationship with me”. But you see, back in Africa, it’s usually not the same.
If a typical African man says “no credits”, what he is saying is “no credit for you except you are a family member or a close friend”.
As simple as this seems, it’s a fast killer of business.
Poor succession plan
Do you want to get an African man angry? Ask him about his plan for death, and you’d have succeeded in your mission. An average African would rather die than talk about dying (well, not literally).
The founder of Coca-cola died a long time ago. But guess what? The business is still very much in existence to date.
Other businesses that have something in common with Coca-cola are IBM, Ford, Pepsi, Nestlé. Bacardi, General Electric, and Procter & Gamble. And what do they all have in common? – they’ve all existed for over 100 years.
The founders and successive CEOs of these businesses can pull this incredible feat off because they all had a clear succession plan. In other words, they all recognised that a time would come when they would no longer be there to run the business, so they plan for a successor ahead.
On the other hand, over here, we don’t even want to hear about death. So, how do we plan for a successor? This also reflects in our political leaders’ behaviour who would rather die in office than hand over to a befitting successor who would carry on their “legacy”.
Black tax
A friend mentioned this term to me for the first time just about a month ago. Fast forward to today, and I’m writing about it as one of the reasons why businesses fail in Africa.
By the way, this is what black tax is – a form of support, common among Africans, that you extend to family members (especially extended).
The term originated from South Africa, but there is no denying that it’s a common phenomenon among almost all Africans.
Look around; there is poverty almost everywhere. Nigeria, for instance, is still the poverty capital of the world. Hence, family members tend to depend on the few people who “make it”. And when this “successful” family member has a business to thank for his success, such business may ultimately hit the rock.
Refusal to adapt to business trends and changes in the marketplace
Adapt or die! Sounds harsh, but it’s the truth.
The world is changing quite rapidly. Make that “rapidly” x100 since the last two decades. So, to stand the test of time as a business, you have to be willing to adapt to these changes. Even better – you should be able to predict the changes before they occur.
We talked about businesses that have existed more than 100 years earlier. Have these businesses lasted for so long by doing things the same way over the years? Of course, no.
For instance, look at how the Coca-Cola bottle has evolved over the years. And the physical appearance of the product is only one of the many changes the business has had to undergo to remain relevant.
Lack of Fund
Money plays a vital role in the success of any business. And more often than not, this money has to come from outside in the form of investment.
These days, several African startups announce how much funds they raised in different investment stages. These stories create the impression that attracting investors is now so easy. Well, not exactly – judging by the number of businesses that folded up due to lack of funds (some in the examples below).
10 Famous African Businesses/Startups that failed
Dealdey (2011 – 2018)
Sim Shagaya is a well-known name in the Nigerian (and African) startup ecosystem. He is the founder of the famous eCommerce store, Konga.
In 2011, Sim Shagaya started DealDey – a Nigerian platform for daily deals. By 2015, DealDey was one of Nigeria’s biggest eCommerce stores, pulling a $5 million investment from Kinnevik.
However, things took a different turn sometime in 2015 when the startup had to lay off 60% of its workforce. It was later reported in April 2016 that Ringier Africa had acquired the company.
While no one knows why DealDey collapsed, a Facebook user (who has now deleted the post) claimed it was because they could no longer pay vendors.
Efritin (2015 – 2017)
Efritin, the Nigerian eCommerce platform for used goods, was reported to have shut down in January 2017. The startup was owned by the Swedish company Saltside Technologies.
Saltside CEO Nils Hammer revealed that high internet data cost, poor internet penetration and adoption and challenging economic conditions played critical roles in the business failure.
Meanwhile, before the shutdown, the company’s former marketing manager, Uche Ajene, had accused the former MD, Zakaria Hersi, of robbing the company of thousands of dollars and not addressing internal mismanagement.
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Wabona (2012 – 2015)
Wabona’s mission was to make video-on-demand a big industry across Africa. The startup was founded in 2012 by two South Africans – Simukai Mukuna and Simbarashe Mabasha.
However, they had to close business in August 2015 after they could not raise follow-on funding coupled with the “uncertainty in the African video-on-demand (VoD) space”.
In the words of one of the co-founders, the business failed to find a scalable business model – “African VoD services are still struggling to find the best business model, and there is a platform bubble. In this kind of operating environment, it became tough for us to get long term funding,” Mabasha said.
Mxit (2004 – 2015)
In 2013, a South African social networking platform, Mxit chat, announced that its monthly active user base had grown to 7.5 million. However, this figure dropped to just 1.2 million in July 2015.
In October of the same year, Mxit finally announced it was closing its corporate operations, but the app would still be available for download and use. A year later, the app users reported that they could no longer send and receive messages.
Founded in 2004, Mxit rode the instant messaging wave even before BlackBerry Messenger, and WhatsApp became so popular with the advent of smartphones. The app was quite popular among South African millennials then in the pre-smartphone era.
Then, in 2012, it acquired Motribe – a platform that allowed users to build, generate and manage revenue from their social mobile website. However, it could not survive intense competition from international offerings such as Facebook and WhatsApp.
OyaPay (2017 – 2019)
Founded by three co-founders with Abdulhamid Hassan as the CEO, OyaPay’s sudden collapse is linked to a family investment gone wrong. According to Hassan, he had earlier taken a “small seed round from an uncle”. However, at the point of product-market fit where there was a need to bring investors on board, the uncle pushed back on the idea of diluting his investment.
The matter dragged for months, so he became frustrated and decided to quit.
There were Initial reports that Paystack had acquired the startup, but Abdulhamid denied it. However, he later joined Paystack, where he now works as the Product Manager.
GoMyWay (2015 – 2017)
GoMyWay was a Nigerian ridesharing platform. The business shut down its operations in October 2017. Their reason? Inadequate funds.
Damilola Teidi, CEO of GoMyWay at the time, said the startup couldn’t afford to proceed according to the initial plan of operating a free service for the first year or two.
“It does take a lot of resources to run this business, and the initial plan was no longer sustainable. The shareholders/investors concluded to shut down operations and close the business as there were no funds to invest further,” Damilola was said to have pointed out then.
At the point of shutting down, GoMyWay had gotten backing from several popular investors, including Konga’s founder and former CEO, Sim Shagaya, and former Naspers and Amazon executive Bill Paladino. Damilola went on to Nigeria’s CcHub as the Director of Incubation.
Showroom.ng (2014 – 2016)
As mentioned earlier, Showroom.ng founder and then CEO Sheriff Shittu made the announcement in an August 2016 Medium blog post. He decided to shut down the business after operating for two years.
Sheriff pointed out some of the reasons the startup failed, summing it all up into wrong execution.
In his words, “I personally won’t attribute the failure to wrong market or wrong product. It was a wrong execution”. Sheriff Shittu started the furniture marketplace in 2015. However, before Showroom, he had worked as a business analyst at Konga for a year and a half.
The business unfortunately fell prey to one or more of the reasons why businesses fail in Africa.
Nezal (2010 – 2016)
Nezal was a portfolio company owned by Ideavelopers. The startup was founded to turn social revolutions in North Africa and the Middle East into games and raised about $1 million in Series A investment. Ideavelopers led the investment in 2011.
However, Nezal’s founder and CEO, Muhammad Ali, has moved on to join Google as a product manager. Based on what can be seen on Ali’s LinkedIn profile, his timeline with Nezal, which he founded in July 2010, ended in April 2016. The business unfortunately also fell prey to one or more of the reasons why businesses fail in Africa.
ConnectMed (2016 – 2019)
ConnectMed, a Kenyan healthcare startup, is one of the latest to shut down within the African continent. In a March 2019 press release where the announcement was made, Melissa McCoy revealed that Merck took over ConnectMed’s intellectual property. That includes their telehealth solutions.
She added that “ConnectMed will cease operations” after the handover.
While in operation, ConnectMed, founded in 2016, launched three direct-to-consumer digital health products in South Africa and Kenya. Also, it served over 8,000 patients, including corporate clients. And it raised more than $300,000 in investment through prizes and grants mainly from the University of Oxford’s Skoll Centre, University of Cape Town’s Bertha Centre, Entrepreneur First and Katapult Accelerator.
The business unfortunately also fell prey to one or more of the reasons why businesses fail in Africa.
Tress (2016 – 2018)
Tress, a Ghanaian beauty startup, was one of Africa’s first startups to get accepted into Y Combinator. However, Tress’ website has long been taken down, and it last updated its social media over three years ago.
Meanwhile, one of the Co-founders, Priscilla Hazel, still has Tress as her current workplace on her LinkedIn profile.
According to the startup’s Crunchbase profile, they had raised at least $120,000 in funding. The business unfortunately also fell prey to one or more of the reasons why businesses fail in Africa.
In Conclusion
What’s even the whole essence of this article? Well, for you to learn from others’ stories.
Running a business successfully is hard everywhere but even harder in Africa. And the reasons for this have been mentioned.
By the way, it’s important to note that “failure” is not always a bad thing. Like motivational speakers would say, “sometimes you win, sometimes you learn”. In other words, failure can be a way to learn and get better.
There are stories of several successful businessmen and entrepreneurs today who had failed at different attempts before. But they kept on pushing till they hit success.
Having said that, it’s often better and safer to learn from other people’s experience.
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