August8 , 2022

Investors steer clear of African startups with only local faces

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By VINCENT OWINO

When Kune Food was established in Kenya last year, the company quickly raised seed capital of $1 million to solve a problem that seemed non-existent. Last month, just 10 months after starting operations, it shut down.

Kune’s business model was “to provide great food at a cheap price and create a strong food culture”, a gap that the founder, French national Robin Reecht, had identified within three days of being in Kenya.

The investment aroused mixed reactions, and many Kenyans took to social media to talk about “white privilege” when it comes to funding startups.

Research by investment platform Partech Partners shows that although funded startups in Africa grow six times faster than elsewhere in the world, raising seed capital remains the biggest challenge to entrepreneurs.

Also read: Venture capitalists pump more money into Africa

“Despite having designed and created all prototypes, my start-up has stagnated because getting the necessary funding to advance it has been hectic,” said Eddy Gitonga, the founder of T-bin, a company that makes solar-powered litter bins that segregate waste.

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Mr Gitonga told The EastAfrican that the only investors who have shown interest in funding his innovation demand too much equity with little financial contribution, and he turns down their offers. Statistics show that the majority of startups that received more than $1 million in funding in 2019 were founded by expatriates, or both foreigners and locals.

In Kenya, where startups received about $140 million of funding, 65 percent were founded by expatriates and 24 percent by a mix of local and foreign founders. Only six percent were started by local entrepreneurs, analysis by Viktoria Ventures, a Kenyan venture capital firm revealed.

Uganda had only one local company, out of the six startups that received funding above $1 million in the same period.

In the rest of the continent, forty-five percent of all startups outside Kenya, Nigeria and South Africa that raised more than $1 million were founded by expatriates and only 32 percent had local founders.

Also read: African technology startups scoop $2b funding

Sirak Mussie, the founder of Flocash, a pan-African financial technology company, said foreign founders have an advantage over their African counterparts because the majority of the funding streams come from the West.

He added that his company, which today boasts an annual revenue of about $6.38 million, stagnated for four years as he struggled to raise funds to build the infrastructure to support the business.

“Finances are traditionally more available in the more developed markets, so it’s only logical that they’ll give them to the people who can convince them the most,” Mr Mussie said.

Hurdles

Although his company was ranked second among Africa’s fastest growing companies by the Financial Times in May this year, he says they have had to overcome several hurdles to succeed.

“In Africa, the main challenge to startups is selling their novel ideas to get them accepted by people, and raising the funds to build on their business models and fundamental infrastructure,” he said.

Robert Karanja, the chair of the Association of Start-up and SMEs Enablers of Kenya, said African entrepreneurs are disadvantaged by a range of factors, including lack of capital to conduct experimental operations, inexperience, and inability to secure the necessary regulatory requirements.

“The foreign founders usually present a better case because, unlike Africans, they are usually experienced and can finance their experimental operations by themselves before asking for the first round of investor financing,” he added.

However, research done in 2017 by the Global Accelerator Learning Initiative and Deloitte revealed that entrepreneurs in emerging markets are just as credentialed and committed as their counterparts in the developed world.

The research showed that startups in emerging markets attract less investment because of a “mismatch between what investors and entrepreneurs are looking for” and, in some instances, due to investors’ cultural biases.

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