An inside look at the emerging startup scene in Nairobi

By Bertil van Vugt on April 18, 2012

Kenya’s capital Nairobi is on the forefront of Africa’s tech-revolution. With the fast adoption of new mobile money services, and the dropping prices for a reliable 3G mobile internet connection, many starting entrepreneurs and investors see the enormous opportunities. But as this is a new game for both sides of the table, there is still a big information gap. Here are some observations from an outsider. 

Since I arrived here in February I’ve attended three events in Nairobi on which I base most of my experiences, Mobile Web East Africa, Startup Weekend Nairobi and the first Afrinnovator meet-up Kongamano. I could really feel the excitement in the air about what is happening and what is going to happen here in the coming years. There has been so much talk about the Internet becoming faster and cheaper, but it is now becoming reality! At the same time people start asking themselves the question; which companies coming out of the various hubs have really made the big step after the initial hype?

 

Having followed the African tech-scene for about 5 years now, I’ve seen many ideas, competitions and companies emerge, but when you visit their website or Twitter profile after a year they are dead or deleted. The question that comes up is: why?  My impression is that there is still a lack of understanding between the entrepreneurs on one side and the investors on the other.

Investor’s frustrations

Investors that are active in the African early investment space say that many entrepreneurs have no clue how to value their proposition. They explain: “An idea, how brilliant as it may sound, is worth nothing.” Often they meet people who think that they can ask $200k for 20% of equity, without having a proper prototype and customer base in place. So where does this valuation of $1m come from? The lack of knowledge about seed funding and venture capital deals in general came up during the recent Afrinnovator meet-up when many questions from the audience revealed the low level of understanding for how these deals work – and it took me some time as well! During the Mobile Web East Africa conference it was often said that good programmers are not necessarily business savy, and there remains a need for good business people. 

Bad term sheets

On the other hand, there are examples of investors who are letting entrepreneurs sign term sheets that are skewed in their benefit, often in the attempt to rule out any risk in as far as that is possible. A story I heard was about a sheet that indicated that the investor would become 100% owner of the company if a certain number of milestones were not met within a specific period. As some entrepreneurs are desperate for startup capital they unknowingly sign these kinds of deals.

Grants versus Venture Capital

An issue that came up several times during conversations with entrepreneurs are the numerous grants and business competitions that are, in a way, serving as a seed-stage investor. The rationale is; you don’t need to give up equity and can still receive startup capital. It is said that ‘free money’ kills creativity and it takes away the accountability of the entrepreneur towards its investors. Another story that I’ve heard is that winners of a Ksh1m competition do not invest their money as they could or should, instead they are making sure they keep their money on the account so they can pay their own salaries for the coming years. Nonetheless the World Bank announced recently to make $55m available as grants to ‘Kenyan web innovators’…

 

VC’s are often doing much more than just investing capital. They are guiding entrepreneurs and they use their networks to be sure their investment will come back with a profit. Some investors I’ve met said that this part is often overlooked by the entrepreneurs who are seeing funding as their end goal instead of as a starting point.

Local investors?

Where are the local investors who fund Kenyan start-ups? This is another question that keeps coming back. But as different people who I spoke to have said, there are no outstanding examples of successful exits in Kenyan (tech) startups. That’s why the local investors remain focused on ‘old fashioned’ sectors such as real estate and agriculture. When we see the first ‘round trips’ in the Kenyan space, it will change the perception, and who knows, we will see local internet millionaires setting the example for many others. After all, some of the best investors today were the most successful entrepreneurs yesterday.

At the same time, there are more and more seed-stage funds with a presence in Kenya. Among them are Innovation4Africa, Silicon Savanna Fund, 88mph, Growth Africa, Sinapis and Invested Development. Behind most of them you will see foreigners, but there are Kenyans who are behind the scenes participating in these funds.

 

Gaining experience on both sides

All actors in the Kenyan startup space have to get used to this new situation, and over time both sides will gain experience in closing deals that are beneficial for all. And as Kenya is a frontrunner compared to other Sub-Saharan countries, the observations as described above must be even more evident elsewhere. It is exciting to see things change so quickly here and I’m sure Kenya will continue to set the example for the rest of the continent. It will take time as clearly the vibrant ecosystem of Silicon Valley did not emerge in the span of 5 years, right?

Do you agree or disagree with these oberservations? Let me know! You can leave a comment below or contact me via Twitter.

VC4Africa’s Bertil van Vugt has recently moved to Nairobi. In this multi-part series he gives an outsider’s perspective to the emerging startup scene, some of the lessons learned and a possible precursor for the emergence of similar tech centers across the continent.

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