Kenya: Agritech firms whet funders’ appetite for ‘highly untapped’ sector

By Morris Kiruga
Posted on Friday, 13 May 2022 14:52

Waki Munyalo watches as Pula field officer Ruth Wambua updates her crop details in an app after a harvest insured by Pula, an agricultural insurance company that helps small-scale farmers manage the risk associated with extreme climate conditions, in Kitui county, Kenya, March 17, 2021. Picture taken March 17, 2021. REUTERS/Monicah Mwangi

In March, Apollo Agriculture – a tech company based in Nairobi that helps small-scale farmers maximize profits – closed its Series B equity funding round, having raised $40m. In total, the company has raised $52.5m and received $16m in debt – making it one of the highest funded agritech startups in Kenya.

Four months earlier, another major startup in the same sector, Twiga Foods – which uses technology to build supply chains in food and retail distribution – raised $50m in its latest funding round. In total, the company has raised more than $100m in debt and equity, having raised $30m in its series B round in 2019. The startup’s founders, Grant Brooke and Peter Njonjo have plans to expand into the rest of the continent.

Apollo Agriculture and Twiga Foods are just two Kenyan companies in a long line of agritech businesses searching for funds to help them grow. Forestry agribusiness Komaza has raised $38m since it was founded in 2006. iProcure, which focuses on optimising rural supply chains, has raised $5.5m since it was founded in 2013 and in 2021, online to offline marketplace platform ShambaPride raised $1.1m. In April, social commerce group-buying platform Tushop raised $3m to fund operations and expansion.

Kenya has emerged as a hot-spot for agricultural technology investment and product development.

The record-breaking funding rounds of these companies and the emergence of regional and country-specific tech startups in the agritech space are opportune, as global dynamics reshape food supply chains. In April 2022, Indonesia, the largest exporter of palm oil, banned exports of the product. A month before, the Russia-Ukraine conflict had triggered major disruptions in food supply chains, which were only just recovering from Covid-19 disruptions.

“The global food supply chain is going to become more disjointed over the coming years,” says Ikenna Nzewi, the CEO of Nigeria-based Releaf. “If we are going to develop a strong FMCG industry in Africa, we are going to have to locally source the inputs for those goods.”

“We’ve seen that the startups that succeed in attracting capital are those that have real sector applications and provide some form of infrastructure to the value chain,” he says. The company is currently in its growth phase and is using satellite technology to identify new palm tree farmers to onboard its services.

Kenyan touch

Agritech still trails other tech sectors, such as fintech, mobility and e-commerce in attracting funding, but its appeal is growing. According to a January 2022 analysis by startup news and research portal Disrupt Africa, the African tech ecosystem passed the $2bn mark in total financing for the first time in 2021. Of the total figure raised across the continent, about $95m – less than 10% of the total – went to agritech companies, up from $60m in 2020.

As one of the major tech hubs on the continent, Kenyan companies have been among the main recipients of this financing, from both local and international investors. Following Apollo Agriculture’s latest funding round, Fitch Solutions has announced that Kenya has emerged as “a hot spot for agricultural technology investment and product development”, which has been able to benefit from the prevalence of mobile phones and mobile money across the country.

It’s a sentiment that has been growing for some time. “Kenya is ripe for fresh modelling of agricultural financing to incentivise both financiers and agricultural value chain actors to take on the investment risks,” Mbaka, a senior innovations specialist at FSD Kenya, said in 2020.

Returns in agriculture are way higher than in other sectors because of lower competition.

“The farmer’s incentive to make returns are as strong as the financier’s and if this fact were to be consciously processed by many farmers, their sustainability is at stake if investments outweigh their returns,” he said.

“Investors favour companies that have a clear social impact, are truly solving an existing problem, and in sectors that are highly untapped,” says Bernard Njathi, Founder of Lofte Kesho, an integrated Fintech and Agritech company based in Nairobi, which helps farmers collateralise animals as assets for financial benefits.

These companies are focused on solving significant problems in the agricultural value chain, in a country where agriculture is both a source of food and livelihood. The social impact has also been a major element in agritech business models, which have emerged to solve problems from food production to how farmers access finance.

Industry players are optimistic that the trend in financing will continue to favour growth in the sector, as both international and national institutions emphasise the need to boost food security in both the short term and the long term.

They are also banking on the fact that, from a profit perspective, the crowding of investments in other tech sectors will in turn favour the agritech sector, which is still fairly young. “Returns in agriculture are way higher than in other sectors because of lower competition,” says Njathi of Lofte Kesho. “Add to that the fact that there is no set standard of earning, meaning you can price it differently.”

Enabling environment

Kenya’s enabling environment provides the perfect testing ground to explore how technology – from messaging via USSD to satellite data – can solve problems within the agricultural sector’s value chain. Government policy interventions and private sector investments between 2005 and 2010 made the East African country an unsurpassed regional leader in tech, colloquially known as ‘Silicon Savannah’.

Moreover, agriculture is a priority area. Agriculture accounts for approximately a quarter of the country’s GDP, two-thirds of the country’s export earnings, and is its biggest employer, employing more than 40% of the working population. For 70% of the rural population, agriculture is the primary source of employment and livelihood.

Agriculture is the backbone of humanity. If agriculture fails, everything else fails.

Kenya’s Vision 2030 includes plans to boost the transformation of smallholder substance agriculture into “an innovative, commercially oriented and modern action”, according to a 2019 speech by the country’s then cabinet secretary for agriculture, Mwangi Kiunjuri.

However, despite its importance to the economy, many of Kenya’s smallholder farmers continue to face a plethora of issues that limit production and distribution. Agricultural systems continue to be mainly rain-fed, which makes the entire sector highly susceptible to drought and unpredictable rain patterns.

The result has been increased food insecurity. In February 2022, humanitarian information resource Relief Web estimated that around 3.1 million Kenyans were now food insecure, representing a 48% increase in just five months. This rapid increase followed three consecutive below-average rain cycles, which affected crop production significantly. It halved maize production, in some places resulting in near-absolute crop failure, in a country where maize is the main staple food.

This environment has made it possible, and necessary, for industry solutions to boost production and improve profits from agriculture. The different emerging solutions offered by agritech companies are meant to achieve both those goals, and the motivation is not merely a business one.

By solving different problems in the value chain, from offering information, financing, and inputs to farmers, to reducing post-harvest losses and streamlining market access, the agritech space is helping solve the critical food security problem. “Agriculture is the backbone of humanity. If agriculture fails, everything else fails. Despite this, agriculture has been left behind as far as technology is concerned,” says Njathi.

Financial products

With the focus on smallholder farmers whose challenges often include a lack of adequate or timely financing, several agritech companies have also started to roll out a number of other financial products to support their users.

SokoLoan by Twiga Foods offers working capital to the company’s clients. Apollo Agriculture builds credit profiles using machine learning and satellite data to offer financing to its customers. SunCulture allows smallholder farmers to pay for its AgroSolar Irrigation Kit, which uses solar energy to power water pumps and provide drip irrigation, in instalments and is able to remotely deactivate pumps when a customer misses an instalment.

These solutions are of course dependent both on funding and uptake. Among the foremost challenges especially for mobile app-based agritech solutions are the attendant costs of access. Despite Kenya’s high mobile penetration, most people still use 2G to access the internet.

Other challenges are easier to solve with consumer feedback. A 2021 study of DigiFarm by MercyCorps AgriFin, for example, found some farmers did not like interacting with buyers directly, because it means they cannot bargain for better prices or get feedback.

Even so, the major challenge remains whether agritech can achieve what Kenya has largely been unable to do despite heavy investments in agriculture – total food security for its population.

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