Country FilesEast & HornStart-ups: Getting owned

Fri,22Sep2017

Posted on Wednesday, 31 May 2017 13:26

Start-ups: Getting owned

By Mark Anderson in Nairobi, Additional reporting by Nicholas Norbrook in Marrakech

rsz startups

For all the goodwill generated by star start-ups like M-Pesa and M-Kopa, Kenyan innovators are still selling out to foreign money too early. Major players in the tech scene are trying to change this

When Joel Macharia founded Abacus, a start-up that builds trading software for investors in Nairobi’s stock exchange, he struggled to access the seed capital he needed to grow his business. “It’s actually been a pretty rough couple of years,” Macharia tells The Africa Report. “I cut off a few deals […] as we built this platform. I was funding it by writing business articles for magazines – that’s what I was using to pay the developers.”

Abacus, which targets Kenyans in the diaspora who are interested in investing on the Nairobi Securities Exchange, now has about 7,000 users. Most of the company’s seed capital was bootstrapped, meaning funds needed to get off the ground are sourced from the founders’ friends and family. But Macharia finally got the capital to take his business to the next level. He says he has raised about $100,000 selling equity in his business over the past two years. As the world celebrates the tenth anniversary of Kenya's M-Pesa, which is among the world’s most successful financial technology innovations to date, the country’s next generation of tech entrepreneurs are facing difficulties in finding a path to success. Safaricom, the company that introduced M-Pesa, is 40% foreign owned through Vodafone’s shareholding. And equity in the country’s young companies is often sold off to foreign companies to get projects off the ground. 

CATCH UP, KENYA

“A lot of Kenya’s more prominent start-ups, or more prominent companies at least in technology, tend to be foreign owned,” Josiah Mugambi, executive director of Nairobi’s tech incubator iHub, tells The Africa Report. “When you look at the likes of M-Kopa [a solar power start-up] there’s that scenario playing out. Investment in the start-up technology sectors of Kenya, Nigeria and South Africa accounted for 80% of such funding on the continent last year, according to annual rankings from Disrupt Africa, a research outfit. But stark differences are emerging between the ownership retained by local investors across the three countries. Compared to their peers in other African countries, Kenya’s tech entrepreneurs are lagging behind in terms of ownership. 

“As someone who’s also in the start-up scene and fundraising constantly, I have seen that a lot of the people who are entering the market are not African, especially in Kenya,” says Chika Uwazie, chief executive officer of TalentBase Nigeria, which provides payroll services. “For example in Nigeria, you’ll see more Nigerians that own the start-up technology – like Paystack, Flutterwave.”

Maya Horgan Famodu, founder of Nigeria-based tech financing company Ingressive, says: “You could say Kenya [is the leading country for African technology success] if you were talking about M-Pesa and companies like that, but are they really African businesses?” Kenya’s young tech companies find it difficult to get the seed capital they need to advance to higher levels of the funding ecosystem – points where private equity and venture capital firms might be interested. Kenya’s ­private-equity sector is not very active, especially compared to other countries with thriving tech scenes. In the University of Navarra, Spain’s annual venture capital and private-equity country attractiveness ranking for last year, South Africa ranked 32nd, well ahead of Nigeria at 87th and Kenya at 92nd. 

“There is lack of money. There is a lack of African private equity firms. There is a lack of huge corporates willing to invest or having the money to invest. And that’s a real problem,” says Abdou Diop, a partner at Mazars Morocco. “And the government is not always helping, too.” These companies are also hit by a gap in the country’s financing systems, which tend to favour higher-value tech companies. Start-ups with valuations in excess of $2m tend to find funding without many problems because they can attract private equity and venture capital financing, according to iHub executive director Mugambi. “Anything less is probably not quite high enough for the big players. I think most of them do $2m upwards. A lot of the money that people at iHub need is probably one tenth of that.”

In January, iHub launched a $40m innovation fund that aims to fill this gap. The fund will start with $10m to invest in Kenya before raising more to build young companies in East Africa. While the fund is not to be owned by iHub, it will be “an exclusive investment partner to the iHub” and it will be mandated to “engage, support and promote the best entrepreneurs across Africa,” Mugambi says.

LONG-TERM VIEW

iHub’s new fund aims to inject long-term capital into the funding ecosystem. “A lot of the local investors in the past have been taking a point of view where if they are making an investment they will not necessarily want to stay long term. They are looking to make a return on investment in two years,” says Mugambi. But others say a lack of capital is not the biggest problem facing start-ups. “If start-ups show good growth and we see that they execute, we can invest ourselves and bring in co- investors,” says Kenza Lahlou, managing partner at Outlierz, a Morocco-based seed investment firm. “So it’s not only about finding the money because, maybe it’s counterintuitive, but money is available. It’s just that the investors are too afraid to invest in start-ups because it’s something that they don’t know.”

Kenya’s technology ecosystem has suffered from a lack of business advice for early-stage companies. For many start-ups, the biggest stumbling block is simply not knowing the right people or how to get connected to the right people. “A start-up needs skills. They need business acumen. They need to know how to write a business plan,” says Eleni Gabre-Madhin, the founder of Ethiopia’s commodities exchange. She is launching an agribusiness-focused incubator in Addis Ababa called blueMoon. “But at least as important as that, they also need connections to power, to people that will make a phone call, to people that will connect them to a high-net-worth angel investor. They need ­people willing to give them a deferred payment plan for legal services, financial services or web design.”

Kenya’s tech entrepreneurs want to be spending their time honing their business strategies and bettering their digital products. The opportunity cost of the disfunction of the current environment is difficult to calculate. “In the start-up community, everybody is so caught up fighting these battles and it’s an extremely difficult space to be playing in when you’re dealing with regulators and a lack of finance. You’re dealing with all these kinds of problems and that community itself tends not to grow as a community,” says Macharia of Abacus. “Because I guess if you’re going to be making contributions to a society or to a community then you need capacity to be able to do so.”

Kenya’s cabinet secretary for information and communication technology from 2005 to 2013, Bitange Ndemo, says the government must do more to help start-ups get off the ground. “The government must underwrite the period of incubation or the period of acceleration,” he says. “They must provide seed capital. Not many people provide seed funds and help start-ups to access the market.” One idea to improve Kenya’s start-up ecosystem is to construct a purpose-built tech city. Konza Tech City, under construction about two hours south of Nairobi’s city centre and dubbed ‘Silicon Savannah’, is Ndemo’s brainchild. He says the city, which will comprise a South Korean and a German university, a dedicated research facility and office space, will encourage “cross-pollination” of students, entrepreneurs and government officials. 

OTHER'S MISTAKES

“In an ecosystem you can’t have pieces scattered all over the place,” says Ndemo. “When you are in a conducive environment [it’s like]: ‘I am the one who is manufacturing a product, there are people who are looking to invest in that product and they are the people [I am] working with.’ There are people who have failed who can tell you ‘avoid this’ and stuff. There are so many things you benefit from in an ecosystem.”

Since Ndemo left office in 2013, the government agencies building Konza have struggled to stay on schedule and to convince investors that power and water supply will be adequate for the city, which is projected to cost $14.5bn to build. “I’m praying that they get back on track,” Ndemo says. But Kenyan tech entrepreneurs are sceptical that Konza will bring any real benefits. “The requirement for a physical location or a physical place for you to be able to access these benefits–and you’re not in manufacturing – doesn’t quite make sense to me,” says Macharia of Abacus. “It’s not an industry that’s based in physical manufacturing, so it’s very difficult to say as a software developer you need to be in Konza for you to get these tax breaks. You can develop software anywhere.” 

From the May 2017 print edition



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