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September 21, 2018

To Nurture Business, Kenya Must Fix Obvious Concerns

A quite critical Reuters article on the Kenyan start-up sector has generated a bit of discussion recently.

From the introduction: "Kenya’s technology rush gave hope that new ideas would help millions of Africans use their mobile phones to circumvent poor infrastructure, but local start-ups are failing to draw major investors or create profits. Lack of talent, problems in attaining seed capital and ideas that cannot be sold to a mass market or easily monetized have so far held back hundreds of Kenyan start-ups. Many were drawn to the tech sector by the Kenyan government’s push for a 'digital future', plentiful Western donor funding and foreign media coverage about 'Africa’s Silicon Savannah'."

For anyone who has watched the sector closely, this does not come as a great surprise, although it is worth unpacking the story a bit. Yes, there are a lot of digital/tech start-ups that went nowhere. Partly that’s simply normal – not everyone succeeds with what seems to be a smart idea (never mind that not all ideas are smart).

However, I think there are some other factors that contributed to this phenomenon: do-gooders liked the whole development/tech story and were keen to 'do something'. This meant lots of funding for competitions, hubs and the like.

Free money is a good thing; no? Maybe not always: It’s been criticised repeatedly that the number of competitions and pitch events created start-ups that are more focused on those events than on becoming a company. Similarly, start-ups that start off with donor funding often struggle to transition to a profit-oriented model, not the least because grant funding often did not come with sufficient scrutiny whether the development angle of the start-up really met a market need, i.e. whether it would provide a service that people need or want and therefore pay for.

Finally, the hubs have probably often nurtured unrealistic expectations: a techie, a laptop and an app are not a company, and entrepreneurship is hard, hard, hard. Not everyone is made for it, and many of those drawn to the hub environments would probably benefit from a few years work in an established company, not just for technical skills, but also to understand how companies run.

This whole dynamic was probably aided by the people who had jumped on the recent 'Africa Rising' bandwagon and were keen to write the good Africa stories. Not that those don’t exist, but reality is usually, inevitably, more complex – and often a lot more prosaic. Nonetheless, watch those reporter tourists cruise the iHub and marvel at all those Africans with laptops! Unheard of! (not really, of course).

Some of the discussion also pointed out that it would necessarily be more difficult for any newcomer, however enthusiastic, to really understand the local market, conditions and people sufficiently to make profitable investments. This was in reaction to tech start-up incubator 88mph, which claimed that there was "too much fluff" in Kenya. 88mph has recently halted its incubation programme in Nairobi in favour of a new facility in Lagos. No doubt the fluff accusations are true, but then an investor should dig through the fluff and find the substance.

And it is certainly something I’ve seen time and time again in covering sub-Saharan Africa’s private equity industry, where deal flow is generally an issue: If you want to invest here, you need people who really, really understand the market and the environment, and you need a solid local network to track down the opportunities.

But then, the Reuters article also partly falls for the same issue that it criticises: the hub hype. Because there is actually a lot going on in Kenya’s tech space – only a good number of people and companies who get things done are busy with just that, getting them done. And a lot of their companies are very prosaic business-to-business service providers, so they don’t have a sexy story involving mobile and, say, smallholder farmers that draws the Africa Rising writer crowd.

Tezza Solutions, for example, are a rapidly growing software testing firm built from scratch by a friend – but software testing is just not as sexy a tale as those farmers. And when I talk to entrepreneurs who avoid the hype and the competition circus, one message turns up time and again: how incredibly difficult a business environment Kenya is, whether it’s regarding daily infrastructure issues (traffic, electricity), local city council (dis)services, the wild jungle of supplier and tendering corruption, or human resources, both with respect to technical skills and ethics. It’s as obvious as saying that water is wet, but if you want to nurture more businesses, tax revenue and employment, in tech or elsewhere, that is what needs fixing.

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