Why even well-funded startups struggle

Last week, certain news sent ripples through the burgeoning startup ecosystems in Kenya. It revealed that eight well-funded startups were facing significant challenges.

This revelation surprised a nascent market such as Kenya, which had not been accustomed to witnessing such a phenomenon.

It prompted many to ponder a question repeatedly asked in startup communities worldwide: Why do well-funded startups fail?

While the Kenyan Government has shown responsiveness to startups, external factors such as inflation and currency fluctuations can harm their operations. This could explain why companies such as Twiga actively cut operational costs to weather the financial storm.

To maintain competitiveness against global giants already leveraging artificial intelligence (AI), there is also a pressing need for regulatory sandboxes, especially in the AI sector, to facilitate its adoption by local enterprises.

To show that these challenges are worldwide, it is essential to recognise that startup failures are not unique to Kenya or any specific region.

Recent studies indicate that approximately 90 percent of startups worldwide experience their demise at some point.

Even in Silicon Valley, the global epicentre of entrepreneurship and innovation, where startups seem to thrive effortlessly, the failure rate is 83 pecent.

But despite having a solid financial foundation, what factors can we say are contributing to the downfall of well-funded startups, especially those securing Venture Capital (VC) funding? These reasons are complex.

They even include internal challenges such as pressure to perform, difficulties in recruiting and retaining top talent, inadequate business models, failure to harness the power of data, the inability to pivot at the right moment, misallocation of resources, and more.

Additionally, external factors, such as economic downturns and lack of proper markets, can play a significant role in the struggles of well-funded startups.

However, amidst this challenging landscape, it is crucial to acknowledge that not all startups face a grim fate. Some non-VC-funded startups, which embarked on their journeys around the same time as the troubled eight ones, are thriving.

An exemplary case is that of Little, which kick-started with a seed investment of $2 million from its founders. Little's recipe for success was their commitment linked to their decision to run their business without succumbing to undue external pressure.

And rather than fixating on lofty valuations, they concentrated on creating genuine value for their customers. This approach allowed Little to grow sustainably over the last six years. And today, based on its gross business metrics, the company is now valued at an impressive $250 to $300 million.

With over 200 employees, Little operates in several African countries, including Kenya, Uganda, Tanzania, Ethiopia, and Ghana.

While it is undeniable that great products will always attract customers, some startups need to pay more attention to the significance of a robust business model and a well-thought-out plan.

These two elements form the cornerstone of a successful strategy for scaling, marketing, monetisation, networking, and, most importantly, building customer value.

Achieving this without the right mix of talented and diverse team members providing different perspectives and checks and balances can be an uphill battle.

The suspicion only arises when the VC-funded startups might start imposing unrealistic expectations on their fledgling counterparts. Pursuing rapid returns on investment often results in immense pressure to achieve ambitious milestones.

Research suggests that such intense pressure can push startups to their limits and force them to crumble before gaining traction.

And in today's data-driven world, certain startups also fail to harness the power of data as a competitive tool. This vulnerability makes them susceptible to more formidable competitors in the market. While startups may face challenges, they must remember that setbacks can be stepping-stones to success.

By understanding the reasons behind these failures, they can better prepare for the journey ahead, striving to survive and thrive in an ever-evolving business world.
The writer is Kenya’s Ambassador to Belgium, Mission to the European Union, Organization of African Caribbean and Pacific States and World Customs Organization. The article is written at a personal level.