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How can African tech startups survive their first year of operation?

By Dr Ekenedilichukwu Gilbert Onwu

  • DEC 2022
18 minutes to read

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The high hopes of African startups

A growing number of tech startups – new businesses developed, enabled and operationalised using technology at their core – are setting up their operations in an extremely competitive environment with high expectations of success as a result of their technological DNA alone. Unfortunately, 90% of them collapse within their first year of operation. In most developing countries, that number is closer to 95%. Globally, fewer than 2% of internationally recognised tech startups come from Africa. 

What are the drivers or capabilities that tech startups can leverage to foster a strong entrepreneurial orientation and remain innovative so that they can survive and preferably thrive beyond their first year of business?

This article is based on a PhD dissertation that sought to answer the following question: What is the effectiveness of a comprehensive set of internal capabilities – specifically top management capabilities, technological competence, organisational learning capabilities, entrepreneurial orientation and innovation capabilities – to enhance tech startup performance? 

Why this focus on a combination of capabilities? Because previous studies mostly looked at one isolated driver of success at a time. This means startups often do not have a bigger picture of the capabilities required to drive success in an increasingly digitised business climate. Also, there has been no guidance on the right mix of dynamic capabilities. 

In many African countries, this knowledge gap has led to low levels of sustainable innovation and entrepreneurial activity. External capabilities, like infrastructural or macro-economic capabilities, are typically context specific or country specific and are constantly changing, making it difficult for startups to control. However, startups that develop the appropriate internal capabilities may be better positioned to perform well over time. 

Increased access to the internet on the African continent has helped tech startups reinvent their business models and improve customer and end-user experience, even though not as advanced as those in more developed markets. Importantly, the networked environment created by the internet makes it possible for tech startups to rapidly make a difference to socioeconomic circumstances. As a creator of a highly skilled workforce and catalyst for wealth creation, tech startups are becoming indispensable to African economies. Hence, there is a need to identify the organisational drivers that help or hinder the impact of entrepreneurship and innovation on startup performance. Understanding these drivers is also important to governments looking to create employment and compete on the global stage. 

This study therefore investigated the combination of internal capabilities likely to foster innovation and entrepreneurship in tech startups, and how these capabilities impact performance.

A growing number of tech startups are setting up their operations in an extremely competitive environment with high expectations of success as a result of their technological DNA alone. Unfortunately, 90% of them collapse within their first year of operation.

More about the internal dynamic capabilities explored in this study

The term dynamic capabilities refers to a firm’s ability to integrate, build and reconfigure internal and external competencies to address business needs in rapidly changing environments. These capabilities may pertain to infrastructure, management, the environment, society, investments, learning, marketing and personal capabilities that could be used to ensure startup performance. 

Various studies were scanned to gain a better understanding of the following three internal capabilities or drivers of performance over and above entrepreneurial orientation and innovation capabilities: 

  • Top management capabilities: The study asked: Would there be any effect on the entrepreneurial orientation and innovation capabilities of tech startups who developed their top management capabilities as a means of strengthening their impact on performance? To remain competitive and to develop productivity and long-term organisational success, tech startup managers should ideally have knowledge of strategy, management, technology, innovation systems, and business venturing as an interdependent system of skills. Other key capabilities highlighted include the influence of top management to diffuse new technologies in the business, and the ability of top management to make better decisions when they are flexible and participate in the firm’s processes. This means top managers can act as catalysts for innovative technology development strategies across a business.
  • Technological competence: It seems that many entrepreneurs are ready to adopt technology, but they often do not know how to incorporate it in the overall organisation. This calls for technology skills, technological will, and technology knowledge. These requirements will dictate the level of preparedness of any organisation using modern technology. Even though the research strongly suggests that developing a startup’s technological competence may lead to improved performance, its effect on strengthening the impact of entrepreneurial orientation and innovation capabilities as intervening measures of performance development has not been established. Therefore, technological competence as part of a comprehensive capabilities-based model for the performance of tech startups has been included as an important capability.
  • Organisational learning capabilities: Would there be any effect on the entrepreneurial orientation and innovation capabilities of tech startups who developed their organisational learning capabilities as a way to strengthen their combined impact on performance in African tech startups? This study hypothesised that organisational learning may have a positive effect on strengthening the combined impact of entrepreneurial orientation and innovation capabilities on organisational performance in African tech startups. This is on condition that the individuals working in these tech startups are incentivised properly and have the infrastructure to measure their goals, and that the effectiveness of internal processes are well communicated. This includes taking into account how different staff members learn. Importantly, it has been shown that organisations with a learning culture moved from the ideation phase to improved technology-based solutions more rapidly.

What are the drivers or capabilities that tech startups can leverage to foster a strong entrepreneurial orientation and remain innovative so that they can survive beyond their first year of business?

The link between innovation, entrepreneurship and performance

This study also investigated the link between innovation, entrepreneurship and performance: 

  • Innovation as a driver of performance: It has been shown that product, process, marketing, and organisational innovation can indeed drive organisational performance. The question is whether the use of this approach in the African setting would yield better results for performance than the more traditional individualistic approach currently used in the innovation process in tech startups.
  • Entrepreneurial orientation as a driver of performance: The entrepreneurial orientation of an organisation requires a proactive mindset, risk taking and innovativeness. It requires the dissemination of technology across the entire organisation, and support and commitment beyond the divisional level for the long-term sustainability of the organisation. Entrepreneurial orientation also entails the practices, processes, and styles of decision-making adopted by an organisation based on its vision. 
  • More about organisational performance: Organisational performance is a function of financial performance, shareholder value performance, and market performance. A failure to drive any of the three in a startup will often have a negative effect on overall performance. However, what drives the mindset in these startups to foster entrepreneurship, innovation and consequently performance is unclear. There is a well-established link between entrepreneurial orientation and performance, and between innovation and performance, but driving a combination of both innovation and entrepreneurship as precursor of organisational performance is largely unknown.

previous studies mostly looked at one isolated driver of success at a time. This means startups often do not have a bigger picture of the capabilities required to drive success

Using Teece’s Sense, Seize and Transform model as starting point

When looking at which constructs to include in a more comprehensive framework for tech startup performance, the literature suggests an entrepreneurial orientation and innovation capabilities. While both the entrepreneurial orientation and innovation capabilities have been individually linked to performance, their impact has been unable to fully account for the poor performance of startups worldwide. What, then, are the drivers needed to foster a successful entrepreneurial orientation and sustained innovation capabilities in African startups?

the networked environment created by the internet makes it possible for tech startups to rapidly make a difference to socioeconomic circumstances

To answer this question, the researcher started with Teece’s Sense, Seize and Transform (SST) theory of dynamic capabilities (2018). Teece’s SST model is aimed at transforming complex business problems in high-tech businesses. The three components of Teece’s framework are:

  • Sensing: This refers to a tech startup’s capability to identify new opportunities, scan the startup ecosystem, examine internal processes that need improving, and evaluate the leadership’s ability to achieve a superior competitive position.
  • Seizing: This refers to the capability to examine and exploit new opportunities, and to prepare for change – also disruptive change.
  • Transforming: This refers to the capability of the firm to create new products and processes, build new capabilities that competitors have not thought of before, and use the new capabilities developed in the sensing and seizing phases to create tangible change for customers. This capability focuses the internal resources in the tech startup on doing the things that hurt now to enjoy the benefits in the long term.

Using Teece’s SST dynamic capabilities-based approach, the final conceptual model was formulated as a set of hypotheses to be tested. Hence, the study builds on Teece’s SST theory by introducing a comprehensive capabilities-based approach to performance development.

As a creator of a highly skilled workforce and catalyst for wealth creation, tech startups are becoming indispensable to African economies. Hence, there is a need to identify the organisational drivers that help or hinder the impact of entrepreneurship and innovation on startup performance.

To test the hypotheses, online surveys were sent to tech startups in Nigeria, Ghana, Kenya, and South Africa. These African countries were chosen because it is expected that their technology hubs will be the most successful of the continent over the next decade. A total of 254 individuals completed the survey. Various tests were performed to assess the proposed model. 

The conceptual model put forward – in which proposed relationships between a set of dynamic capabilities were hypothesised – was empirically tested and found to be statistically significant. In short, the following conclusions were drawn from the hypotheses tested:

  • Top management capabilities have a positive influence on entrepreneurial orientation and innovation capabilities.
  • Technological competence has a positive influence on entrepreneurial orientation and innovation capabilities.
  • Organisational learning capabilities have a positive influence on entrepreneurial orientation and innovation capabilities.
  • Entrepreneurial orientation and innovation capabilities are both implied to have a positive influence on organisational performance.

Based on this, a framework was suggested that includes all the capabilities needed to drive tech startup performance. This approach was premised on the use of capabilities that employees and entrepreneurs of tech startups identified in the literature as relevant, meaningful and thought-provoking for tech startups looking to drive success.

Figure 1: Comprehensive SST dynamic capabilities model for performance development in tech startups

In this model, the sensing capabilities constructs were top management capabilities, technological competence and organisational learning. The intervening seizing and transforming variables were newly introduced as entrepreneurial orientation and innovation capabilities, while organisational performance was introduced as the dependent variable in this study.

there was a significantly positive effect on the performance of tech startups who focused on improving both their entrepreneurial orientation and their innovation capabilities

Key take-outs from the study

This study sought to determine how a set of capabilities drove tech startup performance and, more specifically, how these capabilities strengthened the impact, if any, of the innovation capabilities and entrepreneurial orientation on firm performance in four African countries. This was done by surveying tech startups in South Africa, Nigeria, Kenya, and Ghana exposed to both traditional and capabilities-based approaches towards enhancing performance. The following conclusions are drawn from this study: 

Top-management capabilities and technological competence as part of a comprehensive dynamic capabilities-based view on performance development in tech startups had a significantly positive effect on strengthening the impact of both entrepreneurial orientation and innovation capabilities on performance attainment in African tech startups. 

Similarly, there was a significantly positive effect on the performance of tech startups who focused on improving both their entrepreneurial orientation (which included risk taking, proactiveness, and innovativeness) and their innovation capabilities (which included product, process, marketing, and organisational innovation).

of all the drivers, top-management capabilities had the strongest effect on strengthening the impact of both entrepreneurial orientation and innovation capabilities on performance.

Organisational learning had a negative effect on strengthening the impact of both entrepreneurial orientation and innovation capabilities on performance attainment in these tech startups. Given the infrastructural challenges of tech startups on the African continent, these tech startups (about 40% self-funded) found that taking the time to learn new techniques hampered their ability to think entrepreneurially, innovate and subsequently perform. This is not so far-fetched considering the highly competitive environment in which many of these tech startups operate. Organisational learning that fosters innovation is a function of well-established internal processes underpinned by a technologically supportive environment and macro market efficiencies.

incubators and accelerators that want to help startups improve their performance need to improve these startups’ top-management capabilities in particular while also improving their technological skill, will, and knowledge

In summary, this study found that a comprehensive set of internal dynamic capabilities was effective in enhancing the performance of tech startups. It also found that of all the drivers, top-management capabilities had the strongest effect on strengthening the impact of both entrepreneurial orientation and innovation capabilities on performance.

For management practice, this study suggests that leaders in business, government, and society will require an approach toward technology, entrepreneurship, and innovation that is dynamic and that takes into account societal challenges. In addition, incubators and accelerators that want to help startups improve their performance need to improve these startups’ top-management capabilities in particular while also improving their technological skill, will, and knowledge as a way to enhance the entrepreneurial culture and innovation capabilities in pursuit of improved performance. Investors who are interested in tech startups should likewise look at the management and technological capabilities that foster tech startup performance.

  • This article is based on the PhD dissertation of Dr Ekenedilichukwu Gilbert Onwu. The title of this dissertation is Drivers of entrepreneurial orientation and innovation capabilities in African internet startups. His study supervisor was Prof Marius Ungerer, with Prof Elsamari Botha as co-supervisor – they are both from Stellenbosch Business School.
  • Access the Dr Onwu’s PhD dissertation on SUNScholar’s portal: https://scholar.sun.ac.za/handle/10019.1/123898
  • Teece, D. (2018). Profiting from innovation in the digital economy: Enabling technologies, standards, and licensing models in the wireless world. Research Policy, 47(8), 1367-1387.

Investors who are interested in tech startups should likewise look at the management and technological capabilities that foster tech startup performance.

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