Why do Internet startups fail?

This week’s poll was possibly our most controversial to date. We saw extensive and heated discussions cross the VC4Africa community, Linkedin, Twitter and Facebook. It is not easy to make generalizations and clearly each country, sector and business case is unique. If anything, we facilitate this conversation because we hope to identify trends, help document and learn from what hasn’t worked in the past. Building a successful business is one of the hardest things to do. For many entrepreneurs building companies in different parts of Africa assumes extra challenges. But from all of the different reasons that might cause an African based startup to fail respondents selected poor execution as the leading cause. This point was followed by lack of finance and an unwillingness to adapt to changing market conditions.

So despite often times a challenging business climate i.e. lack of infrastructure, difficulty attracting qualified staff, poor legislation, unfavorable tax climate, etc…. respondents suggested the failure of most startups rested solely on the shoulders of the entrepreneur and their poor performance. This result reflects the findings of a recent study published by the Startup Genome project. Their recently published report found that 90 percent of startups failed primarily because of ‘self-destruction rather than competition.’ The study looked at 3, 200 high-growth technology startups and pinpointed ‘premature scaling’ as a key trend. Specifically this idea that the entrepreneur is getting ahead of the game before they actually have the necessary foundations in place first. This ‘skipping’ of steps might give the impression the startup is finding success early, but lacking key pieces in the business model creates much bigger problems later in the business lifecycle. And given these are fundamental building blocks the startup is too often unable to recuperate and is forced to fold the business completely.

There are many ways this occurs i.e. possibly spending money on unnecessary things like an expensive office, hiring too many employees too early, not spending time on proper market research, running expensive customer acquisition or launching the product before it is ready. According to the Startup Genome report bout 74 percent of Internet startups fail because of premature scaling, while those who scale properly typically see growth that’s 20 times faster. Those companies that scale properly end up attracting more capital and servicing more customers. They are also the businesses that end up hiring more employees. But in how far can we compare this study focused on startups in Silicon Valley with the startups in Africa? Growing too fast was also an option in this weeks survey but surprisingly the option only received a single vote. The results of this week’s poll seem to place more emphasis on the inadequate abilities of the entrepreneur (poor implementation) than on their efforts to grow the business too fast.