Kenya, or the Silicon Savannah, has shown how entrepreneurship can be game-changing. From Mpesa (financial inclusion), M-Kopa (energy), and M-Tiba (health) entrepreneurship can solve development challenges and create jobs. Agri-tech farm to fork company Twiga foods, for example has raised over $67m, employing over 300 people, and partnering with 17,000 farmers and 8000 vendors, in just seven years.
It’s a risky business
However, entrepreneurship is inherently risky. With every Twiga there are dozens of failures. Whilst this is the nature of business, Kenyan entrepreneurs face significantly more hurdles. Funding is, arguably, the most pressing. For any company, early stage finance is critical in supporting the development of products/services, testing them, and then taking them to market. Normally this is done by both “boot-strapping” (using savings/personal finds). However, in Kenya most people do not have such savings and therefore tend to ‘hustle’, continuing their jobs whilst starting a business on the side.
The next step of finance comes from what’s colloquially known as the 3Fs, “family, friends and fools.” These are angel investors who see potential in the entrepreneur or the business idea and provide initial financing, support and networks.
The missing middle
This is where the gap lies, particularly in Kenya. Many of the entrepreneurs do not have the initial capital or friends/family who can invest in the business, moving it from a concept stage to a revenue generating business suitable for venture capital.
Consequently, many entrepreneurs, despite sound business ideas, fail to raise the initial round of funding leading to a pipeline problem. This results in investors competing for the relatively few “connected” entrepreneurs who have managed to move past the first stage of financing, whilst the majority of the local businesses struggle.
Angel investing can help address this gap by providing a bridge between a start-up idea and scalable company. Angel investors bring their own money, network and experience and support startups to cross the “Valley of Death”. Most startups don’t require large amounts of funding with investments typically ranging from USD 10,000–350,000.
Despite this, angel investing is still nascent in Kenya and not because of a lack of money. A lot investment is taking place in Kenya but in the in the traditional sectors of real estate and stock market For instance, it is estimated that investment groups have a total of USD 3.4 billion which is in traditional assets and cash. The African Philanthropy Network estimates the potential giving pool of wealthy individuals at $2.8 billion per year, with the potential to be as high as $7 billion. We are already seeing individuals move towards impact investing, with the Tony Elumelu Foundation in Nigeria and local family offices in Kenya including Chandaria Capital and Kuria Capital.
Catalysing Angel Investments
There are two main reasons limiting investment into Kenyan startups. First, a lack of awareness of angel investing as an asset class. Second, the fact that stable returns can be made elsewhere. Kenyan investors prefer to invest in property and land rather than in new businesses. This is why many investors speculate on property, not to develop but simply to accumulate value and sell it on.
In order to address the first issue, HMG’s UK- Kenya Tech Hub and Tech for Growth team, supported by Viktoria Ventures, a leading angel network in Kenya, have published “Angels in the Silicon Savannah — A practical guide for early stage Investors”. The report covers the entire investment process from finding businesses to invest in, evaluating if a good opportunity, the investment process including valuing the company, negotiating terms, legal, tax considerations in Kenya and finally exiting i.e. getting the money back.
Greater the Risk, the Greater the Reward
Investing in early-stage ventures is an adventure. It is risky. However, if approached in the right way, it can pay great rewards. As the old maxim goes, the greater the risk, the greater the reward. Kenyan entrepreneurs have already shown how disruptive technologies and business model innovation can be game-changing. However, they need support to grow and scale.
Angels can do this. In addition to money, local angels offer their market and sector knowledge, experience, networks and become mentors. International angels bring experience in investing, conducting due diligence, valuations, and terms sheets. Co-investment by local and international angels offers the best of both in a way that could turbo-charge Kenyan entrepreneurship.
Join the Conversation
In order to start the conversations, we will be hosting a panel discussion on Investing in early-stage start-ups at London Tech Week on 9th September, 12:00–13:00 (BST) with panellists including Laila Macharia, a leading angel investor in Kenya, Toby Hanington, founder of Baobab Network an early stage investor in Africa, Stephen Gugu, Founder of Viktoria Ventures and report author and Wayne Hennessy-Barrett Founder and CEO of 4G Capital, an MSME Finance neobank to see how we can stimulate more early stage investing.
Kenya needs Angels. This is the time to step up.
Written by Sheena Raikundalia UK-Kenya Tech Hub
Click the link to download the full Investor Guide