Economy
Domestic funding drought flagged as threat to start-ups
Monday May 01 2023
Insufficient research and local risk funding for start-ups are stifling the Kenyan new enterprise ecosystem. FILE PHOTO | SHUTTERSTOCK
Insufficient research and local risk funding for start-ups are stifling the Kenyan new enterprise ecosystem, experts say, despite it being termed vibrant and progressive.
In just under a year, at least six tech start-ups have closed shop on the back of difficult market conditions and funding hitches, hurting the country’s vision to become the Silicon Savannah of Africa.
To remedy this continuing deterioration of the sector, the experts suggest tapping into private domestic funding, with corporates playing a more active role to bridge the risk capital deficit.
“Kenyan investors need to be encouraged to fund domestic start-ups especially given that the majority of the funding in the sector currently is foreign,” says Esther Ndeti, investment principal, Unconventional Capital (UnCap).
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Ms Ndeti notes that encouraging more participation requires the government to incentivise the activities of investors, venture capital firms and venture builders.
Raising early-stage capital from investors has remained a tough task for most start-ups, making it difficult to stay afloat, with others opting to shut down.
At the very beginning, start-ups require a lot of risk capital to enable them to move from the concept phase to the prototype and then to the commercialisation phase.
“It is a longer journey for those businesses and there is a support gap in terms of skills, facilities and capital that is more risk-taking and willing to wait longer,” she said during a startups ecosystem conference by the Friedrich Naumann Foundation.
The meet-up dubbed Freedom Café heard that most of the capital made available to Kenyan start-ups in the form of private equity, venture capital, senior- and subordinated loans and grants come from the Global North.
Kenyan capital from corporates, pension funds, investment funds, banks and high-net-worth individuals has so far been insufficiently mobilised for this investment spectrum.
“In Germany, it also took a while to get corporates involved and it did not automatically occur,” said Matthias von Bismarck-Osten, an impact investing adviser and former chairman of Oxfam Germany.
He explains the successful involvement of corporates in the affairs of start-ups was a result of long-term political strategy and institutional arrangements.
Over the past 30 years, Berlin has transformed into a hotspot of innovation, community and connections.
Some of the fastest-growing startups in Berlin have been in medical technology, finance –technology and manufacturing technology.
Renowned start-up names include Raisin, a fintech that functions as a bank allowing customers to store savings and receive the best interest rates.
Start-ups that found success on a worldwide scale and have established themselves as household names include food-delivery service Delivery Hero, online bank N26, online fashion store Zalando, and inter-city bus service FlixBus.
Mr Bismarck-Osten, a senior economist, says Kenya which has a vibrant start-up scene can benchmark on Germany’s experience to achieve its full potential.
Kenya comes third in place in Africa for the global start-up ecosystem index behind South Africa and Nigeria.
The Kenyan start-up ecosystem is recognised as among the most progressive ones in Africa owing to its commendable level of funding.
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In 2022, Kenyan start-ups raised more than a billion dollars (Sh133 billion) in funding but it was focused on three specific sectors, namely clean energy, fintech and e-commerce.
