The African tech ecosystem has been experiencing a boom since 2019, with startups springing up from every corner of the continent. This is hardly surprising; the continent is rife with problems waiting to be solved through technological innovations. From challenges in logistics and transportation to healthcare and payments, there is enough room for as many solution providers as possible.
Nigeria reportedly had over 3,360 startups in 2024, the most in Africa. Egypt and Kenya follow closely behind, with approximately 2,112 and 1,000 startups, respectively.
However, less than half of the startups established in Africa make it past the first few years. Globally, 90% of startups fail, with 20% failing in the first two years and 45% within the first five years.
Failure can often be a sour topic in Africa’s tech environment because African founders cannot afford to fail. For one, they do not have the opportunities many of their Western counterparts have in funding and infrastructure.
To understand the common problems that lead to failure and how to circumvent them, Techpoint Africa spoke with Justin Stanford*, a venture capitalist for over 20 years and Co-founder and General Partner at 4Di Capital, who gave insights on the struggles African startups face that lead to failure. Stanford believes that investors have a critical role to play in the success of a startup, but they can only play this role if founders communicate with them.
What are some common reasons you have seen startups fail on the continent?
I think all startups ultimately fail for the same reason. They run out of money.
Why does that happen? The answer is pretty broad, but maybe there are two core reasons. If the business is struggling to succeed, it’s going to be reliant on investor funding. So, I think one of the key issues is that, eventually, you lose the confidence of your investors to continue funding the business. And at some point, it’s impossible to keep raising more money.
I think there are so many faculties behind that. But if a business is not able to achieve product-market fit in time, it’s not able to start to scale in time. If it hits some obstacle that changes the plan or the course of the business, at some point, investors lose faith in the opportunity or the founder’s ability to keep managing the business. It becomes impossible to raise any further funding. So that’s probably the most conventional story.
In some less common cases, we have seen problems where founders end up having disagreements, having fights, and being at loggerheads with each other. I’ve seen having the wrong investors involved in a company destroy a business before. I’ve seen greater competition from incumbents also destroy a business before. Let’s say you are entering a market dominated by some large multinational corporations, and they decide that whatever you’re doing is too close to something that matters to them. They throw a lot of money at it, crushing the startup.
What are some early warning signs that a startup is headed for failure?
One thing is that the company is struggling to meet the targets and milestones it set or promised investors. Sometimes, you see that maybe spending is high, but results are low, and then communication worsens. Maybe previously, there was a lot of good communication with the investors. It starts to slow down or stop completely, or the communication becomes more defensive.
So, my advice is to communicate frequently and openly. Be honest about when things are going well and when they’re not going well. I find that if you take investors along on the journey with you, they’re far more likely to go to battle for you.
The other big mistake I see is people underestimating how long things might take and how much money they might need to survive those periods. So, if you raise money, you have to be very careful about how you manage it because everything can take a bit longer than you thought.
In your experience, do most startup failures stem from external factors or internal missteps?
I think it’s a blend. External factors imply that something outside of the business prevented it from succeeding. But it could also just be that the founders were wrong about the size of the market, the demand, or whether the customers would pay for their products. That’s also an internal mischief because you’ve incorrectly assessed the market and the opportunity. So. I think it’s kind of hard to separate it.
How do investors determine whether to cut losses on an investment or support a struggling startup?
It’s an incredibly difficult decision for investors to make. In general, investors will be prepared to give a struggling company a chance if the relationship with the founders is good, if their communication has been transparent, and if there’s some evidence to show that things are working but maybe not quite there yet. Then, I think there’s a good chance of getting some support. But if the relationship has deteriorated, if there’s fighting between the founders, or if there’s no data to show that things are working, then I think it’s more difficult, and eventually, you get investor fatigue.
Also, investors look to see what other investors are doing, so that can influence the outcome. If other investors are prepared to support, then it might influence. In contrast, if other investors are not, then one investor alone will probably not be prepared to try and support the company on their own.
What advice would you give African founders trying to circumvent the difficulties of building in Africa?
It’s a challenging environment, and it is different from overseas. So, I think that’s the first point. You have to be careful with everything you read overseas in blogs and articles about startups; many of the principles apply, but not all of the methods. For instance, on the West Coast of the United States, one method is to raise and spend a lot of money. I’m not sure that works here.
We have a different environment. So, one piece of advice is to be careful about what you read overseas and consider how it might be different.
Lastly, be careful with spending. You need to make your money go further and last longer, so try raising money earlier than you think you need it.
What lessons should founders take away from failed startups to increase their chances of success?
One thing is acting quicker to make changes when things are not working. If you see things are not working while you still have money, don’t waste time and money on them; reconsider if what you’re doing is the right thing while you still have time.
I see a lot of pivots that should have happened earlier. They happen too late, and then the money runs out, or they only happen after the company fails and the founder restarts somewhere else.
The other mistake people make is that when things are not going according to plan and spending is high, they don’t move fast enough to cut spending aggressively. You need to be willing to cut spending by 75% or more to move cash while you work out what the next step will be.
*This interview has been edited for length and clarity
