By Omoruyi Edoigiawerie, Esq
I will start this article by stating the obvious, start-ups fail just as much as they emerge. Daily we see entrepreneurs churning our great products and services, receiving wide acclaim and patronage, but again in a few years, it is as if those businesses never existed, no one is talking about them, and they have either failed or have been bought over or “swallowed” by the bigger fish. This trend is not limited to Nigeria or Africa, rather it is a global problem.
In the African continent, Nigerian start-ups have a failure rate of about 61 per cent, Ethiopia and Rwanda have a failure rate of 75 per cent, Ghana at 73 per cent, Zimbabwe 66 per cent while Senegal 58 per cent and Kenya have 58 per cent failure rate. These numbers tell us one simple fact – more start-ups fail than they succeed.
The question now is, why do start-ups fail? What are the lessons to learn from these failures and more importantly what are the mistakes they made and the lessons to learn. Let us explore seven common mistakes that lead to start-up failure:
1. A complex business model
For any business, no matter how mall, a business model is fundamental and it serves as the backbone upon which the company structure is built.
Many start-ups in trying to fit in, impress investors or even the public, make their business model unduly complex. Oftentimes complexity is a precursor to unrealistic assumptions. A complex or complicated business model will invariably affect the impactful delivery of their business objective. This is because they end up setting the wrong timelines and creating poor or faulty benchmarks that cause confusion and end up doing more harm than good.
As I have often said, a workable business plan must be clear and concise, kept simple and flexible enough to be reviewed without rocking the boat.
2. Going alone
While it is agreed that many entrepreneurs are the primary visioners’ and dreamers based on which they will prefer to muscle it out on their own, bearing all the brunt and taking all the benefits in the process, this is not always the best idea.
Establishing a business is challenging and time-consuming. Setting it up all alone; especially in a complex business environment can be very difficult. Hence there is the need for a support system either from a co-founder, partner, consultant, or industry collaborator to help navigate the murky waters of establishing the start-up in the formative years.
It is not always individual effort that makes a company significant, but the teamwork and collaboration that get the job done at the end of the day.
While at it, I must warn that it is equally very important to identify and work with a co-founder or partner who you are certain shares the same business goal and can be the critical second eye on the business model. There is also the need for a network of human resource assets – whether employees, mentors, or freelance consultants who bring their different perspectives and skill-sets to the table. They will help you when the going gets tough.
3. A Lack of Direction & Focus
We often are faced with scenarios where two businesses set out to do the same thing or provide the same service, while one succeeds, the other fails abysmally and packs up. The reason for this may not be farfetched – the lack of direction and focus on the part of the company that failed. Not having the right direction will immensely derail any start-up especially one on the path to sustainability.
When companies fail to follow through on their primary business focus and direction without evaluating the long-term implications they end up failing.
Lacking focus can be exemplified in simple business strategies that are misplaced or wrongly channelled. A faulty move such as focusing on marketing rather than product or service improvement could lead to a company’s quick failure.
As a start-up owner, it is important to have a disciplined focus on the things that matter which are the product or service and those who utilise them– the customers. Every sustainable business creates an avenue for finding out what its customers are saying or are not saying while improving the ability to satisfy them.
4. Over Investing / Unnecessary cash flow
Investing a lot of money in a start-up can become an albatross for the start-up and invariably may lead to its failure. One of the initial mistakes growing businesses make is investing a lot of money in the early stage without a proper financial strategy.
Start-ups at the early stage need to adopt a frugal financial approach by restricting themselves to bootstrapping rather than seeking external investments or venture capital and reducing the overhead cost to the barest minimum, just enough to hit the ground running.
5. Incubating the idea or product for too long
Many start-ups are often in doubt as to the acceptability of their product or services and because they are worried, they try to do more than they should to make the product perfect. What they forget is that nothing is ever perfect and by incubating the idea for too long in a bid to attain ‘perfection’, they miss the crucial customer feedback that could help them develop a better product.
The product is always better in the hands of the customer than in incubation, because as long as it is out there, you will receive feedback and improve on it.
6. Ignoring Feedback
This is a no-brainer when it comes to the reasons start-ups fail. Once the first version of a product is launched, it becomes imperative to take user feedback very seriously. Not paying attention to customer feedback guarantees failure. Entrepreneurs must stay open to all feedback whether positive or negative, analyse them, and build a strong communication channel with customers.
By listening to their demands and designing the products they need and not what the company thinks they need, companies gain customer loyalty and dependence. It is also important to create products and services to solve the customer challenges, struggles, and frustrations by being customer-centric, and not ‘money-centric.’
7. Scaling too early
Scaling a start-up earlier than it should or when it should be left as is, is another cause of start-up failure. Companies that rush into new things or take on additional challenges without first having a proper grip of the start-up phase and its financial capacity, will most likely fail. I often advise start-ups not to scale unnecessarily. And before they do, they must ensure they have sufficient control of their finances and predictable the cash flow.
The world is moving at the speed of light towards innovation, the general appetite for the normal is waning and is being replaced with new ideas, and possibilities that give rise to new start-ups. However whether or not these start-ups remain sustainably in business or fail and be counted on the other side of the data, will depend largely on their ability to avoid the mistakes I have mentioned above or correct them timeously if they already have their hands in the pie.
Omoruyi Edoigiawerie is the Founder and Lead Partner at Edoigiawerie & Company LP, a full-service law firm offering bespoke legal services with a focus on start-ups, established businesses, and upscale private clients in Nigeria. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Our firm can be reached by email at [email protected]