BY TOM JACKSON
As recently as 2017, we had our concerns about whether or not the Kenyan startup space was developing in the hoped-for manner, but it seems we needn’t have worried.
According to Disrupt Africa’s recently-released African Tech Startups Funding Report 2019, 311 startups on the continent raised a grand total of US$491,623,400 in 2019, up 46.7 per cent on 2018.
And the country that was responsible for the biggest chunk of that combined funding figure? Kenya, the home of M-Pesa, iHub and so much excitement from a tech perspective for so many years, but an ecosystem that for a while appeared to be losing its appeal in the face of growth in markets such as Nigeria, South Africa and Egypt.
Over the course of 2019, 45 Kenyan startups banked a record US$149,145,000, the most any one African country has ever secured in one calendar year and up 58.6 per cent on its 2018 total. Indeed, Kenya accounted for 30.3 per cent of Africa’s total funds secured in 2019.
There were major rounds for a host of startups, the standout ones being for the likes of Copia, Lori, Twiga and BitPesa, now AZA Group, though there were a host of smaller ones too. But what is behind such growth?
Bigger growth, and bigger rounds
Sam Gichuru, chief executive officer (CEO) of the Nailab, believes the growing number of success stories and the fact investors have started to see returns is boosting confidence in Kenyan companies.
“Because a few investors enjoyed some exits last year, this might have increased investor appetite” he said.
“Companies like Cellulant have shown that it’s possible for local tech startups to absorb large ticket sizes.”
Dr Bitange Ndemo, a former permanent secretary at the precursor to Kenya’s Ministry of ICT, attributes the growth to investors tiring of the “unicorn promise” and getting “down to basics”.
“Many are looking at what the 4IR technologies can do, especially in agriculture. There is promise that blockchain, AI and IoT will bring new enterprises. I can see the focus of 2020 conferences and what some of the VCs are looking at. Kenya has created some of the necessary legal sandboxes,” he said.
Miguel Granier, managing director of VC firm Invested Development, says the growth in funding in Kenya is part of a more global trend in which “we are seeing money chase deals and the round sizes going up substantially because of that”.
“I would suggest that the biggest culprit is low or negative yields in global bond markets,” he said.
A mature market
That is a very big picture reason, of course, but looking at Kenya in particular Granier says it is having an impact now because of market maturity.
“Those of us who took risk on early tech startups 10 years ago have seen that maturation and now others are stepping in. That is great. The valuations are probably a little out of whack, but that is a global phenomenon,” he said.
Stephany Zoo, head of marketing, branding, and communications at AZA Group, agrees with Granier that the local ecosystem has matured to the point that established startups are now raising bigger tickets.
“I think this less about individual companies and more about the holistic maturation and growth of the ecosystem at large. Many of these companies – ours included – started around 2013-2015, and have progressively grown through the natural cycles of funding rounds. Most of these companies are at Series B or later now, which are commanding larger rounds,” Zoo said.
“Because investors can see the leadership of the entrepreneurs, as well as the resilience and executional ability of these companies, they are willing to put in increased amounts of capital at higher valuations. In many ways, even though the absolute amount is more, later-stage investments are lower risk because these companies have proven traction and more concrete numbers.”
Funding foreign founders
One concern is the extent to which funding is focused on startups, like AZA, Twiga and Copia, that have been launched by non-Kenyan founders, and what potential damage this may do to the sustainability of the local ecosystem. Zoo doesn’t see a reason to worry, however.
“The larger rounds are, as expected, later-stage companies. A large number of the generation of founders who are at Series B and above now, were expat founders, which is why it may seem like they are the only ones raising at these bigger rounds. I don’t think this is a problem, just a matter of time,” she said.
Granier, however, thinks there is a bias issue.
“How do you measure a “strong team”? What qualifications are you using? Oxford, Harvard degrees? Experience at global startups or big five consulting firms? There is tremendous technical and managerial talent in Kenya and East Africa overall, but most investors haven’t figured out how to gauge that easily,” he said.
“What is the Kenya pedigree that you are looking for? I’ve learned over the years that some high schools in Kenya have powerful networks that give some alumni a competitive advantage. That isn’t something that most investors are looking at. They don’t think about high school networks that much because it’s not something we would do in the US or EU.”
Success for some Kenyan founders will help create a pattern for investors to follow, according to Granier, but that takes time.
“In the meantime, expect investors to pile into the foreign-led companies with strong pedigrees. And yes, that is a problem, but if they hire local talent and build up from there it will also be a solution in the long-run,” he said.
Ndemo sees reasons for optimism even as non-Kenyan founders continue to raise more funds.
“VCs are beginning to be aware that in the past they have funded even poorer ideas of non-Kenyans. Non-Kenyan startups are often good in presentation. They spend money on marketing themselves to look better and their pitches are often top-notch. This, however, will not continue forever. Local startups are closing the gap,” he said.
More work to be done
Kenyan may have had a bumper year funding-wise, but the fact most of the investment was secured by a small handful of established businesses suggests more work needs to be done to grow the ecosystem as a whole.
Angel and seed capital is still sorely lacking.
“For all the growth capital that is moving in, there are not enough investors willing to take that seed-stage risk and really build out the local ecosystem. It’s likely there will be a boom/bust cycle unless that changes,” said Granier.
This view is shared by Adam Grunewald, CEO of recruitment startup Lynk, which raised some funding of its own in 2019.
“The increase in total VC investment is largely driven by a number of big ticket investments as opposed to a major increase in the number of companies getting funded each year,” he said, a view that is confirmed by Disrupt Africa’s data.
“Other than this, Kenya and other countries in Africa are largely seen as risky and unproven markets for venture capital. It is still a very nascent industry in comparison with the VC markets in other parts of the world and with that comes a lot of inefficiences, misaligned expectations, and frustrations.”
Grunewald thinks this will change as time goes by, however.
“Each year that goes by where investors see meaningful growth and no major macro-economic or security issues helps to build confidence and therefore larger investment numbers,” he said.
These larger investment numbers were certainly in evidence in Kenya in 2019, but the question now is how soon the funding effect can trickle down to seed-stage, Kenyan-founded startups, a process that would truly mean the country’s startup ecosystem had come of age.
