Nigeria's tech startups, according to Voice of America are facing reluctance from investors, stemming from the shutdown of some prominent young companies last year. Why is this happening? The failure rate of startups, in Nigeria and anywhere else, is close to the rooftop. Are you still wondering why there is a question on sustainability in every grant application? Startups do not only fail due to no capital, some are failing due to their inability to keep the startup running after the funding period. 

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Securing grant funding is a significant milestone. However, the real challenge lies in sustaining operations and impact beyond the grant’s lifespan. This vital aspect of sustainability is often overlooked, resulting in the premature closure of many promising ventures. In this article, we delve into the importance of sustainability, the common pitfalls that can dwarf a startup from sustainability, and practical solutions to ensure long-term success.

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What is Sustainability in Grant Funding?

Sustainability in grant-funded projects refers to a startup's ability to maintain its operations and impact after the grant funding period ends. It's about building a self-sufficient organization that can weather financial storms and adapt to changing circumstances. Sustainability is the foundation for creating lasting change and empowering communities.

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Why is Sustainability Crucial for Funders?

Funders prioritize sustainability for several reasons:

• Maximizing Impact: Funders seek to maximize the impact of their investments by supporting startups that have the potential to create lasting change beyond the duration of their funding.

• Guaranteeing Return on Investment: Funders aim to achieve a positive return on their investment, and sustainable startups are more likely to generate long-term returns by continuing to deliver value and attract customers or users.

• Reputation and Accountability: Funders are accountable to their stakeholders, including donors, investors, and the communities they serve. Supporting sustainable startups enhances their reputation and demonstrates responsible stewardship of resources.

• Leveraging Resources: Funders want to ensure their resources are used efficiently and effectively. Investing in sustainable startups allows them to leverage their funding to catalyze broader social or environmental impact over time.

• Scaling Startups' Solutions: Some solutions can be replicated or expanded to reach larger populations or address systemic challenges. This is only possible if the startup sustains its operation post-funding. 

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Benefits of Sustainability for Startups

Sustainability is significant for startups beyond the grant funding period because it allows them to:

• Longevity: Sustainable startups have a higher likelihood of surviving beyond their initial funding period, allowing them to continue growing and achieving their mission over the long term. Long-standing, grant winning businesses like Crop2Cash and Lumus Global were once startups but with a strong sustainability plan.

• Stability: Sustainability provides startups with a stable foundation, reducing the risks associated with sudden disruptions or financial instability. Having a sustainability plan means a startup can stand even when shaken because they have a plan for the future. 

• Brand Reputation: Sustainable startups often build positive brand reputations by demonstrating their commitment to social, environmental, or economic causes, attracting loyal customers and investors. The longer a startup exists, the easier it is to build a reputation. 

• Innovation: Sustainability fosters innovation by encouraging startups to develop creative solutions that address social or environmental challenges, leading to new market opportunities and competitive advantages. Part of a sustainability plan includes staying ahead of the competition, and this could be achieved through innovation. With AI taking the world by storm, the addition of useful AI features can keep a startup ahead of their competitors and ensure their longevity.

• Access to Funding: Sustainable startups have better access to funding opportunities, as investors and grantmakers increasingly prioritize projects with long-term impact and viability. Most funders ask to know how long a startup has been in existence and their revenue over time: a clear indication of their interest in the startup's sustainability.

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Common Challenges Hindering Startup’s Sustainability Post-Funding 

Despite the importance of sustainability, many startups fail to survive beyond the funding period. Here are some common reasons why:

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1. Running out of Cash

Startups that fail to manage their finances effectively, including grant funding, often run out of cash and find it hard to sustain their operations after funding, leading to a premature demise. Funders require a sustainability plan from grant seekers to ascertain the level of financial management of the startup and its team. 29% of startups cease to exist for this reason. 

For example, Notify Logistics, a Kenyan startup, despite having raised $370,000, ran out of cash and ultimately shut down operations.

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2. No Market Need for the Product

Many startups often seek grant funding with ideas or prototypes and, fortunately for some, they secure funding. However, 42% of startups pack up due to a lack of market demand for their product or service. These startups fail to validate their product-market fit and often struggle to find customers, leading to a lack of revenue after burning grant funds and eventual closure. 

Dinnr, a web platform that allowed customers to select a recipe and order pre-measured ingredients with printed cooking instructions, failed because of no market demand.

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3. Outperformed by Competition

Funding can either be used to start operations, scale operations or to stay competitive in the market. However, many startups fail to take advantage of the last opportunity. Their failure to use grant funding to innovate and adapt to changing market conditions often leads them to be outperformed by their competitors, resulting in a decline in their market share and eventual closure after being funded. 

Zazuu, a British/Nigerian cross-border remittance aggregation platform, shut down after failing to secure a growth funding round due to a tough funding climate. Startups that are constantly evolving will find it easy to secure funding no matter the competition, as they are like sharks in a fish pond.

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4. Flaws in the Business Plan

Startups that fail to develop a solid business plan often struggle to scale and sustain their operations, leading to eventual closure. While some startups might not have entered the market with a poorly thought out business plan, over time, their business plan can become obsolete.

This was the case with Okadabooks, a pioneer in digital publishing and bookselling, that closed down after 10 years of operation, citing rough macroeconomic conditions. According to the CEO, the startup faced insurmountable challenges.

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5. Legal Challenges

Startups that fail to comply with legal and regulatory requirements often face legal challenges that can lead to closure. Sometimes, this might not be entirely the fault of the startup but rather due to a changing legal environment where they operate. When it happens to an unprepared startup with no sustainability plan, it could spell doom. Well, only 9% of startups that stopped operating are victims of this. 

OPay's ORide, a Nigerian motorcycle startup, was forced to stop following the 2020 ban on motorbike operations on major roads across Lagos State. The ban came shortly after raising US$120M in Series B funding.

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6. Inability to Pivot When Necessary

One of the reasons startups fail is due to the changing operating environment. In Nigeria, currency fluctuations can greatly affect startups. Even startups that secured funding recently can be caught in this situation. Startups that fail to adapt to changing circumstances will struggle to survive, leading to eventual closure. 

Here is a positive story: KiaKia Health, a multi-grant funded health startup, noticed the startup’s initial approach was not working. They pivoted into offering quick access to Sexual and Reproductive Healthcare (SRH) Information and Services. The startup is not only still in operation, it’s thriving.

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7. Overdependence on Grant Funding

Startups that fail to diversify their funding sources and rely solely on grant funding will struggle to survive beyond the grant funding period, leading to eventual closure. Available funding from funders is sometimes not enough to fund the startup's operations fully. 

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Practical Tips to Help Startups Overcome Sustainability Challenge 

• Implement robust financial management practices, including budgeting, cash flow projections, and cost-cutting measures. Additionally, diversify your revenue streams and explore alternative funding sources through partnerships to reduce reliance on grant funding alone.

• Whether with grant funding or bootstrapping, conduct thorough market research and validation before developing a product or service. Engage with potential customers, gather feedback, and iterate based on their needs and preferences. Additionally, continuously monitor market trends and adapt the offering to remain relevant.

• You entered the industry to solve a problem or do better than the existing solution. Be prepared for the entry of another startup. Conduct regular competitive analysis and allocate resources for research and development to stay ahead of the curve. Additionally, focus on building a unique value proposition and continuously improving the customer experience to differentiate from competitors.

• Remember that as a founder, when you snooze, you lose. Regularly review and update your business plan to align with changing market conditions, customer needs, and internal capabilities. Seek guidance from mentors, advisors, or industry experts to identify blind spots and refine your strategy. 

• If you are not informed, you and your business might be deformed. To avoid that, stay informed about changes in legal and regulatory environments, and proactively adapt to comply with new requirements. Seek legal counsel and guidance to navigate complex regulatory landscapes. Additionally, diversify operations and offerings to adapt to the new legal challenges in a specific sector or region.

• Have a positive mindset and be willing to pivot the business model when necessary. Continuously monitor market trends, customer feedback, and internal performance metrics to know when to change. Foster a culture of innovation and experimentation, and allocate resources for exploring new opportunities. Pivot when necessary.

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Conclusion

Sustainability determines the longevity and impact of grant-funded startups. Most funders, investors, and the broader community have a vested interest in supporting sustainable startups that drive positive change and create lasting value. Embracing sustainability from the outset is a wise investment in the future of startups and the communities they serve. Addressing the common challenges highlighted using the practical tips in this blog post can increase a startup’s chances of surviving beyond the funding period and achieving long-term success.

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