Understanding the key drivers that turn an entrepreneurial mindset and innovative ideas into high-performing businesses could hold the key to reducing the 95% first-year failure rate of African tech startups. This, in turn, could unlock their potential to boost economic growth and job creation.
Entrepreneurship is seen as the catalyst for addressing Africa’s socio-economic challenges. But, while the continent has no shortage of innovators and entrepreneurs willing to take risks, the performance of many startups is limited by their lack of the know-how to achieve growth and scale.
Less than two percent of internationally recognized high-tech startups originate from the African continent. Of the 600 “unicorn” tech startups (companies valued at over $1 billion) in the world, the African continent, with over a billion people, has produced just seven.
New research at Stellenbosch Business School has identified and developed a model of the most critical capabilities that enable startups to identify and exploit opportunities, drive delivery of innovative products and services to consumers, and build sustainable businesses that attract investment.
Stellenbosch Business School business management and administration graduate Dr Ekene Onwu surveyed more than 250 people engaged in tech startups in four African countries – Ghana, Kenya, Nigeria and South Africa. This enabled him to study the drivers of entrepreneurial orientation and innovation capabilities in African tech startups.
The four countries together have attracted the most startup investment on the continent to date.
Onwu Says, “The research indicates that tech startups that cultivate a comprehensive, developmental approach that looks at their top management capabilities, their technological competencies as well as their ability to foster rapid and locally relevant learning, have a better chance of succeeding despite the obvious macro-economic challenges in Africa’s dynamic and complex business terrain.”
He hopes that by applying his “sense-seize-transform” African model of interlinked, dynamic capabilities, startups and their founders will have a better set of performance indicators to assess their “culture, mindset, behaviours and ability to succeed, where so many seem to have failed before”.
Onwu’s research and model challenge the prevailing mindset of entrepreneurship in Africa.
His research identified that the capabilities of top management, the business’s technological competency and the ability of the organisation to learn and adapt to a changing environment are the key factors that enable the business to identify (sense) and seize opportunities, and transform them into sustainable business success through an entrepreneurial mindset and ability to innovate.
“Having the ‘technological DNA’ alone is not enough to guarantee success in highly competitive and rapidly evolving digital environments. Many businesses fail because they lack the knowledge, networks and capabilities to effectively drive their performance.
“To achieve favourable business outcomes in high-tech environments, startups must be able to constantly sense opportunities, and strengthen their capabilities to seize and transform opportunities and tackle complex business problems, threats, and opportunities as and when they appear.
“Achieving these capabilities allows the tech startup to drive productivity and bring changes in the market that its competitors are unable to.”
The knowledge gap in many developing countries, on what business capabilities to foster and focus on, has led to low levels of sustainable innovation and entrepreneurial activity, threatening much-needed employment creation and economic productivity.
“Ensuring the success of tech startups on the African continent has become increasingly important in helping nations combat socio-economic challenges such as high rates of unemployment, food and healthcare insecurity, environmental sustainability, financial exclusion, and infrastructural deficiencies,” said Onwu..
“Tech startups need to succeed as they are drivers of economic development and productivity improvements and are the catalysts for novel industry, product and service creation as well as attracting foreign direct investment to developmental sectors.”
However, the performance of tech startups across multiple sectors and industries on the African continent had been “dismal”, he said, with very few attracting venture capital investment or being targeted for acquisitions by larger, more established businesses, in comparison to startups in the West. These are considered key indicators of startup success.
While venture capital investment of $560-million in some 80 African startups in 2017, showing year-on-year growth of over 50%, could be seen as positive for the continent, he said this was negligible compared to the USA alone. In the same period, over 8,700 US tech startups attracted $85-billion dollars in investment, representing growth of over 400%.
In Onwu’s research sample, 37% of the businesses were self-funded, while only 7% had attracted venture capital investment.
Infrastructure challenges on the African continent play a significant role in hampering business startups, with 61% of the startups that Onwu surveyed struggling with access to electricity and 71% lacking reliable internet access.
However, since these challenges are largely out of the business’s control, Onwu focused on the internal dynamic capabilities that enable startups to survive, adapt to change and grow despite Africa’s complex and dynamic business landscape.
His research found that improving top management capabilities (to think, to network, to lead and to effectively deploy technical resources) and the business’s overall technological competence had the greatest positive effect on both its entrepreneurial orientation and innovation capabilities, and strengthened their combined impact on the firm’s ability to perform.
“The findings also indicated that there was a positive effect on the performance of tech startups who comprehensively focused on improving both their entrepreneurial orientation (being proactive, risk taking, autonomous etc.) and their innovation capabilities (product, process and marketing innovation) simultaneously.”
The significance of his research is that the capabilities and drivers are usually studied and considered in isolation and inferences made from them are often over simplistic and impractical, but his model takes a comprehensive, integrated view that highlights their linkages and directly links a key set of capabilities to organisational performance.
“Startups often look at capabilities in isolation as drivers of success, but this limited focus does not give them the comprehensive overview needed to drive success in an increasingly digitised business climate.
“Startups that develop the appropriate internal capabilities, and take a holistic, integrated view, can better understand where exactly investments are needed internally to foster their growth, scalability and ability to drive performance. It is about simultaneously looking at the capabilites of the top managers, the technological skills, knowledge and will of the whole startup, their ability to learn and unlearn processes in a way that’s entrepreneurially deep and innovatively robust that will impact their ability to perform and survive doing business in Africa.”
Onwu’s research received the award for the most outstanding futures-related PhD in business management and administration at Stellenbosch Business School.