Department of informatics

Master thesis, 30 hp

IT Management

SPM 2020.08

Barriers in digital startup

scaling A Case study of Northern Ethiopia

Biniam Taddele Wedajo, Hyacinthe Kakuze

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Abstract

The advancement of digital technology has created a pathway for digital start-ups to flourish

very rapidly. However, these companies are facing resilient challenges and barriers during

their scaling. Scaling is an important stage for ventures to grow their revenue at an exponential

rate while keeping operating costs low. Nevertheless, there are several research papers that

reflect the challenges and obstacles that hinder the scaling of digital startups. There are a limited

number of scientific studies conducted in the context of developing countries. Therefore, this

study aims at investigating the key potential contributing factors in northern Ethiopia (Tigrai).

In this study, qualitative exploratory research is considered as a suitable and appropriate

method to generate contextual understanding. The outcome of the study shows that the most

noticeable themes impeding digital startups scaling are market challenges, lack of financing,

lack of support from incubators, poor digital infrastructure, digital culture, and regulatory

issues. Based on the findings this research critically suggests key applicable recommendations

to overcome those challenges.

Keywords: Scaling, Scaling Challenges, Developing countries, Digital startups, Digital

Businesses, Digital entrepreneurship.

1. Introduction

The fast pacing advancement in technology and internet maturity has created an incredible

amount of connections among people across the globe. This, in turn, has brought a vast number

of entrepreneurs to a new market for creating large wealth during what was known as the “the dot

com” era (Fairlie, 2013). Kaufman Index of Entrepreneurial Activity (KIEA) shows that the

number of entrepreneurs in the USA has been dramatically increasing after this era. Most of those

new emerging businesses are digital startups These digital ventures leverage the opportunities

provided by the internet (world wide web), mobile technologies, and media to create value to their

business (ibid).

According to Landes (2015), the economic growth of developing nations in this era is linked to

the number of ventures and entrepreneurial activities. Numerous research has shown that

entrepreneurship plays a vital role in the alleviation of poverty and promoting prosperity in the

short run whereas innovation and competitiveness will have a remarkable positive impact in

bringing growth. Regardless of this promising increment in the number of startups in Africa, the

startups in the region are facing intensive political and economic challenges ranging from

ineffective transportation systems to lack of suitable and effective technological tools (Ahmed et

al. 2013). Various researchers emphasize the need for entrepreneurial developments as of

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prominent importance to overcome poverty. According to the global entrepreneurship index,

2019 Ethiopia is ranked 111 out of 137 countries (Zoltán et al. 2019). Which makes the country as

one of the least developed nations.

For this study, startups are defined as ventures established to build something new under

extreme uncertainty (2017). As such, many startups are digital startups in the sense that they build

on digital technologies in their operations (Huang et al., 2019; Nylén & Holmström, 2019).

According to Ries (2017), scaling is one of the most important things for ventures to maximize

their chance of success. Furthermore, the lean startup methodology illustrates how startups can

take their product into the market in a shorter time. According to the definition of the scaleup

nation a scale-up "an entrepreneurial venture that has achieved product-market fit and now faces

either the 'second valley of death' or exponential growth"(Cherad, 2020). Along with digital

startups in the contemporary era, digital investment hubs are flourishing in Africa. However,

researchers showed that several obstacles are obstructing their initiation and growth of these

startups (Hain et al. 2015; Zajko, 2017). Moreover, digital startups in Africa, especially developing

nations are struggling to get the required resources, professionals and help to launch, grow, and

scale up their products and services (Kelly et al. 2016; Ngoasong et al. 2015). To our knowledge,

it seems only a few scientific studies have been conducted in developing countries concerning the

challenges that digital startups currently face and probably counter in the feature in their scaling-

up journey. Identifying and understanding the challenges and barriers of scaling earlier is

critically important for ventures for their future growth and scale-up. The lack of scientific

research paper in this field leads us to formulate the following research question: “What are the challenges digital startups face during scale up in developing countries?

In order to answer this research question, we carried out an exploratory case study on the digital

startups located in northern Ethiopia (Tigrai). The purpose of our study is to investigate the

barriers of scaling up of digital startups in the context of developing countries and to come up

with concrete recommendations to tackle the challenges during this phase. Based on the finding

the research will develop sets of recommendations for digital startups in developing countries to

help them overcome the potential pitfalls they are facing during scaling.

The remainder of this study is formulated as follows: In chapter 2 we discuss concepts related

to digital entrepreneurship in general. After explaining concepts, in chapter 3 we provide the

research methodology and case study. Chapter 4 presents the results obtained and in chapter 5

we discuss the challenges digital startups face in the alignment with findings and the existing

literature and we provide the recommendations to digital startups. Finally, we conclude and

suggest further research in chapter 6.

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2. Related Research

This chapter describes the concept of digital entrepreneurship in general, digital scaling, and

barriers that digital startups face in the scaling up phase. To achieve the purpose of our study, we

adopted a systematic review approach to investigate the existing literature. This approach allows

a researcher to select literature for a review in a structured way (Boell and Dubravka, 2010). To

cover all relevant literature for our study, we used search engines such as Google Scholar,

ACM.org, and Umeå University library search. To gather more materials about the study, we

considered keywords such as “digital entrepreneurship”, “entrepreneurship”, “digital

entrepreneurship in developing countries”, “entrepreneurship in Africa”, “scaling” and “digital

scaling challenges”. This led us to more broad articles, scientific journals and conferences which

were first narrowed down based on the publication source and the relevance. Since our study is

mostly based on the concept of digital entrepreneurship, which is broadly defined depending on

different perspectives, we explored the nature of digital entrepreneurship to better understand its

implication.

2.1 Digital entrepreneurship

In recent years, entrepreneurship has become popular and created more attention in our society.

Previous research such as Cunningham and Lischeron (1991) and Venkataraman (1997) defined

entrepreneurship in terms of who an entrepreneur is or what he/she does. However, placing the

person in the center does not include entrepreneurial activity and the opportunities it provides.

In contrast to previous research, Shane and Venkataraman(2000), Eckhardt and Shane(2003),

Drucker (2014), Autio et al. (2018) and Nambisan et al., (2019) completed the definition where

they argued that entrepreneurship is also about creating new opportunities, taking risks of the

business and taking advantage of innovation. The commonly adopted definition by Onuoha

(2007) defines entrepreneurship as “the practice of starting new organizations or revitalizing

mature organizations, particularly new businesses generally in response to identified

opportunities”. The emergence of digital technologies has changed the way the industry is

working. This fast pace has transformed traditional strategies, structures and it has opened routes

to new ways of doing business (Turuk, 2018; Ngoasong et al.2015; Bharadwaj et al. 2013).

Moreover, it has altered the concept of entrepreneurship in a significant way (Nambisan et al.,

2019) and pushed entrepreneurs to leverage the advantage of digital technologies in the business

where digital entrepreneurship becomes a growing area and it attracts more entrepreneurs.

In order to explore the concept of digital entrepreneurship, the impact of digital technology,

and the creation of new ventures, we followed a systematic review approach to study existing

literature in a structured way (Boell and Dubravka, 2010). This resulted in 40 articles that were

chosen based on keywords, abstract, and introduction related research. We narrowed them down

to 15 articles based on common repetitive insight. Therefore, we retrieved the common terms used

to explain the nature of digital entrepreneurship and we categorized into research streams (Table

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1). The following section describes the two research streams of digital entrepreneurship namely:

Digital economy with entrepreneurship and technology entrepreneurship.

Research streams Definition of Digital entrepreneurship (DE)

Related articles

Digital economy with entrepreneurship

Refers to entrepreneurship in the digital economy era.

- Davidson and Vaast, 2010 - Hafezieh et al.2011 - Zhao et al. 2016 - Turuk, 2018

Technology entrepreneurship Refers to the impact of digitization to entrepreneurial processes, outcomes, and entrepreneurial opportunities.

-Hull et al.,2007 -Sigfusson & Chetty (2013) - Ngoasong et al.2015 -Nambisan, 2017 -Rippa and Secundo, 2019 -Nambisan et al., 2019

Table 1: Stream of digital entrepreneurship

2.1.1 Digital economy with entrepreneurship

The advancement of digitalization has influenced the shift from the traditional economy to the

digital economy. Moreover, it is also applied to the entire society and not limited to the economy

only (Zhao et al., 2015). In this aspect, digital entrepreneurship is considered as the

transformation of existing businesses that drive the economy through digital technologies (Turuk,

2018; Hull et al., 2007). It contributes to the economic growth of the country where researchers

consider it as a measure of the country ‘s electronic business environment. In addition, it reflects

on how the market explores internet-based opportunities. Digital technologies have influenced

the digital economy to bring new opportunities with crucial potential business value ((Hafezieh et

al., 2011; Bharadwaj et al. 2013; Zhao et al., 2015). This explains how the digital economy provides

opportunities for entrepreneurs. According to Yetis-Larsson et al. (2015), a transition to the

digital economy has impacted entrepreneurial activity. The authors state that “In the

contemporary economy, work is increasingly becoming freelance-based while moving online.

Open-source software communities are rapidly becoming arenas in which individuals identify, co-

create, and realize opportunities through shared resources and expertise. Operating in a

communal setting, these individuals, whom we label open entrepreneurs, work and collaborate

with members of their open source community” (p.475). In this context, the digital economy

ensures opportunities for many entrepreneurs by creating new ventures in different business

areas (Zhao et al. 2016; Davidson & Vaast, 2010).

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2.1.2 Technology entrepreneurship

Digitization has transformed the aspects of business processes, models and nature of uncertainty

(Nambisan, 2017). As we mentioned before, entrepreneurship is about taking risks with more

uncertainty (Davidson & Vaast, 2010). Hence, digitization has changed the way to cope with those

entrepreneurial uncertainties and shaped entrepreneurial opportunities (Shen et.al, 2018).

Digital technologies have transformed entrepreneurs’ mentality therefore they started exploring

the potential of digital technologies on entrepreneurship and changed their decision-making

processes (Hull et al., 2007). Moreover, it is highlighted by Nambisan (2017) that digital outcomes

technologies' characteristics have shaped entrepreneurial activity and impacted its processes and

outcomes. With digital entrepreneurship, the outcomes and process became less bound due to the

infusion of digital technologies elements such as digital platforms (Nambisan, 2017).

Furthermore, elements namely digital artifacts, digital infrastructure and digital platforms enable

entrepreneurial opportunities by generating more value for entrepreneurs (ibid). Information

communication technology (ICT) enhances entrepreneurial opportunities through innovation

which in turn can stimulate the new venture creation process (Rippa and Secundo, 2019;

Ngoasong et al.2015). In short, this research stream focuses on the impact of digitization on

entrepreneurial activity and opportunities. It also explains how digital technologies have changed

entrepreneurship in a considerable way (Nambisan, 2019).

The classification of digital entrepreneurship into research streams contributes to better

understand its nature from different perspectives. The second stream fits well with existing

businesses and startups since digital entrepreneurship is about the transformation of existing

businesses and the creation of new ventures by using digital technologies (Zhao et al.,2016).

However, digital entrepreneurship in developing countries is different from that practiced in

developed countries (Lingelbach et al., 2005).

2.2 Digital entrepreneurship in the context of developing countries

The evolution of technologies has changed people’s lives and the way of doing business.

Nevertheless, the way countries embrace digital technologies and digital transformation varies

from one to another. In the USA, digital entrepreneurship has increased enormously (Fairlie,

2013). On the other hand, in developing countries, digital entrepreneurship is in its infancy phase

and entrepreneurs are exploiting opportunities provided by digital technologies to create new

ventures. Emerging economies started leveraging the importance of technology in the

entrepreneurship field a few years ago. For instance, Kenya has received various innovative and

expanding ventures in 2015 where one of the ventures disrupted the market by introducing the

combination of Bitcoin and mobile money (Ndemo and Weis, 2017). Information communication

technology (ICT) is one of the factors that shape digital entrepreneurship and trigger

entrepreneurial activities (Ngoasong et al.2015). Moreover, ICT competencies enable

entrepreneurs to provide innovative solutions to the opportunities they have identified in the

market. In Cameroon, the emergence of ICT has enabled entrepreneurs to be involved in

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entrepreneurial activity and innovation (Ngoasong et al., 2015). Many digital entrepreneurs have

emerged due to the creation of ICT hubs where entrepreneurs share ideas and get funding.

Regardless of that, Cameroon as one of the emerging economies, its digital entrepreneurship is

nascent (ibid). Internet penetration and IT development are also factors that boost the

development of digital entrepreneurship. The study by Mohnanty (2019) shows that the price of

the internet and many ICT services in developing countries such as Ethiopia is one of the most

expensive tariffs in the world. This is due to the fact that Ethiopia government owns the internet

service provider (ISP) and the existence of poor digital infrastructure (ibid). In Contrast, the rate

of the internet has increased in Iran and entrepreneurs created many digital businesses in

different areas (Hafezieh et al., 2011). This shows the growth and development of Iran's digital

entrepreneurship. However, it is in the beginning stage, researchers need to know more about it.

Entrepreneurship in developing countries differs from developed countries due to the economy

they are operating in. In addition, there are other factors that enable the development of digital

entrepreneurship for example digital infrastructure (Lingelbach et al., 2005). In developing

countries especially in Africa, the digital entrepreneurship boom, a lot of investments have been

made in tech cities, entrepreneurship training, and innovation hubs (Friederici, 2018). Different

leaders have argued that digital entrepreneurship is the driver of the development of Africa in the

21st century. They stated that “digital technologies are enabling Africa to leapfrog and experience

ground-breaking economic progress” (ibid, p.2). This proves the effort countries are putting in

leveraging the opportunities provided by digital technologies. Ethiopia, one of the fastest-growing

economies in Africa has sped up the entrepreneurial ecosystem in collaboration with incubators.

However, innovative businesses that are working outside the capital city (Addis Ababa) do not get

enough support from incubators (Africa, 2009). The literature (Carvalho et al., 2016; Kelly et al.

2016; Ndemo and Weiss, 2017) stressed the role of incubators in the growth of digital

entrepreneurship. Further, incubators help startups scale, boost their innovative ideas, and

provide funding to them which in turn bridge financial gaps.

The development of digital technologies stimulates the innovation process to open up a new

way of doing business (Tidd and Bessant, 2013). Entrepreneurs are looking for new ideas to start

their business. According to Ries (2017, p.17), a startup is defined as “a human institution

designed to create new products and services under conditions of extreme uncertainty”. At the

same time, Zajko (2017, p.2) defines a start-up as “a growth-oriented small enterprise, up to 5

years old, searching for a scalable business model or innovative product/service, and open for an

alternative financing”. The popularity and valuable literature on startups have stimulated the

emerging subject of digital startups. Those startups are founded by digital entrepreneurs (Ries,

2011; Maurya,2012). According to Quinones et al. (2015, p.2), a digital startup is defined as “a

start-up born on the Internet to sell only digital products/services exclusively online”.

Notwithstanding, this definition eliminates “e-commerce stores such as Amazon that have online

business models for distribution” (Zaheer, 2015, p.7). In contrast, this study attempts to consider

digital ventures as the companies /organizations that their business is digital such as

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goods/services or production. Digital ventures take into account the opportunities provided by

the internet (World Wide Web), mobile technologies and media to create value to their business

(Hull et al., 2007). Therefore, we can distinguish some opportunities that digital ventures benefit

from such as ease of distribution which allows products to be distributed across the world by using

the internet instead of going to stores as incumbent firms used to do in the past(ibid). Digital

goods where digital entrepreneurs can alter products and release a new product in the market at

the same time the previous one is taking place which enables entrepreneurs to rapidly respond to

the market (ibid). Another opportunity is digital service where they provide online service to

ensure the speed of customer responsiveness (ibid). Besides these benefits, digital startups also

possess the ability to rapidly scale up and establish themselves in the market (Skog et al., 2018).

2.3 Digital scaling

The life cycle of startups describes the stages that show the firm's progress from the start to its

establishment. The stages include the discovery of an idea, validation that focuses on testing the

product, efficiency which targets to increase the customer base in an effective way, and lastly scale

which proves business scalability. Every startup goes through those stages as it strives to establish

itself in the market (Marmer et al, 2011). The scale is a term that is mostly confused with growth

in the business. The definition of scale and growth overlap at times. For instance, in the industrial

age, the research describes scale and growth as the way to decrease the cost of production while

gaining competitive advantage (Kelestyn et al., 2017). This refers to the ability to add new

resources and expand the business. In such a context, it requires more time to scale up in the

industrial age. Nonetheless, scale and growth are two different things. On one hand, according to

the scale-up nation, Scale-up is "an entrepreneurial venture that has achieved product-market fit

and now faces either the 'second valley of death' or exponential growth" (Cherad, 2020, p.23). On

the other hand, growth “refers to increased revenue as a result of being in business” (Cherad,

2020, p.23), which is characterized as the growth of a company in size. For example, an increasing

number of employees, amount of offices and an increasing number of their clients.

To better understand the concept of scaling, take an example of how the product is delivered

to many customers in different ways without adding costs and resources (Growth vs. Scaling,

2014). The intuition behind this concept is the fact that companies use business models that

facilitate them to easily scale by producing more revenues and minimizing the cost (Growth vs.

Scaling, 2014). Ries (2017) stresses the role of scaling for startups where companies can realize

their early success in scaled-up deployment. Huang et al. (2017) highlighted that digital

innovation and digital technology are considered as the drivers of scale-up for digital ventures.

The authors describe how digital ventures made rapid scaling through digital innovation. Digital

ventures leverage existing digital infrastructures while scaling up instead of investing in

producing technologies to reach an economic scale (Kelestyn et al., 2017; Huang et al., 2017).

There are different ways of scaling digital ventures but the most used is scaling through the user

base. This is due to the fact that the nature of digital technology is easily reprogrammable and, in

most cases, it requires less time and resources for scaling (Kelestyn et al., 2017). A quick example

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is Airbnb which “amassed sixty million users in only eight years, due to its sustainable ways of

meeting user needs with digital technology” (Kelestyn et al., 2017, p. 4777). Nevertheless, digital

startups face many barriers and challenges in the scale-up phase (Hain et al. 2015).

2.4 Digital Scaling Barriers

According to Ansong and Boateng (2019), most of the new ventures do not survive after 42 months

of their establishment. Moreover, the report of 2012, shows how Africa has a high rate of

enterprise that fails beyond 42 months of creation, 16 percent do not survive while in the USA the

rate is 4 percent in total (ibid). This is due to the challenges these startups face while trying to

establish their business in the market. The market is one of the critical factors for the

entrepreneurship ecosystem that impacts the entrepreneur's decision and success (Isenberg,

2011). Zajko (2017) mentioned that while a startup is scaling, there are always challenges

associated with that phase. The author mentioned barriers such as regulatory and administration

as the leading challenge to scale globally (ibid). For instance, startups are disadvantaged from the

government regulatory policy because of higher taxes imposed on them and the payment to get a

license is high (Lozano and Petros, 2018). The book entitled “Digital Kenya,'' discussed the

challenges that digital enterprises face in Kenya. The authors highlighted challenges such as

culture, policy, and financing issues (Ndemo and Weiss, 2017).

The study of Russ (2018) also highlights the barriers that digital ventures face in the scaling-

up stage namely market challenges due to tough competition against established companies, lack

of financing, user acquisition, and localization and culture. The barriers listed above are also

highlighted in the study of Gill and Biger (2012). The authors argue that there are three main

challenges that small businesses face in their scale-up phases such as lack of financing, regulatory

issues, and market challenges. In addition, the study stresses the obstacles businesses face in

different regions specifically in developing countries. In Zambia, they review barriers for instance

the capital needed to scale the business and most entrepreneurs rely on their family’s support

(ibid). Okpara and Wynn (2007) underlined that most entrepreneurs in developing nations use

their savings for scaling their business because it is hard to access funding. The author

furthermore mentioned that in Nigeria, businesses face challenges in the scale-up stage such as

poor infrastructure and corruption. Besides that, extant literature (e.g. Ngoasong et al., 2015)

pinpoint high collateral requirements in the bank as a potential barrier when it comes to scaling

a startup. All these barriers cited above impede the scaling process of digital startups and it is not

surprising that digital startups struggle to establish their business in the market. According to

Ries (2017), the phase of the transformation of a startup to scale-up can result in failure or success.

The author mentioned that hundreds of entrepreneurs fail at first-hand and new ventures do not

achieve their potential.

In summary, digital startups are increasing so fast all over the world and it is creating more

attention in our society. Digital ventures scale rapidly with incremental cost and there are

numerous research papers with certain strategies and recommendations for digital startups to

scale up their business (Zajko, 2017; Ries,2017). Notwithstanding, several challenges impede the

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establishment and growth of those startups in developed as well as developing countries (Ndemo

and Weiss, 2017; Gill and Biger, 2012). Digital startups in developing countries are in their infancy

stage. There exist articles that focus on digital entrepreneurship in general (Friederici, 2018;

Ndemo and Weiss, 2017; Ngoasong et al. 2015) and different blog posts describe barriers that

entrepreneurs face in developing countries. However, it seems that there is a limited scientific

research that focuses specifically on challenges that digital startups face in the scaling-up process

in the context of developing countries.

3. Research Methodology

This section describes in detail sections that cover research methodology such as the research

approach we used while analyzing our study, case study description, sampling method, the

method for data analysis, and lastly ethical consideration and limitations.

3.1 Research approach

This research aims to investigate the challenges digital startups face during the scaling phase in

the context of developing countries. Since qualitative research helps to explore different arrays of

dimensions of the social world such as understanding and experiences (Mason, 2002) therefore,

investigating scaling challenges fits this method. In this study, qualitative research is considered

as a suitable and appropriate method to generate contextual understanding, detailed and rich

data. Moreover, it helps a researcher to understand people and the context in which the decision

will take place (Myers, 2013; Mason, 2002). According to Ritchie and Lewis (2003), there is no

single accepted way of conducting qualitative research as it depends on different factors such as

the goals of the study, the nature of the social word, and the research participants. All these factors

led to several variations of carrying qualitative research. On the other hand, Mason (2002)

stresses the key ways a researcher should follow while conducting qualitative research. The author

highlights that research should be flexible, systematically, and strategically conducted (p.8).

Hence, while conducting our study we attempted to follow these principles.

According to Yin (1994), the case study allows researchers to investigate and retain

comprehensive and meaningful characteristics of real-life events. In other words, case research is

valuable when a phenomenon is broad and complex. Moreover, the authors highlight how a case

study follows “holistic investigation” which is an important characteristic and a suitable way to

understand the general interactions among people(ibid). Furthermore, a case study is applied for

the exploration and creation of hypotheses (Dubé and Guy, 2003). Hence, we chose to conduct a

case study for our research. The concept of digital startups in developing countries is not as

famous as in developed countries thus exploratory research is required to analyze the holistic case

study to generate an explanation of processes and practices for that case study (Mason, 2002,

p.170).

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3.2 Case study description

Ethiopia is a country with nine federal states. North Ethiopia (Tigrai) state is one of those federal

states located at 12°–15° N and 36° 30' – 40° 30' E. The capital of this region is called Mekelle

where this research is conducted. Even Though, several digital startups are flourishing in

Ethiopia. Most of them are concentrated in the capital city (Addis Ababa). Most startups are

working on software development, mobile, and online applications. Very few of the startups in the

country are involved in hardware-oriented products and services. In contrast to Addis Ababa,

there are a fewer number of digital startups and incubation centers in northern Ethiopia (Africa,

2009), and most of them are concentrated in the state capital (Mekelle). Also, technological

infrastructure in northern Ethiopia is less advanced compared to the capital city. Telecom and

power supply are owned by the federal government in monopoly. In other words, neither the nine

regions in the country including Tigrai (Northern Ethiopia) nor private companies are not in the

digital infrastructure and power supply. For this study, we identified 9 digital startups operating

in Tigrai (northern Ethiopia). The objective of this study was to identify the barriers and

challenges that digital startups are facing during their scaling and come up with a concrete

recommendation to tackle those challenges. Most of the startups who participated in this thesis

are also software companies.

3.3 Sampling Method

This study aims to investigate the challenges digital startups face during the scaling phase in the

context of developing countries. According to Mason (2002, p.122), sampling and selection “are

principles and procedures used to identify, choose, and gain access to relevant data sources from

which you will generate data using your chosen methods” following this definition, we search for

a logic that those principles and procedures should follow. To select our sample, we used a

nonprobability sampling technique called purposive sampling or subjective sampling. This

technique aims to a better understanding of a study and it helps to generate rich data. Purposive

sampling is a nonrandom technique that is based on a specific theory or number of participants

(Etikan et al., 2016). There are different purposive sampling methods and the homogenous

sampling fits our study since it focuses on the respondents that have similar characteristics traits

such as jobs, the life of experience (Etikan et al., 2016; Ritchie et al., 2014). Moreover, the

researcher selects the respondents based on the knowledge or experience of them. This means

that the sample is chosen purposely. To get enough information and rich data for our study, we

selected respondents that have insight on digital entrepreneurship and scaling challenges. In

general, our respondents were chosen based on the following criteria: the company must be digital

and a startup (should be less than five years old), based in northern Ethiopian, and also the

company should have scaled up or tried. The chosen respondents were mostly the CEOs of their

companies and others hold positions that are also connected to top management. In order to keep

anonymity, the respondents were assigned names as respondent 1 to 8 (Table 2).

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Respondent Role Year of establishment

Duration of Interview

Respondent 1 Co-founder 2017 50 minutes

Respondent 2 Junior Developer 2016 45minutes

Respondent 3 CEO 2018 70 minutes

Respondent 4 CEO 2018 42 minutes

Respondent 5 CEO 2019 62 minutes

Respondent 6 Finance Manager& Co Founder 2017 35 minutes

Respondent 7 CEO 2018 48 minutes

Respondent 8 CEO 2019 65 minutes

Table 2: overview of conducted interviews

3.4 Data collection

As our study is to investigate challenges digital startups face while scaling up, we wanted to

generate data that will allow us to capture a full and meaningful analysis of the case in question.

Thus, we conducted in-depth individual interviews to explore the personal perspectives of each

informant (Mason, 2002). Interview technique engages one to one interactions or large groups.

This allowed respondents to express their views in their terms which helps the interviewer to

select relevant context (Mason, 2002). Also, we used a semi-structured interview to give our

respondents freedom to answer questions which made our discussion active (ibid). The open

discussion allowed the respondents to bring innovative ideas during the interview. The purpose

was to collect enough information therefore we formulated our questions in open-ended mode

(see appendix 1). Since we wanted our participants to feel free and express their opinions, we

started by general and informal questions to create a smooth environment. After we continued

with deep questions related specifically to our research question. As our case study is in Northern

Ethiopia, we couldn’t reach our participants physically. We chose to use digital tools to collect our

data, participants were reached via skype. Also, we utilized phone calls to those who want to. In

total, we had 9 interviewees, and the duration of the interview varied between 30-70 minutes. The

first interview was considered as a pilot and excluded from the analysis and result. Considering a

pilot interview as an indicator helps in examining the interview flow and coming up with essential

modifications (Mason,2002). All the interviews were held online, no face to face interview was

conducted.

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3.5 Data analysis

Our goal was to understand the respondents’ ideas related to the challenges that digital startups

face in the scaling-up phase. To achieve so, we used a thematic analysis method to analyze our

data. This method is used to “identify, analyze, and report patterns (themes) within data. It

minimally organizes and describes your data set in (rich) detail” (Braun and Clarke, 2006, p.6).

Following this insight, we considered this method as the best and suitable for our research.

Moreover, the thematic analysis presents important characteristics such as flexibility and

accessibility for analyzing qualitative data (Braun and Clarke, 2006). Our research follows an

inductive approach which is a bottom-up approach that provides results that are drawn from the

data (Braun and Clarke, 2012). Since thematic analysis is an iterative process, we followed all the

stages described by Braun and Clarke (2006) to retrieve important patterns in the data. The five

phases of thematic analysis are: familiarization of data, generating initial codes, searching for

themes, reviewing potential themes, and creating final themes (Braun and Clarke, 2006).

Familiarization of data: Before we conducted a thematic analysis, we transcribed our data

as we recorded our interview during data collection. The purpose of this phase is to read data and

figure out participants' opinions. This enables us to be familiar with data and retrieve common

understanding. In doing so, we read our data carefully to highlight the important and potential

items of interest (ibid).

Generating initial codes: after retrieving the potential concepts, the next phase is to

generate initial codes. This phase aims at systematically analyzing data through code (Braun and

Clarke, 2006). We went through our data and started coding using straight words from data. Our

focus was to reveal scaling challenges that participants mentioned in interviews. To capture all

angles, we went line by line, and all available data were coded. This was done by using Atlas.ti, a

qualitative data analysis software which “helps to uncover and systematically analyze complex

phenomena hidden in unstructured data” (Friese, 2019, p.5).

Searching for themes: The objective of this phase is to identify potential themes through

the previous step. We looked for initial codes and started grouping the codes into themes

according to their similarities. Since themes are formulated based on initial codes, we remained

with data that are closely related to our analysis.

Reviewing potential themes: the fourth step is done by examining the themes that are

related to our research questions. We narrowed down the previous themes we had to stay with the

most meaningful and relevant to our analysis.

Creating final themes: the last step was performed by renaming and editing the previous

themes to make them understandable by everyone. Also, we verified if the final themes reflect our

analysis and if they are concerning the literature review. The final themes we found are market

challenges, regulatory issues, lack of financing, digital culture and lack of awareness, poor digital

infrastructure, and lack of support from incubators (see appendix 2).

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3.6 Ethical aspects and limitation

Qualitative research has to take into consideration ethical issues and ethical principles while

conducting research (Ritchie et al., 2014). In our research, we followed all principles in every step

of our research design to ensure the trust of our respondents as well as the quality of our data.

Before we collected the data, our respondents were contacted via email and telephone. We

explained in detail the objectives of the study; we clarified why we have chosen northern Ethiopia

as our case study and the research’s contribution to the country as well as to other developing

countries in general. The second step was to ask our respondents consent to record the interview

as we will need it for transcription. Moreover, we explained to them that the recorded interview

will be used only for research purposes and we will only share the respondent's information such

as job titles, the year of the company was established and the area the company is operating in.

Ritchie et al. (2014) emphasize that researchers must ensure data confidentiality and anonymity

of respondents. Therefore, we removed all personal information that can reveal the identity of the

companies and the approach of scaling regarding the companies.

Besides that, there are some limitations that we should note in our research. This study is

exploratory and aims to cover the challenges digital startups face in the scaling-up phase in

developing countries. Therefore, we attempted to not generalize due to the small number of

sampling populations. Moreover, Ritchie et al. (2014) point out that case studies and purposive

sampling show less likelihood for scientific generalization. However, this is also applied to other

methods, not only for a case study and qualitative methods (ibid). Our purpose is to reveal barriers

that digital startups face while scaling up in developing countries even though they may have some

common challenges as the one digital startups face in developed countries. Another constraint

was due to the Coronavirus outbreak, we did not manage to conduct interviews for incubators

since the country is in lockdown, and respondents (incubators) postponed the interviews.

Although the data gathered from that group of incubators could be helpful as we want to see the

challenges in terms of two dimensions (startups and incubators), it is a global problem and is out

of our control. Even though we missed that group, the generated data is rich. Therefore, we argue

that the captured data answer our research question.

4. Results

This chapter covers the challenges digital startups face in the scaling up phase in developing

countries. The barriers were derived from the analysis of data and summarized into six themes.

The following section presents the results from the interviews in detail.

4.1 Lack of financing

This theme focuses on the financial issues that digital startups face in the scale-up phase. Even

though digital entrepreneurs are willing to scale their business, they need financial support to

achieve their objectives. Extant literature has highlighted how entrepreneurs need financial

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support to grow and establish their business in the market. However, if they lack support from

the government, sponsors, funding, and bank loans, it becomes a challenge for startups to grow

their company. This challenge needs to be addressed to facilitate digital startups scaling their

business. The government should support digital startups since digital entrepreneurs contribute

a lot to the development of the country. However, it happens that startups lack support from the

government which hinders the establishment and the scale of digital startups. During the

interview, respondents mentioned that the government does not support startups financially.

“The second is the lack of financial support from the government. I think they underestimate the

importance of digitizing. The government doesn’t put enough emphasis on digital startups. The

government is more interested in manufacturing”.- Respondent 5

The participants mentioned other several points related to financial issues while interviewing

them. As stated by respondent 1, the process of scaling requires financial needs. He explains that

the entrepreneurs may have the idea of how to scale his company but due to financial constraints,

the entrepreneur may end up failing to proceed to the next stage. Respondent furthermore

mentioned that scaling digital products demand immediate needs to respond to environmental

needs. This, in turn, will prolong the time for the services/product to be on the market so that the

community can use it.

“The second problem is financial needs: the immediate needs to be supported

financially to thrive or succeed. Even if you have an idea for a product, you may not

have a developer and you are not able to hire a programmer/developer or a

designer. So that could be a problem because there's no way that you can build the

application faster and give it to the community to use it”. - Respondent 1

Establishing and scaling a company requires money. This seems to be a challenge as many

startups’ entrepreneurs do not have enough money in the initial stage. Also, it is quite hard to get

loans for startups. Even though getting loans is helpful, on the other hand, it is risky since the

company is still young and there is much uncertainty in the process of scale. According to

respondent 2 who explained how lack of funding leads many startups to fail to scale. Respondent

furthermore acknowledges how he used all his savings from previous work to continue running

the business and scale the company. Moreover, the interviewed companies pointed out the

challenge of finding investors due to the fact that investing in ideas requires time and there is

much uncertainty in predicting the return of investment.

“Another challenge is capital. When you want to expand of course you need finance but getting

financial support is extremely hard. And by that, I mean investors, they're not very patient to

invest an idea that sometimes ideas take time to get the benefit”- Respondent 2

15

In general, this theme shows how digital startups need financial support to scale their business.

Moreover, it explains how a lack of funding is a big challenge for digital startups. While

interviewing, many respondents revealed that lack of funding affects their scaling process since it

takes too much time to get loans and investors to work with. They furthermore explained how

some entrepreneurs fail to scale due to financial issues. The key takeaway for this theme is that

lack of government support and funding resources impact negatively the scaling process.

4.2 Regulatory issues

Digital entrepreneurship boosts the development of the country they operate in. Each country has

its regulations regarding business creation and entrepreneurship in general. Sometimes it

happens that every region has special regulations. Scaling allows startups to establish their

business in the local and global markets. Scaling globally is a success for the company. However,

startups may face some barriers while operating in other countries or regions. The respondent

pointed out various points related to regulations issues such as the country's policies in general,

taxation challenges, and getting a license for conducting business.

According to respondent 4, the first challenge startups face is to get a license to scale their

business in the new market. He clarified that it requires much time due to government policy and

the procedures. This means that policies vary from one country to another which impacts the

scaling process to set up the business in a way that is compatible with that market. Sometimes

companies fail to meet certain conditions to operate in the host country which led them to not

scale their business. This is emphasized by respondent 7 who met that challenge while scaling in

another country.

“In the initial stages to get a license to operate in another country is very hard. I

mean it takes a lot of time and has bureaucracy. For instance, when we initiated our

company, we couldn’t find an appropriate category for our business, so the only

option was to pick some field that is similar to what we were planning. This means

the legislation by itself is confusing; there is no clear documentation every time you

want to do something you have to go through a lot of procedures”. -Respondent 7

From the answer of this interviewee, it is obvious that digital startups face an obstacle of getting

a license to conduct their business in the new market. This seems to be time-wasting since it

requires them more time, therefore, delaying the process of scaling. Besides that, companies need

to pay taxes according to governmental law. Taxation is one of the obstacles startups face in their

scaling-up process. The interviewed companies claimed that taxes are high. The respondent 3

articulated how the regulation doesn't facilitate the startup's companies. The respondent

furthermore stated that the trust for the tax system is low since they increase the tax rates very

often.

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“The third challenge is tax. As to me, the tax is extremely high or unfair since they do everything

manually, I think the tax is just a guess by the authorities. This is a big challenge; every end of

the year startups gets into trouble due to the high and unfair tax system”. - Respondent 3

This shows how digital startups face obstacles in the scaling process because taxation regulations

do not facilitate them. Moreover, there are other potential risks associated with regulations. The

respondent 6 who is the finance manager of the company mentioned that government's policies

as a potential obstacle. Furthermore, the bank’s law hinders entrepreneurs that want to get loans.

For entrepreneurs to consider a loan, it is nearly impossible if they do not have collateral.

“The main challenge is access to credit and finance. Finance Institutions do not have

trust in startups if you want to get the credit you need to have something like land

or vehicle to get credit. The loans for youth startups have been blocked for the reason

I do not know. It is hard to approach them most of the time. It is a waste to spend

time looking for credit”. - Respondent 8

To summarize, the data revealed how regulations limit the entrepreneur’s opportunities during

the scale-up phase. Respondents highlight that government’s policies do not facilitate

entrepreneurs, for example, an obstacle of limitation of international money transfer which is not

allowed in the country and difficulties of getting loans from banks. This explains how regulation

issues are a big challenge that might slow the process of the scaling and this barrier has to be

addressed to facilitate digital startups.

4.3 Market challenges

This section describes the overall challenges digital startups entrepreneurs face when they want

to scale their business in the market. Startups scale up in order to diffuse their product/services

in the market and be able to compete with established companies. However, during the scaling

process, they face some obstacles that might delay the process. The general challenges discussed

in section 2.4 were also confirmed in this study. While interviewing, the participants mentioned

the issue of competition as one of the obstacles startups face when they are scaling up. The

respondent 3 mentioned that competition is high for startups. The established companies may

have several services similar to startups. The respondent furthermore gave an example of how his

company competes with digital giants such as the Facebook marketplace since their platform

delivers similar service. Thus, scaling in the market where competitors have already operating

business models and existing products/services is a challenge for digital startups.

“The third challenge we face is competition. There are big platforms such as Facebook with

similar services to us, so the competition is not just vertical, meaning we are not just competing

with similar companies but with a broader spectrum of the digital era companies”. Respondent

3

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The empirical data also revealed the challenge of the monopoly system. The interviewed

companies mentioned how the monopoly system affects startups in the scaling process. The

respondent acknowledged how in the whole country, there is only one Internet Service Provider

(ISP) and its service is not good due to the lack of competitors. This is a potential risk for digital

companies especially in the scaling phase since the internet is key in digital entrepreneurship.

“The main challenge to me is the monopoly system of the country as you know the tale is owned

by the government there are no alternative ISP providers. The network in some parts of the

region is worse than the other. So, I think as digital companies we face some circumstances ….”

-Respondent 6

While scaling a business, startups ensure that their product and service diffuse in the market.

However, they face an obstacle in the procurement process. The market is not open and fair. The

interviewed companies mentioned how procurement procedures do not facilitate digital startups

since they are not allowed to participate in the bids when they are new in the market. There are

some requirements such as the year of establishment and the resource company should have.

They furthermore mentioned that the system is corrupted, only established companies have the

highest opportunity than startups.

“... also, the process of procurement and bids is the biggest hardship that obscures the expansion

and scaling up. The market is closed, and the system is corrupted”. -Respondent 4

The respondent 1 also acknowledges the challenges that startups face when they scale in the other

country. He explained that scale to another country is a new market that has to be explored before.

Depending on the host market and existing players, it happens that the company has to start from

scratch the project they had before. This delays the project; the scaling process and it requires a

lot of resources and time to establish the company. Respondent 7 who is the CEO of the company,

explained how they had difficulties when they were launching new software to the new market.

The existing competitors did want a new player in the market with the same business.

“.... for example, we had a challenge when we launched our service to a new market, it was an

interesting project, but the established competitors fought so that we could not make any

progress. Also, the governments kept interfering in our business by increasing tax rates and

arresting the leadership of the company”. -Respondent 7

The general picture of this theme shows how the market challenge presents a potential barrier for

digital startups in the scale-up phase. High competition is one of the biggest challenges they face

in the scaling process. Also, the data revealed the challenge of misunderstanding what the market

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needs. This refers to entrepreneurs that start their business before studying the market. Later,

when they try to scale, they face challenges since they do not know what the market needs.

4.4 Digital culture and lack of awareness

This theme describes the obstacle of lack of awareness as one of the challenges digital startups

face in the scaling stage. The general picture is derived from the empirical data of this study which

showed how people resist technology. Digital companies use technology to create value for the

business model and customer experience. In other words, they use technology as their

competence. Adoption of technology is an advantage for digital startups since their service or

products can easily diffuse the market. However, it becomes a big challenge for digital startups

when people resist adopting technology or if there is a lack of awareness. In the process of

technology adoption, it is evident that new features and new ways of working will be induced that

might create fear of the unknown due to this people might resist technology adoption. In addition

to this lack of communication, lack of digital skills, lack of training and consultation can be big

obstacles for change. In relation to this if the people do not have clear understanding the benefits

and the values of the tend to be reluctant to use digital products and services. The data revealed

the reason behind this challenge. Firstly, people tend to continue doing things as they used to and

resist adopting technology in their daily work routines. It means either people do not understand

the value of technology or they are reluctant to embrace technology. Secondly, the evolution of

technology is impacting people’s lives in general and its development differs from one country to

another. In the case of developing nations that are still in the process of embracing digitalization,

they tend to face resistance from people who do not trust the security of using technology.

The interviewed companies mentioned how people do not value the use of technology. The

respondents explained how it is difficult to convince stakeholders/customers that the product is

valuable for them. For instance, they raise the issue of what employees would do if we automated

the service. It means customers do not see the value that technology can provide to the existing

system. Moreover, another resistance occurs in organizations and institutions where they tend to

prefer to work the way they were working by using existing systems and they resist change.

“The biggest challenge we faced is the culture of the people. Digital culture has a long journey to

go. People's understanding of technology is low, and they don't understand the value of

digitization or the value of the internet. Also, the government by itself is not promoting

technology in all regions of the country”. - Respondent 5

The empirical data revealed how some people do not trust some services. This becomes a

challenge for digital startups since it can delay the scaling process of their companies while trying

to raise awareness towards technology and ensure them how their services will be secured. The

interviewee acknowledges how some people don't trust the technology when it comes to the

service which includes money transfer and personal identity.

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“Yet there is a fear of computers and technology. They don’t trust it; they want to maintain paper

records. For instance, people prefer to go to a broker instead of using apps because they do not

trust the process of using digital services. They are afraid of the service's security. That’s why I

think they hesitate to use the technology”. - Respondent 6

Conclusively, digital culture and lack of awareness is a big challenge for digital startups in the

scaling process since changing people’s culture and increasing technology awareness requires

time. Even though there are some changes and progress which somehow give a promising future,

startups are still struggling, and they need the government’s support to educate people and

promote technology to cope with this barrier. Therefore, people will understand the value of

technology and digitization in general.

4.5 Poor Digital infrastructure

This section illustrates the negative impact of poor digital infrastructure on digital startups

scaling. The general picture is derived from the empirical data of this study which showed how

Connectivity and access to digital infrastructure slow down the scaling process. Connectivity

expansion and access to data have been a universal focus for several years. The existence of a

digital economy without digital infrastructure is unthinkable because it is the core component in

serving the interest of all actors in the digital economy. However, it is one of the biggest challenges

for digital startups when there is no reliable internet connection and power supply during their

growth and scaling journey. The data shows that the monopoly internet service provider (ISP) has

left digital startups with no other alternative in terms of gaining access to the internet and power

supply which is the vital component for the existence of digital startups. The government didn’t

put enough effort and investment into improving both the quality and availability of the internet

and power supply. Accordingly, the development of digital infrastructure influences the growth of

digital startups. This has been significantly manifested in countries that build and enable physical

infrastructure with upfront and ongoing investment and were able to attract more investment.

However, the data revealed that there is a lack of the needed infrastructure for the business to

operate. This is due to the fact that there is no reliable communication network, power supply,

and e-payment infrastructures. Certain companies are working on introducing mobile payment

but still, their main concern is the reliability of their services heavily relies on the availability of

mobile and internet connectivity.

“The main challenge is poor infrastructure, internet connection and electric power. Guess what, you are a digital company and you don’t have enough access to the internet.” - Respondent 1

The respondent 4 stated that poor infrastructure is hindering their scaling. The respondent

furthermore explained how internet connectivity and power supply affect their service delivery.

On top of this, the respondent mentioned that communication with their customers is not

sufficient and most of the time it is restricted to phone calls because of slow internet connection.

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As a digital business, the internet is not just to improve the service but also it is impossible to

operate without it.

“Without the internet and power, it is impossible to give the services”. - Respondent 4

To summarize, digital infrastructure plays a vital role in the development of digital

entrepreneurship. Moreover, it boasts the scale of digital startups. Poor digital infrastructure

negatively impacts the scaling process of digital startups since digital companies need reliable

internet to operate and scale. This big obstacle needs to be addressed to facilitate the scale of

digital startups and digital companies in general.

4.6 Lack of support from incubators

This theme describes the obstacle due to a lack of support from incubators that digital startups

face in the scaling stage. Incubators and innovation hubs provide valuable help to digital startups

starting their business. The support could range from strategic mentorship up to financial and

law advice. Digital startups who manage to get supervision at the early stages are most likely to

succeed in their endeavor to attain success (Kelly et al. 2016; Ndemo and Weiss, 2017). Those

incubation centers are especially important for mainly two reasons. First, the education on

entrepreneurial skills given in universities and colleges is not sufficient to equip entrepreneurs

with the needed contemporary knowledge. Second, after entering the market, startups will face

certain challenges since they lack experience and understanding of market, laws, and regulations,

and technical skills. Therefore, they will need continued supervision and mentorship from

incubators. However, it happens that startups lack the support of the incubators which impedes

the establishment and the growth of the startups. During the interview, respondents pointed to

the issue that there are not enough incubators and the once exciting are also not functioning well.

Notwithstanding, they believe that in the future startups will be supported by the incubators due

to the new policy they introduced and some private institutions' efforts.

Second, there is no one who can connect us with those incubation centers. Of course, they are

weak for themselves. This is what is limiting the development of the startups in our region. -

Respondent 2

The empirical data also revealed that the incubators in the region are not strong enough to deliver

the needed support for digital startups. The incubation centers for themselves have a big financial

and technical constraint. The respondents mentioned that the focus of the incubators is towards

the manufacturing sector when it comes to digital business, one they don’t have a clear strategy

to support the business second they possess a limited capacity to supplement both in terms of

financial capability and technical accusations. In addition to this the number of incubation centers

in the region is few according to this respondent there is only one incubation center and it is not

functioning well.

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“No, we are not collaborating with incubation centers. The only incubation center I know is the

Tigrai sieTech and they are not functioning well even for themselves. I guess they also have

financial issue” - Respondent 8

The key takeaways from this theme are that there is an informal collaboration between incubators

and digital startups. Moreover, digital startups lack support from the incubators which

consequently impact their scaling journey. Incubators are important and play a vital role in the

development of digital startups. They boost the innovative ideas of startups as well as provide

funding to them which bridge financial gaps. Therefore, the lack of their support and collaboration

impacts the startup's growth and scale.

5. Discussion and Recommendation

5.1 Discussion

In the following, we review the detailed analysis of the case study relative to our research question:

What are the challenges digital startups face during scale-up in developing countries? While

extant literature on digital entrepreneurship in general, digital scaling, and barriers digital

startups face in the scaling phase is rich and diverse, extant literature provides little empirical

guidance on how to build sustainable digital startups in developing countries. Our findings

revealed a number of barriers facing digital startups in developing countries. Failure to consider

these barriers may have profoundly negative consequences for startup emergence and scaling.

The study revealed 6 key barriers that impede the scaling of digital startups in developing

countries namely market challenges, regulatory issues, digital culture and lack of awareness, lack

of financing, and lack of support from incubators. These challenges are discussed in alignment

with extant literature in the below paragraphs as follows.

In our literature review, we discovered that numerous researchers such as (Okpara and Wynn,

2007) noted that market challenge is one of the key obstacles faced by startups particularly in

developing countries. According to Isenberg, (2011), the market is one of the factors of the

entrepreneurship ecosystem that impact the entrepreneur's decision and success since they need

to diffuse their products in the market. Nevertheless, there are challenges associated with the

diffusion of the product or service in the market. Extant literature (e.g. Gill and Biger, 2012) points

out that market barriers harm the growth and scaling of the business. When it comes to the field

of digital business this challenge is significantly visible since “the nature of digital products and

services at its core is almost a prerequisite for replication” (Kelestyn et al., 2017, p.4778). In other

words, software products are easier to replicate than hardware, this leads to tough competition

since it is inevitable to have a unique market. For instance, one of the respondents underlined

that their platform delivers similar services to the Facebook marketplace. In this case, the

competition is extremely high since they are competing with digital giants. Competing with

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companies that have already operating business models and existing products/services is a

challenge for digital startups since it requires them much time and resources to scale up and

establish a strong market position (Russ, 2018). The existence of transparent and fair competition

in the market is a prominent important factor for businesses to grow (Okpara and Wynn, 2007).

However, all in all, the respondents mentioned that there is a considerably corrupted and

distorted market system that is hindering their growth and scaling.

Financial issues, as suggested by Russ (2018) are the potential obstacles to scaling digital

startups. Indeed, extant literature has noted that a lack of financial support and funding lead the

companies to fail to scale. This issue was confirmed in this study. For instance, one of the

respondents presented that scaling requires financial capabilities. This respondent furthermore

explained that entrepreneurs may have the idea of how to scale but due to lack of financial support

they may end up failing to proceed. As a business grows it is evident that additional resources are

required, and money is one of the most important resources for businesses to scale and operate.

This study also revealed that the government does not support the startups financially. It explains

the struggle startups face since the only important support they should have is from the

government. When you dig a little deeper, this matter mostly happens in developing countries

since in developed countries existing literature (e.g. Zajko, 2017) shows how governments support

startups. The author states that in 2016, the European Commission launched measures on how to

address startups/scale-up barriers in the member states. The policy of the commission states that

“scaling support of social startups through better access to finance and to the markets” (Zajko,

2017, p.5). To do so, they created a Pan European venture capital fund of funds to support start-

ups. In that essence, it is evident that digital startups in developing countries face a serious issue

due to a lack of support from the government. In developing countries, in most cases,

entrepreneurs depend on financial support from their families or their own because access to

funding is hard (Okpara and Wynn, 2007). This is very much in-line with what our study

uncovered where the respondent gave an example of how he invested his savings from previous

work in the scaling process. Similarly, the entrepreneurial ecosystem snapshot in Ethiopia

highlights the lack of access to finance as a major constraint for local businesses (Africa, 2009).

Reflecting on the challenge of lack of financing, we argue that digital startups in both developed

and developing countries face this barrier while scaling up. However, the magnitude differs from

region to region. In developing countries, there is limited personal and family savings to bootstrap

the startups when entrepreneurs lack the capital to scale up. Moreover, there is limited access to

finance in emerging economies in Africa for example high collateral requirements (Ngoasong et

al.2015), and the limited number of capital ventures that can support digital startups in the scale-

up process.

The other issue identified in this study is regulatory issues. It is also highlighted by Zajko (2017)

as an obstacle that most startups face in the scaling-up process. Following legalization and

regulation is one of the vital requirements for a business to function in an intended way. In

Ethiopia however, the process has been criticized for generally being challenging around the

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implementation. The extant literature has highlighted that regulatory issues are negatively

impacting the scaling of business (Gill and Biger, 2012). Similarly, in Kenya, entrepreneurs face

governmental policies and rule of law barriers in the scale-up process (Ndemo and Weiss, 2017).

During the analysis of the data and its corresponding themes, a pattern has been identified.

Government regulations vary from region to region within the country. This means digital

startups have to go through the same procedure, again and again, to obtain a license for their

business during their scaling. Moreover, the monetary policy of Ethiopia is restricting the digital

startups in the region to deliver their services and products globally since the international e-

payment is not yet available. This makes it hard for digital businesses to sell and buy their

products/services online. The tax burden for startups is relatively high since in most cases those

companies likely have a small financial annual transaction. The authors Lozano and Petros (2018)

argue that the tax for startups should be lightened including tax derogation. (Gill and Biger, 2012)

Share this suggestion. This was also reflected in the empirical data respondents state that in the

taxation system there is no special consideration for those digital startups when it comes to the

monthly and annual taxes.

Poor infrastructure is another key barrier. The Internet and power supply are some of the key

factors that boost digital infrastructure. In the contemporary era, the overall benefits of the

internet for any business is irreplaceable. Digital startups cannot conduct daily operations without

it. At the same time, it is impossible to think of a reliable internet without a sustainable power

supply. For instance, Okpara and Wynn (2007) argue that the existence of poor infrastructure has

been a bottleneck for startups to scale their business. The study conducted in Cameroon,

(Ngoasong et al.2015) identifies the problem of internet connection and due to power outages, the

internet is not always reliable. According to Mohnanty (2019), the price of many services in

Ethiopia was discounted 40% to 50%. In comparison to other countries, the price of ICT services

in Ethiopia is one of the most expensive in the globe. For example, the price of internet services

in the country is almost 100 times more expensive than India and China (ibid). This corresponds

to what the respondents reflect in the interview due to the reliability and cost of access to the

internet; sharing and storage of information are still manual in many cases. Some places still do

not have internet access which restricts digital startups from reaching out to more customers. In

other words, it slows down its scaling-up process. Similarly, our findings revealed that the

government is reluctant to embrace digital infrastructure in the country.

Another considerable challenge proposed by this study is the lack of support from incubators.

Incubators provide valuable help to startups including strategic mentorship, financial support,

technical support, and law advice (Carvalho et al., 2016). Also, Kelly et al. (2016) illustrate the role

of incubation centers and hubs in the development of the economic growth of Africa. In addition,

Ndemo and Weiss (2017), discuss the importance of entrepreneurial support systems such as

incubators and hubs in shaping the development of digital startups and digital entrepreneurship

in general. However, the incubation centers in Ethiopia are highly concentrated in the capital city.

This means the startups working outside the capital (Addis Ababa) do not get enough support

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from incubators (Africa, 2009). The analysis data could confirm this situation, the respondents

mention that there are few incubators and they are technically and financially constrained. This

study shows how a lack of support from incubators affects the scaling of digital startups.

In addition to other barriers discussed, this study also revealed digital culture and lack of

awareness as a challenge to digital startups scaling. The literature review highlights that digital

entrepreneurship in developing countries is in their infancy stage (Ngoasong et al., 2015).

Countries are in the process of embracing digital transformation which takes leadership

commitment to drive transformation and it requires time to build awareness of digital

opportunities (Westerman et al., 2014). According to the global human development index,

Ethiopia is ranked 173 which is among the lowest ranks, this correlates to the criteria for modern

development and digital capabilities (Mohnanty, 2019). In addition to this, internet world stats

2020, Ethiopian's internet penetration is 17.8% and mobile users are 50% of the population. This

is also reflected in the empirical data respondents stated that digital startups are facing challenges

to cope with technology advancement since identifying and training the right expertise for the

right position by itself requires a substantial amount of resources. Moreover, the findings revealed

that lack of awareness and inability to adopt digital culture is the key aspect that is impeding the

scale of digital startups in northern Ethiopia. People are not willing to change their culture and

adopt new technology. The reason for this challenge is the lack of digital skills and trust. For

instance, all in all, respondents mentioned that their customers prefer printed documents over

digital files.

5.2. Recommendation

In alignment with the literature and the results obtained, we developed recommendations that

will help to improve the digital entrepreneurship ecosystem in northern Ethiopia and alleviate the

challenges that digital startups are facing during the scaling phase.

Globalization & Liberalization of the ICT sector: The ICT policy of Ethiopia is criticized

for being one of the strict policies across the globe (Mohnanty, 2019). The country has only one

telecom/ Ethiotel which is owned by the government; therefore, the government should

restructure its ICT policy in a way that allows both domestic and international ICT operators to

be part of the market. In relation to this privatization will play a great role in reducing internet

tariffs, improving digital infrastructure, and enhancing the quality of telecom services.

Promote Accelerators and ICT incubation centers: The young population is an advantage

that is not yet fully utilized. Entrepreneurship training could strive for capacity building of the

youth population (Africa, 2009). Most of the accelerators and ICT incubation centers of Ethiopia

are concentrated in the capital city Addis Ababa due to the fact that digital startups in northern

Ethiopia are not getting as much support as the other startups operating in the capital. The North

Ethiopia (Tigrai) regional government should work to attract those incubation centers to the

region (Africa, 2009). There are some initiatives to establish private ICT hubs to promote socio-

25

economic development and competitiveness through innovation. Consequently, the regional

government should pay good attention to such initiatives. Digital startups in the region should

also establish a connection with those incubation centers in the capital. Through

entrepreneurship programs the scaling challenges of digital startups can be alleviated

substantially. Digital startups in the region could learn a lot from startups/businesses operating

in the capital. In this regard innovation hubs can play a vital role in bridging both sides.

Digitalize the regulatory system: Various research has shown that digitization services will

facilitate work. According to the result obtained from this study, we underline that paperwork is

time-consuming and bureaucratic procedures to get a license and pay tax. This affects the scaling-

up process since it requires time. To overcome this issue, we recommend the regional government

of northern Ethiopia (Tigrai) to digitize the system to make its services available and accessible.

Build digital culture: Delving in with the prognostications about the digital culture we

underline that inability to adopt digital culture as a challenge that both government and digital

startups should address. The development of digital culture relies on building knowledge

effectively around digital skills. In order for a society to be digitally competent, education and

training on digital skills should be a strategic priority of the government. The government should

also encourage people to utilize digital tools through various incentives, for instance by providing

discounts for people to pay through mobile money and internet banking. In relation to this, digital

startups should also strive for rising digital culture in society by preparing digital campaigns and

workshops that cater to all levels of knowledge. Moreover, digital startups should regularly revise

their business model and make sure that it encourages customers to be digitally integrated for

example by providing free membership for a certain period.

6. Conclusion and suggestion for further research

This thesis aimed to investigate the challenges that impede digital startups in the scaling-up

phase. With this thesis, we intended to address the following research question “What are the

challenges digital startups face during scale-up in developing countries? To answer our research

question, a qualitative exploratory case study has been conducted in northern Ethiopia. The study

revealed different challenges that hinder the digital startup's establishment. The challenges were

market challenges due to tough competition in digital business, regulatory issues such as high

taxes and the problem of getting licenses, finance constraint to support scaling process, poor

digital infrastructure due to poor internet connection and shortage of power supply, lack of

support from incubators and lastly the inability to adopt the digital culture and lack of awareness.

These challenges need to be addressed for startup emergence and scaling. In this study, we

consider that the barriers presented are not only related to digital startups that operate in

developing countries but also, they can be identified in developed countries. We argue that

challenges such as poor digital infrastructure, lack of support from incubators, lack of digital

26

awareness are specifically linked to developing countries whereas the other identified barriers in

this paper are common that digital startups face in the scaling-up process. The current findings

add significantly to the comparatively delimited scientific papers on scaling related challenges

and barriers in the context of developing countries. Since the research sample size was small and

incubators were not included in the study it becomes hard to generalize the findings. However,

this paper aimed to explore and uncover potential barriers in scaling and act as a starting point

for further study that delves into the challenges related to scaling digital companies operating in

developing nations. Future research could empirically investigate the barriers related to scaling

in-depth with a larger sample size of participants from both digital startups and incubators.

27

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Appendix 1: Interview Questions

Appendix 1 : Interview Questions

General questions

1. What is your role in this company?

2. Is your Company digital?

3. When was the company established?

4. Who is the founder of the startup?

5. In what industry is your company active?

More deeper follow up questions

1. How do you scale or grow? Can you describe your scaling up process?

2. How do you measure your scaling?

3. How do you track your growth?

4. Do you work with investors? If yes, in which way?

5. Are you in collaboration with incubators? Briefly explain how?

6. Who supports / sponsors your business?

7. In general, what do you think are the leading challenges of scaling up in digital

entrepreneurship (case for startups)?

8. Specifically, what are the five biggest challenges you have faced when scaling up?

9. Why do you think many digital startups entrepreneurs fail to scale up or decide not to scale

up?

Other questions

1. How do you communicate with your customers? Is there any channel?

2. How do you value their(customers) feedback?

3. Have you or do you usually cooperate/ collaborate with other startups?

4. Is there anything else you want to bring up that could be valuable in my thesis?

Appendix 2: Example of Thematic analysis process using Atlas.ti

Appendix 2: example of Thematic analysis process using Atlas.ti

Quotations codes themes

Appendix 2: Example of Thematic analysis process using Atlas.ti

Appendix 2: example of Thematic analysis process using Atlas.ti

Quotations codes themes