Top 4 Alarming Reasons Why Most Businesses Fail and What You Can Do To Avoid Them.

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Entrepreneurship for a couple of years now has become a hot topic in our daily lives. Every year thousands of businesses are created in Africa and offer a huge range of products and services in many industries. Many of these businesses are created by young entrepreneurs who start their ventures to make an impact in society and create wealth for themselves and their circle in the process. Regardless of the zeal most of them show in their businesses, very few of them actually survive the first two years, not even to talk about the first five years. From a global point of view, a research done by the American Labour bureau reveals that 20% of businesses fail within the first year,30% within the second year, 50% within the fifth year, and 70% within the first 10 years. These numbers though alarming, are the reality about entrepreneurship. In the face of these numbers, two questions come in mind.

What are the reasons why businesses fail and what could one do to avoid business failure? This article seeks to bring more light into these.

I – Wrong Mindset

Success
Mindset

This is a very complex issue. First, with the entrepreneurs themselves, we can observe that many just go in business for the need to make money or have the title of ‘entrepreneur’, as it has become a cool title these days. These entrepreneurs are not passionate about their field or craft but just want to make money and gain fame. Creating a business and running it is a challenging thing and when not driven by passion, as the late Steve Jobs said, will lead to abandoning and unhappiness.

Secondly, it is not in our culture as Africans to take risks and do bold things, or if we ever had that culture, we have clearly lost it. This absence of risk tolerance usually comes from the inner circle of the entrepreneur or society at large. Family members or friends will barely support your business or wish it to fail so that you go and get a usual job like any other person. This type of pressure is very unhealthy for any entrepreneur and is slowing the continent’s economic growth in the face of nations such as the United-States where there is a vivid culture of entrepreneurship.

Lastly, on mindset, we have in Africa the popular notions of small business and short-term thinking. The reason why these two go together is that when the entrepreneur starts a small business, it is essential in the logic of satisfying a present need, cover current financial needs, not an entity that can last decades and solve societal problems. When a business is created for the long term, the entrepreneur is more cautious in the execution of the company goals as he or she wants to leave a good legacy for the generation to come.

Proposed solutions: Though having multiple layers, the mindset component in entrepreneurial failure can be solved by a radical change in mindset. This change has to occur in our homes and educational institutions. The academic curriculum must include entrepreneurial courses. From primary to college, young people need to have significant interaction with basic notions in business building, risk management, and long-term thinking. Our homes also need to become more supportive and embrace the entrepreneurial journeys of their children.

II – Absence of actual demand

Business
Male and females in a kitchen

It has been observed that many entrepreneurs build their businesses on their perceptions of the needs of the market. What mostly happens with these entrepreneurs is that they may need something constantly but are unable to get it or a few people they personally know, are facing challenges in acquiring a good or service. These new entrepreneurs, from that moment, go on and start a particular business to cover these needs, failing to do proper market research to know whether the product or service they intend to offer has enough demand to sustain their business and make it profitable.

Proposed solution

Before starting any venture, proper research must be done about the product or service. This means, knowing the exact market demand. Is this demand worth creating a business for? Is the demand considerable enough to cover the monthly expenses of the business and also make profits? Am I dealing with a seasonal demand? All these questions need to be answered by the entrepreneur. Failure to do so may be fatal for the venture.

III – Lack of financial resources

Fail
Coins aligned vertically

Money is like blood for any business. Financial resources are needed for the success of any business. When starting an enterprise, there are very little chances that the revenue generated in the first six to twelve months, even up to the twenty-fourth month will be enough to cover the business expenses. Therefore businesses that start with a very little amount of money, which happens in the vast majority of cases, navigate very tough times early on in their lives. These tough times are more engraved when the demand for goods or services is very low.

Proposed solutions

The remedy that can be proposed here is that entrepreneurs possess enough financial resources to support their venture before starting them. But such a solution will take out ‘risk’, which is a key component of entrepreneurship at the core. Businesses such as FedEx have been started with only $100 and are now multi-billion dollar empires. It is just impossible to perfectly predict the future. But here what every entrepreneur needs to do is understand that his or her business can fail for lack of money and therefore satisfy the demand for a very needed product or service. Independently of how one starts, if you are the only one able to cover a particular demand, buyers are surely going to pay for your products or services.

IV – Weak entrepreneurial support system

Africa
African women chatting

Lastly but certainly not the least, every African country suffers from the non-existence of a proper and efficient entrepreneurial support system. This problem is also in three different layers.

First, there is an absence of strong policies that ease doing business in Africa. Getting a common business registration certificate in most African countries can take weeks even months, while in the USA will take as little as thirty minutes. Also, there are not enough fiscal incentives for starting entrepreneurs, who are likely to make little money in their first year of business. Added to that there is not enough trade among African countries themselves, a situation that we hope to see changing in the next months to come with the new free trade agreement that has recently been signed by most African countries.

Secondly, the venture capitalism system in Africa is very young and therefore unable to support the many businesses that we create. Many of the great companies we know today now such as Apple, Instacart have been supported by the venture capitalist ecosystem available in the USA. This is not only about money but also the right business orientation and guidance we need to make any new venture thrive.

Lastly, the banks who are among the top players in any economy are highly reluctant to provide loans to starting businesses even if some of them have been in existence for a few years and having an appreciable turnover. Most banks would rather borrow money to existing and well-established businesses than giving out financial support to young start-ups. This may be good for them on a business safety perspective, but does not help in the economic development of the continent and in the long-term will affect this same banking sector as we will nurture very few businesses

Proposed solutions

African leaders need to define and implement policies that will encourage people to venture into entrepreneurship and build long-lasting businesses that will boost African economies. We have to implement free trade agreements to get the best possible outcomes.

On the venture capitalism side, more VCs need to be created so that there can be ‘patient money’ available for entrepreneurs to develop their businesses and not having to depend on banks who are very reluctant to give them loans. This financial support must also be followed by continuous business education and guidance.

Lastly, banks must also revise their loan policy so that they can cater to young businesses.

Now as an African entrepreneur or a potential one, you have an idea of what is needed for you to succeed and what can hinder you from doing that. The change we want in Africa heavily depends on how well our economies are developed, and that implies having more businesses succeeding on the continent.

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