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Venture capital: Kenya waiting for lift off

Posted on Tuesday, 7 June 2016 12:00

Every day, a fleet of motorcycle couriers whisks tubs of pad thai, business contracts and laptop chargers forgotten in the office through Nairobi’s notoriously congested streets.

Smartphone users across the city beckon delivery men using a new-age solution to an old-school problem: these drivers are part of Sendy, a mobile delivery app. It was founded by Meshack Alloys, who is one of Kenya’s promising young entrepreneurs attracting local and international investors eager to get a slice of Nairobi’s start-up cake.

It’s just a hustler culture. People want to make money; they want to have a business

Kenya’s tech industry has gone from strength to strength with the enormous success of mobile-money platform M-Pesa, which is now the world’s largest mobile payment system, and Ushahidi, an open-source crowdsourcing system developed during Kenya’s 2007-2008 post-election crisis. The hype machine even dubbed Nairobi the ‘Silicon Savannah’ because of its potential for tech innovation.

That might be overstating it, but the sector is set to contribute up to 8% of the country’s gross domestic product (GDP) next year, according to the government. Much of this success can be put down to Kenya’s highly entrepreneurial culture: 78% of young entrepreneurs say their families are supportive of the idea of starting their own business.

“It’s just a hustler culture. People want to make money; they want to have a business,” says Toni Maraviglia, the co-founder and chief executive officer of Eneza Education, a mobile-based education platform.

Cash for ideas

Kenyan tech entrepreneurs are struggling, however, to find the cash to grow their businesses. In a 2015 poll by research outfit Intellecap, 68% of Kenyan business leaders said access to finance is a challenge. With few funding options, 40% of the same entrepreneurs said they were forced to self-finance their business, and 23% said they turned to friends and family for help.

Small and medium-sized enterprises (SMEs) – defined as companies that employ 5 to 250 people and need between $20,000 and $2m to grow their operations – provide close to 80% of jobs in Kenya, but they only contribute 20% to the country’s GDP, suggesting the industry is not reaching its full potential.

The country’s tech start-ups are caught in an unwelcoming financial landscape. The ‘missing middle’ of the financial spectrum means that many of Kenya’s SMEs are unable to find the funding they need to grow. Microfinance options are plentiful – there are 32 institutions with $586m in assets lending to small businesses, according to Intellecap.

And medium to large companies have access to funding from 43 banks with an asset size of $28bn. But in the middle of the spectrum there are few funding options. This could change, however, as more venture capital funds open up shop in Nairobi. Mbwana Alliy, the founder and managing partner of the Savannah Fund, a venture capital outfit, says his company’s goal is “for local entrepreneurs to know what venture capital is and to prefer that model of investment”.

Alliy started out with a strong focus on Kenya, but he quickly set his sights on the rest of the continent. Today, Savannah has funded 22 companies in six African countries. With a strategy of investing in early-stage, high-growth technology start-ups and specialising in $25,000 to $500,000 investments, it has pumped money into start-ups such as Sendy and Eneza Education. Since 2012, investors have committed about $93m of venture capital to Kenyan companies, according to estimates from the East Africa Venture Capital Association (EAVCA).

First stop Nairobi

Last year, Hong Kong-based venture capital firm Nest opened an office in Nairobi. Founded six years ago, Nest is launching operations in Nairobi with an eye towards expanding across the continent and connecting African entrepreneurs to Asian capital.

It is not just venture capital getting in on the action. Of the 100 private-equity firms active in sub-Saharan Africa, 35 have an office in Nairobi, the EAVCA says. In the past two years, they estimate that 10 new firms have set up shop in Nairobi.

Some of Kenya’s start-up funders are local firms. James Mworia, chief executive of Centum Investment, says his company has invested in Bunifu, a software start-up, as well as Elimu TV, an education-focused start-up.

“We are supporting start-ups that do not have access to capital at all, and the majority of them are technology start-ups. There are a lot of brilliant ideas coming up, particularly around financial technology,” he says.

Impact investment, a form of finance meant to generate both a profit and a social good, has been touted as another solution to the funding problems of Kenya’s start-ups. Nonnie Wanjihia, one of the founders of the EAVCA, explains: “It contributes positively because there is obviously the problem of the missing middle investment. […] So an increase of impact investors who do have a capacity to invest smaller amounts is definitely a good thing and will improve the pipeline towards larger growth-capital investors.”

One of these impact investment companies is Novastar Ventures, launched in 2014 to assist early-stage and high-growth businesses in East Africa. So far, it has raised $75m and invested in eight companies across Kenya and Uganda.

For many, impact investment is an ideal melding of Nairobi’s aid industry and its growing start-up scene. But other entrepreneurs have quickly grown frustrated with the emphasis on social good, sometimes over profit and scalability. Alliy says: “I believe strongly in local private-equity ecosystems being built and not coming in with ‘Aid 2.0.’ I just want to find entrepreneurs who want to make a lot of money, and impact will come from that, like job creation.”

Foreigners get the funds

Industry insiders are also concerned that the solutions for bridging tech funding gaps have propped up foreign investors rather than building a new generation of Kenya’s business elite. “Foreigners dominate,” says Alliy of Nairobi’s venture capital scene. “Maybe 90% of the venture capital is foreigners investing in foreigners. That’s just the reality.”

Many of the Kenyan start-ups that have been doing well were founded by Westerners. British entrepreneur Nick Hughes founded M-Kopa, which provides solar power equipment to poor Kenyans. It received more than $31m in seed funding last year, making up the bulk of investment in Kenyan start-ups.

Americans Dylan Higgins and Benjamin Lyon set up Kopo Kopo, a payments platform that received $2.1m last year. BitPesa, which uses the digital currency Bitcoin to conduct remittance transfers, received $1.1m in funding and is also American-founded.

Rodgers Muhadi, the co-founder of Paykind, a mobile-phone platform used to distribute vouchers from remittances or aid earmarked for things such as education, healthcare and food, shares the sentiment: “There are Kenyans who are born and bred here and they’ve been able to raise funding, but those success stories are few.”

Muhadi, who was forced to travel to the US to raise funding for his business, says: “It’s a frustrating reality for us. We need Kenyans to be the ones leading [the industry]. As Africa grows, as Kenya grows, we need to have more good stories to tell and create the kind of success to inspire other people to invest in this market.”●

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