Startups in Nigeria: The Key Building Blocks for Running a Successful Business 

 

By Omodiaogbe Samuel

Last Updated: December 4, 2023

Introduction

Startup mortality rate is the highest in the world. Research has it that 70% of startups die within 2 years of establishment, and 90% never live to mark their 5th birthday. Nigeria is no exception. If you happen to pay a visit to the Corporate Affairs Commission (CAC) across the country, you will be marveled at how people troop in and out registering companies. Then you began to ask, ‘if 5% of these registered companies turned out to be successful, then Nigeria should be an industrialized nation.’ The fact is that most of those registered companies exist only on paper, or at best, to boost the ego if the owners. There are many reasons attributed to high mortality rate of startups, and among them are lack of market, inadequate funding, lack of structures, leadership problems, lack of planning, and so many other factors. However, we want to address the challenges of entrepreneurship in Nigeria by focusing on 5 major pillars that form the foundation of successful business venture, and they are the strategy, marketing, team, accounting & finance, and business model. Understanding these five pillars would give us insights of why startups fail early, and how to avoid the trap of early exit for our ventures. Now let’s take a deeper dive at each of them.

1: The Strategy

Broad markets

From economic perspectives, we have 4 major types of markets: perfect competition, monopolistic competition, oligopoly, and monopoly. Understanding the market you operate in from these four broad perspectives will help in structuring your business. For example, if you are operating in a perfectively competitive market, don’t expect an economic profit, and that is because you are a price taker and not price giver. For instance, if everyone is selling a delica of garri for 100 naira and you said yours is120 naira, why should I buy?  In monopolistic competitive markets, you can only win if you differentiate your product from the numerous existing ones. We have different brands of bread around our neighborhood, but we know why we love the brand we buy. They are all bread, but different in one way or the other, and that results to price variations as well. Oligopoly have structural and legal barriers that only give room for only few companies to operate, like the GSM telecom providers and beverage companies in Nigeria. Legal and regulatory policies can give monopoly rights, such as patents and government licenses to operate, and so we have monopoly in electricity in Nigeria, but that allow many companies to operate along the value chain. Big companies like Apple, IBM or Google have portfolio of patents numbering thousands. Those patents give them market protection in one way or the other. Besides, you might equally need to know about duopoly and monopsony although they are not our focus in this context

 

Industry

Apart from the broad market structure, there is need to have greater understanding of the industry you operate in. Certainly, all industries are not the same, some are more profitable than others. For example, if you’re in grocery business and projecting above 7% returns, it might be difficult to achieve that. The same applies to forest & paper industry, airline, and real estates. For example, if you are in airline business you need to know that it’s a volatile and less profitable sector. That may be the explainable reason why we have seen lots of entry and exits of airlines in the country in the past few decades. Airlines such as Concord, Okada, Nigeria Airways, Sossoliso, Birdview, Dantata, Virgin, and lots more. This is not peculiar to Nigeria, even in the US, so many airlines have come and gone. The only US airline that has consistently performed above industry average since the mid-70s is Southwest airline. The reason for its huge success is not our focus here, but it can be found by understanding the resource-based view of a firm

On the other hand, industries such as pharmaceutical, medical equipment, network and communication equipment, platform businesses, and a couple of other are highly profitable. Most profitable industries tend to be those with imperfect competition, and that means you need to provide what is not easily available, and cannot be acquired overnight. The fact is that, the profitability of your industry determines yours at the end of the day. For instance, you may not expect to earn 10% ROI for an industry that average 5% ROI, it’s going to be very difficult.

Industry Analysis

 There are many tools to analyze the industry, but here we want to focus on Porter’s Five Forces because of its robustness in looking at the industry from multiple angles. The tool was developed by Michael Porter, a Professor at Harvard Business School in 1979. The tool helps us to analyze industry from five difference approaches, and so let’s look at each briefly 

Threat of Entry: Do you want entrance to be high or low? If we’re already in the industry you want entrance to be low, but if you are yet to enter, then you want it to be high. What this is basically telling us is that the fewer the players in the industry the better for us. More players in an industry can easily drag down the profitability due to competition

Threat of substitute: substitute products or services are those that are not directly competing with ours, but can be used instead of ours. For example, Laptop versus Smartphone. Do you want the threat of substitute to be low or high? Of course, we don’t want our products or services to be easily substituted for another, and that makes us to choose industries where there’re low substitutability 

Bargaining Power of Buyers: we want an industry where buyers can’t hold us to ransom. If we’re in industry where the buyers of our products and services are few, then they have stronger bargaining power over us, and that affects our profitability

Bargaining Power of Suppliers: on the other hand, we want to operate in an industry where the suppliers are many so that none will be able to hold us to ransom. If we have strong bargaining power over the suppliers, then we could be able to negotiate prices with them downward, and that makes us much more profitable

Industry Rivalry: if the intensity of rivalry in an industry is high, it’s profitability that will eventually suffer. That was what happened in the Nigeria telecom sector when MTN started with per minute billing, and Glo emerged and slashed that to per second billing. Later, Etisalat came with ‘talk for one minute and get the next free.’ Since then, prices continued to nose dive at the detriment of the service providers. So, you don’t want an industry with high intensity of rivalry

Resource-Based View

Apart from the external analysis of an industry, there is need to focus on the competency of the firm. The idea of Resource-Based View (RBV) is that in order for a firm to create a competitive advantage, the firm need endowment of resources or capabilities that competitors cannot easily replicate. A strategic resource is an asset that is valuableraredifficult to imitate, and nonsubstitutable. Essentially, the tangibility of a firm’s resources is an important consideration in resource-based view. Tangible resources are resources that can be readily seen, touched, and quantified, such as physical assets, property, plant, equipment, and cash. In contrast, intangible resources are resources that are difficult to see, touch, or quantify, such as the knowledge and skills of employees, the brand, and a firm’s culture. In comparing the two types of resources, intangible resources are more strategic than tangible resources. Therefore, as entrepreneur or business executive who wish to achieve long-term competitive advantages, the emphasis should be developing capabilities in intangible resources. As a matter of fact, many organizations struggle in achieving that. But that is the capabilities that distinguish winners from losers in the competitive landscape.

2: Marketing

Marketing

Marketing is very important for entrepreneurial success. Our focus is going to be on the marketing concepts such as segmentation, targeting, and positioning.  This is because they have a strong strategic implication for entrepreneurial success that we need to highlight. No business can succeed without customers, and knowing your customers deeply is what these concepts help us to understand.

Segmentation: A market can consist of subgroups that are similar in certain ways, but these subgroups have different values, needs, or desires, and therefore there is need to respond to each distinctive subgroup uniquely, and that is what segmentation addresses.  Segmentation has five components; demographics, behavioral, psychographics, motivational, and firmographic segmentations.

  • Demographics segmentation comprises of age, gender, social-economics groups, and location. This type of segmentation enables us to look at the customers from the perspective of their attitude to products or services based on their demography.
  • Behavioral segmentation looks at the behavioral factors that determines the buying decisions, and so it considers what they do, their loyalty, the frequency of their purchase, and other behavioral factors.
  • Psychographic segmentation has to do with personality characteristics, and lifestyle. So, it tries to understand what kind of persons are they, their lifestyle, and their attitude toward a product or service.
  • Motivational segmentation makes us to be concerned about what motivates the consumers by trying to know what influences them, what drives them to do what they do, their intrinsic vales, and other motivational factors
  • Firmographic segmentation is similar to demographic segmentation. The deference is that demographics look at individuals while firmographics look at organizations. Firmographic segmentation would take into consideration things like company size, number of employees and would illustrate how addressing a small business would be different from addressing an enterprise corporation

By understanding the customers or potentials from these multiple perspectives, we would be able to figure out the real customers to focus on. Don’t make the mistake that everyone out there is your customer, you need to know who the real customers are. Segmentation enables you to achieve the following:

Targeting: After segmenting the market, you would now have clearer picture of the segment to focus your attention on. Targeting makes you to focus on the real customer that actually need your product or service, and that has the capacity and potential to pay for your offerings. In deciding on the market or segment(s) to target, four basic questions need to be asked:

  • How do we define the market – what its scope and constitution?
  • How is the market segmented into different customer group?
  • How attractive are the alternative market segments?
  • How strong competitive position could we take –where do our current and potential strengths lies?

Answers to these questions would help us to determine where to focus our attention and how to go after the customers that really need our products or services

Positioning: Your product or brand should establish itself in some distinctive way in the mind of the customers or prospects. Your brand needs to stand for something. Because positioning is based on the notion of differentiation, it’s important to look first at the competitive environment to know what is obtainable, from there you determine what to do to be unique. Bear in mind, positioning is not what you claim on your positioning statement, but it’s what you do to the minds of the customers. Therefore, it’s more about perception and emotional appeal than what you explicitly stated. In Nigeria for example, once you see GTBank what usually come to mind are words such as trust, professionalism, reliability, or strong. These words are how the customers perceives the bank, and that makes GTBank unique among its peers. All those words may not be explicitly stated on the positioning statement, but that is what customers sees the bank to be. On the other hand, we have other brands that have well-crafted and laudable positioning statement, and nobody cares to read because that is not what we know them to be.

Basically, what I’m saying is that you cannot deceive the customer for long, if they know you to be a bad brand, the only way to change that perception is to improve. The problem is, must entrepreneurs are only good at benchmarking, and cannot express what makes them unique. You need to let customers know what makes you unique and why they should fire their present providers for you. You can only do that by giving than what they perceive as superior both functionally and emotionally. As an entrepreneur, you need to work on uniqueness and believability of your brand at the same time, as that is the only way to guarantee customer loyalty. If you are the same as everyone else in the marketplace, why should I leave my present provider and patronize you? Why should I pay higher price for your product if you are the same or worse than what is in the market?

3: The Team

Most venture capitalist see team as the most important determinant of business success or failure. This in particular is a major challenge in Nigeria’s entrepreneurial landscape where founders see themselves as supermen that should control everything. The fact is that as human beings, we’re only very good at few things, and so you need to identify your strengths and weaknesses early enough. You need to bring in executives and board that can make-up for your weaknesses, and complement your strengths. Let’s look at the different aspects of the team.

Founding Team:

One of the most difficult challenges you face as entrepreneur is assembling the founding team. This is a major challenge because people have different motives, interests, beliefs, and purposes for what they do. The most important thing you need to do is to assemble the types that are like-minded in solving the problem your business wants to address in the marketplace, and that are intrinsically motivated to see it actualized. Money only comes when value is created, but if the focus is on money and not the value creation, then there is a problem from the onset. I have personally experienced how founding team could be demotivating and demoralizing because of diverse interests and values

Selecting the founding team goes beyond friendship, associates, or family membership. You need people that can add unique value to the business. You need people that can complement your skills. As the leader, you may be the visionary type, but may not be good at putting structures and system in place, and so you need a person in the team that is good at that. You may know the product or service to offer, but you need someone who is good at marketing or sales that can create market for the offering. You may not be good at dealing with the stakeholders of the business, and so you need an integrator to do that. You may also need a maverick who is ready to challenge decisions made, and provide alternative view, as that makes you to avoid group-think

Talent Recruitment

Most entrepreneurs make the mistake of thinking that they can only offer to bring on board people with the right skills and knowledge when they make enough money. The unfortunatehing is that you may never end up making the money with unskilled labor. You may ask ‘where do I have money to pay for the right skills when the business has not generated revenue yet’? This is a dilemma for most entrepreneurs and there is a way around it. To address that, the first thing is to find the right people that buy into your vision, and are willing to work with you to actualize it. After that, you need to offer stock options to compensate for the low wages you can offer. That makes them to be part owner in a way, and motivates them to think like you as entrepreneurs, by being interested in stock appreciation.  This is the strategy companies like Microsoft, Google, Facebook, and many other successful companies adopted. When Bill Gates started Microsoft, he brought a Steve Ballmer and other seasoned managers. At Facebook, Mark Zuckerberg brought Sharyl Sandberg to be the COO.  At Google the case was more interesting as the founders Larry Page and Sergey Brin recognized their weakness early and brought in Eric Schmidt to become the CEO. Naturally most founders like to be CEOs but the case was different at Google.  If the founders had pretended of what they were not good at and occupied the prestigious sit, the story would have been different today. Even in Nigeria, at Globacom the chairman Mike Adenuga brought in seasoned executives like Mike Jitubor and Adewale Sangowawa, to join him to kick-start the company.

Moreover, you need to recruit for fit, not solely for credentials and experience. No matter how qualified, if the person doesn’t fit into your mission and values, the person can’t achieve much. The person(s) needs to be intrinsically motivated first before thinking of how to reward them extrinsically. If from the onset you recruit people that buy into your overarching goals and purpose, then you have stated on the right foot, rather than starting with rough edges.

 

4: Accounting and Finance

Understanding the financial aspect of your business is crucial. You need to know whether you’re creating or destroying value, and knowledge of finance will help you to determine that. Value creation is what keeps you long in business, and therefore if your business is not creating value, the chances of survival is slim. Accounting is the language of business, and without it you can’t measure your performance or communicate your results. Therefore, we want to dive deeper into each of them for basic knowledge

                                                                                      Finance

Financial knowledge will help you to make good financial decision given scarcity of resources. It will help you to know the investment amount you need, the future cash flows you will generate and the expected profitability of the business. To better understand this, we want to focus on Net Present Value (NPV)). Although there are many tools out there for financial analysis, we focus on NPV not only because it’s the most popular, but also very robust and easy to apply.

Net Present Value (NPV)

As entrepreneur, you’re not just investing for the sake of it, you want to know the rate of return of your investment and when. You also want to know the opportunity cost of your investment, by looking at the next best alternative. NPV enables you to evaluate project and make comparison. You want to know beforehand whether the project you want to invest in is worthwhile before embarking on it. If the NPV of a project is negative, no matter how much you fall in love with your business idea, it will be difficult for you to make money out of it. You only need to invest in a project that has positive NPV. To calculate the NPV, all you need to know is the amount of capital required for the investment, the projected cash flows and the prevailing interest rate. Once the NPV is positive, then you need to consider other factors that are strategic in nature, but that is not our focus here.

Knowledge of the NPV is important because many companies have invested in businesses that never guaranteed adequate returns, and they borrow with high interest rate for such projects. That is a big problem because you’re not generating enough cash flow, but paying back the capital borrowed and the high interest rate as well. A lot of companies have failed because of that and so you need to be certain of you returns before investing. For example, the Adjakuta Steel Mill is a federal government project that engulfed billions of dollars of investment, but the project failed to generate any returns. This does not happen to government projects alone, but lots of private investments are guilty of it as well. Proper NPV calculation will enable you to understand whether you are creating value or not, and avoid the trap of investing in wrong projects.

                                                                      Accounting

To better understand the importance of accounting for business success, we need to look at cost accounting and financial accounting in a bit detail.

Cost Accounting:

 This is all about the internal operations of the business, and how to better manage cost for efficient operations. There is need to understand the fixed, overheard, and variable costs of your production. More importantly, you need to know the unit cost of your production. For example, if you are producing biscuit, how much does it take you to produce one pack when you factor in all costs? This is an area where most entrepreneurs usually make a mistake, instead of figuring out their unit costs, they benchmark against competition. You need to know your unit costs as that will determine your selling price. For example, if others are selling a pack of biscuit for 10 naira and it took them 6 naira to produce it, and you sell at the same 10 naira but it took you 8 naira to produce a pack, then you’re already at competitive disadvantage. So, you need to either reduce you cost of production substantially, or figure out ways to charge more.

Break-even point: the important thing you need to know is how many units you need to produce to arrive at breakeven point. Most businesses fail because they never sell enough to arrive at breakeven, and so you need to know the number of units to sell to breakeven. For example, when I saw the smartphone produced in Nigeria, Afrione, I loved it, but then I asked myself, how can they breakeven? In such a low margin business you need to sell a very large quantity to breakeven, but Nigeria being dominated by foreign brands, and the market of smartphone already matured, then it will be difficult for Afrione to sell enough to breakeven. What I’m effectively saying is that you need to understand your market and know the number of units to produce in order to breakeven before ever thinking of production. As a matter of fact, you can even set profit target and know how many units to sell to attain such profit. That is what will drive and motivate your marketing and sales teams to push beyond their boundaries

Financial Accounting:

The main components of financial accounting are the balance sheet, the income statement (profit & loss) and the statement of cash flows

Balance Sheet: what the balance sheet gives you is the financial situation taken at a particular point in time, usually the end of the financial year. The components of the balance sheet are assets, liabilities, and the stockholder’s equity. On the right-hand side, you have the liabilities and equity. The equity is the fund you have available for your company. Since the equity is not enough to meet your investment and production needs, you go to the bank for loan (liabilities). On the left-hand side, you have the assets which is the value of the firm, and that is further subdivided into current and non-current assets. Basically, the asset is what the company own, while the liabilities is what the company owe, and the equity is what the owners own

Income Statements:  This measures the firm’s performance over period of time. It’s here you are able to know you topline (sales of products and services), determine all the cost you incurred to in the production, and then eventually arrive at the bottom line (net income/earning). It’s very important to note here that you don’t need to take your eyes off the bottom line. You can sell as much quantity as you want, but if that doesn’t reflect on the bottom line, then there is a problem. Therefore, you need to be concerned with the profit you are making at the end of the day, not just how much you sold. If you’re selling much and it doesn’t reflect on the bottom line, then you need to look at your operations deeply. You need to look at your systems to see if there are areas that are shooting up the cost. It could be as a result of overemployment, poor working capital management, poor supply chain management, or poor pricing of your products or services. You need to identify the cause and manage it promptly in order to return to profitability

Statement of Cash Flow:  There are three components of statement of cash flow we need to focus on: operations activities, investment activities, and financing activities

Operating Activities: this has to do with transactions related to providing goods and services to customers, and paying expenses related to generating revenue. Positive cash flow from operation is very important for entrepreneur, that is because if you can organically generate cash flow from your operation, you would be able to fund your investment activities without resorting to excessive leverage. That means the money you would have spent on interest payment could be saved

Investing Activities:  this has to do with transactions related to acquisition or disposal of long-term asset. As entrepreneur, you always invest in asset because they determine your productivity at the end of the day. There are businesses that are assets-light, while others are assets-heavy. So, depending on the nature of the business you still need to invest on asset. It might be the nature of your business is skill-intensive, and so you spend more on wages and salary. For example, if you are into Cyber Security business or services related to Artificial Intelligence (AI) or Data Science, you know skilled labor in those fields are scarce, and so they don’t come cheap. Therefore, you may not be spending too much in assess acquisition, but paying heavy wages and salaries

Financing Activities: this has to do with transaction related to owners or creditors. The question is how do you finance you investing activities or run your operations? Bootstrapping is very good, but if you want to grow fast, external financing is inevitable. You either raise funds through equity or debt. Equity means you don’t have to pay back in cash, but you do that in kind, as you need to give up part of your stake in the company to realize that. On the other hand, debt means you would need to pay back the loan with interest, while retaining your equity stake.  Equity funding is not very popular in Nigeria, but is better for startups. You can’t be paying capital and interest when you have not started generating positive cash flows from operation. Moreover, interest rates in Nigeria in double-digit, and that could mean whatever you generated from your operations may not be enough to payback the capital and interest. How do you run your business if all you work for is paying back your loan and interest? That could lead to early failure of the venture. As a result, you need to think deeply about your Weighted Average Cost of Capital (WACC)

5: Business Model

The battle of business is usually won or loss depending on the business model adopted. This is where your creativity as an entrepreneur becomes very important. You need to figure out the business model that can make you distinctive, and enable you to generate superior value. A tool such as Business Model Canvas developed by Alex Osterwalder and Yves Pigneur is very good at structuring your business model:

                                                       Business Model Canvas

The 9 blocks are: value proposition, customer relationship, customer segment, channels, key partnership, key activities, key resources, cost structure, and revenue stream. However, our focus here is not to explain each of the components in detail, but you need to understand how to innovate with business model canvas, by delivery more or less of each of the components. Business model innovation is not all about technological innovation, but also has to do with process innovation, and product/service innovation. Business model innovation is what lead to the creation of companies like Uber, Airbnb, Alibaba and related companies. For example, taxi renting has always been around but Uber was able to deploy technology to make the process much more efficient on a large scale. Uber created a multinational company out of what ordinary people have been doing for ages, and today Uber is worth over $60 billion. Hoteling and house renting have always been around, but Airbnb came with a business model that allow home owners to share their apartments with strangers for a fee. The company is powered by technology that match home providers and customers together, and today the company is worth over $30 billion. The point I’m trying to make is that business model innovation requires creativity and deep customer insights

Business model innovation forces you to thing deeply about your business in a holistic way, of how to compete better, of the technology that is likely to disrupt your industry, on how to design your process to be more responsive, and on how to develop products that delight the customers. For example, in Nigeria telecommunication sector, CDMA (Code Division Multiple Access) was the dominant technology before the coming of GSM (Global System for Mobile Communication), and even at the early days of GSM. Then companies like Stacomms, Multilinks, Visafone, En-International System Ltd (EMIS), Inter-Cellular, Mobitel, Independent Telephone Network (ITN), VGC Communications, etc. were all around. All the CDMA technology companies were all striving, but how come none of them is around anymore? You may think it’s because of the technology, but that is wrong. CDMA technology is the dominant technology in China, India, and even in the US. It failed miserably in Nigeria, not because of the technology, but the business model they adopted

It’s equally important to know the market you operate in as that will determine the business model you need to apply. For example, up till 2007, Apple was a computer company, and at that time it was called Apple Computer. But in that year, Apple came to the realization that it could do more than confining itself to a restricted computer business. Therefore, it decided to change its name from Apple Computer to Apple Inc. Now the company saw itself as a Consumer Electronics company, and not just computer company. It was that change of mentality and mindset that gave birth to products such as iPod, iPhone, iPad and other i-Devices and i-Wearables. If Apple had remained in the narrow market of computers, no matter the ingenuity of Steve Jobs, Apple would have suffered the fate of IBM computer or Dell Computer. The main problem was Apple Computer was powered with proprietary technology, as opposed to open technology, and that technically put Apple Computer at competitive disadvantage. So, Apple market share was less the 7% and continued to nose-dived before it eventually made a radical shift on the business model

Back home in Nigeria, inappropriate understanding of the market it was operating in was what led to the downfall of DAAR-SAT, a cable arm of African Independence Television (AIT). Been a media company, it saw cable TV as a media business, and therefore thought it could use its capabilities in the media business to expand to cable TV hence the DAAR-SAT. What AIT did was using the same business model of its media company to run cable-TV business, and it failed miserably. Multi-Choice the owner of DSTV, GOTV and Explora is a Technology Platform that distributes media content, and not a media company. Basically DAAR-SAT was supposed to be a technology business that distributes media contents and not media business. AIT management misread the market, and that informed the business model they applied. As a result, the business failed with billions of naira going down the drain. Now, Multi-Choice enjoys monopoly in Nigeria, not because it was legally given, but by applying the right business model. Essentially, the point I’m trying to make is that you need to have deep market understanding to know the appropriate business model to apply.

                                Conclusion

There is high mortality rate of startups, but most entrepreneurial mistakes are avoidable. These four building blocks for success was met to highlight the key point you need to note in order to avoid the untimely death of your business. We explained the importance of understanding the market you operate in. You need to have the right team that key into your vision and who are willing to make the necessary sacrifice to actualize it with you. Accounting and finance enable you to make decisions based on data, and to measure your performance from the data generated. Business model determines how you play to win, and how to differentiate your business in order to create superior value. However, the building blocks should not be seen as silos, but all need to work together and create a synergetic-fit in order for you to be competitive

Omodiaogbe Samuel, MSc. CMC, ChMC, FIMC

Omodiaogbe is a Strategic Management Consultant, and he the Principal Consultant/CEO at Vast Thinking Consults Ltd where he help organizations and business leaders to create superior value. Omodiaogbe holds BSc. and MSc. in Economics. Also, he is a Certified Management Consultant (CMC), a Charterd Management Consultant (ChMC), and a Fellow, Institute of Management Consultants, Nigeria. He is an Instructor on Coursera, where he teaches 25 courses in Strategic Management. Omodiaogbe is one of the world’s leading learners on Coursera and Edx with over 500 Certificates from top-ranked Universities and Business Schools. 

Contact him:
Email; somodiaogbe@vastthinking.com.ng
Visit: www.vastthinking.com.ng

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