Fold, rinse, repeat: risk-taking and startup failure in South Africa

Failure is basically being encouraged in Silicon Valley. The old-time favourite “failure is the greatest teacher” saying seems like their daily bread and butter. In South Africa on the other hand, there is a general fear of failure when it comes to risk-taking that makes the process much more intense, where the crazy ones are more likely to survive. With good reason, of course.

Hard truths
Five out of seven small businesses started in South Africa will fold in the first year. At least that’s according to South Africa’s Minister of Trade and Industry Rob Davies, cited in an article by Sowetan Live. These figures stack up against a global average of every one out of two small businesses.

Furthermore, The Global Entrepreneurship Monitor paints a rather bleak picture for South African entrepreneurship. Firstly, the report states that early-stage entrepreneurial activity of 2012 dropped to 7.3% from a high of 9.1% in 2011.

Secondly, only 14% of individuals intend to pursue a business opportunity within the next three years compared to a 27% average of the 69 countries that took part in the survey.

Thirdly, South Africa’s rate of perceived opportunities for its youth is 39% and considered the lowest of the sub-Saharan African countries that participated (the region’s average is 70%).

Why is this the case? It’s a mixture between both internal business decision-making and environmental or market dynamics that shape your business. As Nic Haralambous, founder of African mobile strategy firm ForeFront Africa, has pointed out previously, the “lack of funding, horrible government regulations, and red tape that often cripple a fledgling business and fundamental skills being developed in South Africa.”

A few reasons for startup failure
In a LinkedIn post, CEO at Innovation Works Kai Fu Lee has popularly jotted down some reasons he believe to be the main causes of startups’ downfall. First off, he says there is a lack of focus.

He says that smart people want to try many new ideas, but a resource-constrained startup does not have the luxury to try all these cool things.

Secondly, he says startups are often too ambitious. Startups should be focused on one area — just tackle one market, one user segment, with one compelling feature that solves a real user need. After proving a concept with a small group of users, you can then expand to more users. Then you will be well placed to discover more user needs to expand your product iteratively. This is the ‘lean startup’ methodology.

With the third point, he notes that an entrepreneur generally doesn’t scale. He argues that scaling up requires either an “experienced entrepreneur or one who is able to scale up quickly”.

The fourth point Lee believes to be startups’ popular downfall is team trust issues. As you can expect, teams lacking trust will be severely challenged by both failure (how to downsize and what to cut) and success (how to divide responsibilities and financial upside).

Poor execution sounds simple enough but it also refers to constantly staying in the game and adapting to the ever-changing environment. You must be able to execute dependably and quickly — your product needs to be updated on a weekly if not daily basis. Your leadership is maintained not by brand or by IP, but by your continual ability to execute and lead the pack.

The so-called recipe for success often reads that those who don’t stop trying — persistence — brings them out on top in the end. Throwing the dice over and over until they gain some ground. Trial and error. The right balance of luck and skill.

But in an ecosystem that doesn’t take to kindly to failure, what chances do entrepreneurs really have?

A report by Omidyar Network notes, “Lack of knowledge — and the resulting fear — among existing and aspirant entrepreneurs restricts them from taking calculated risks to start and stretch their businesses.” Are the risks too great in a region that isn’t as likely to encourage second chances?

The silver lining?
Executive Director of Global Entrepreneurship Monitor Mike Herrington says that together with cumbersome national issues, areas that require work include the following:

“Recommendations for improving the climate for entrepreneurship include overhauling the education system; identifying entrepreneurial role models within communities; improving conditions for new start-up businesses; relaxing labour laws and regulations; mentorship by bigger business; streamlining funds to reach start-up businesses; the encouragement of vigorous competition in all sectors; and promoting innovation by rewarding companies that innovate.”

According to the report by Omidyar Network, entrepreneurs must be allowed to “fail fast, fail often and bounce back.”

Then again, while that might be all true and considered good advice, Einstein’s concept of insanity — “doing the same thing over and over again and expecting different results,” doesn’t seem too far fetched in an ecosystem that doesn’t take kindly to entrepreneurial failure.

On the other side of the spectrum (and looking for the inevitable silver lining), the ones that do manage to climb out top are often considered the crazy ones anyway. Think Facebook, Google, Apple and Twitter. They all sounded crazy before they became our daily rituals.

There’s the famous 1997 ad from Apple that comes to mind. It rounds-off by saying that “people who are crazy enough to think they can change the world, are the ones who do.” And while the risks might be amplified, they should then lead to greater reward in the end. Is this the case for South Africa?

Image via theyoungthousands