Silicon Savannah [Kenya]- Must be careful of Hype

By Mbwana Alliy  |  June 16, 2014

This is a very sensitive post as I know it most certainly won’t resonate with everyone in Kenya tech ecosystem. Over the weekend, I read Sam from Nailab’s post about how NGO money is not messing up the tech ecosystem in Kenya and that maybe I should be accused of calling foul on the hype too early and not recognizing NGOs or donor money’s contributions. I am firmly on the same side as Wired’s article on this very topic before you start reading- mainly because of the incentives and behaviours for scalable startups it distorts- I am an investor after all.

So let me set the record straight from my point of view- which I consider it to be a global/local one- but more a pan African view as will become clear as you read on (should you need reminding, I am East African from Tanzania that spent time abroad in UK and Silicon Valley- but Africa is my home.)

Let’s not confuse the tech scene with startups: Jessica Colaco of iHub Partnerships once asked me, “what comes after hubs and before accelerator investments?” I found this an intriguing question as it goes to the heart of what many in Kenya working in tech should be asking. I believe the answer is “value added training”. Many in Kenya are just looking for funding when they should also be  looking to get trained in the necessary skills to absorb capital to build startups- startups are about high impact people. People should not be doing high growth, high impact startups if they can’t bear the risks and aren’t capable of learning on the job (we address this somewhat with accelerators that take up way more time than investors and even donors will give us credit for)- by startups, I mean the real risky stuff- startups = growth. Too many so called startups are really going after grant money or consulting projects and marketing themselves as startups. Sam saying that many in Kenya don’t have the deep pockets that westerners have and hence rely on NGO money to get going is dangerous, is the wrong lens- there should be a deeper question as to is this a project, job or startup. In Kenya it is better to say you have a contract with USAID than it is that you have money in the bank from your uncle to shoot for the moon- the former is NOT a startup. A Kenyan who has to feed his family and pay down debts will likely do the later and that’s understandable. I have tried to invest in enough Kenyan startups to understand this dynamic all too well- my hope is that I can influence them enough to get on the right path before its too late when they go back to raise more money with ZERO traction and at a ridiculous valuation in the global marketplace. It is true that connections matter in fundraising and expats have an advantage over locals as long as locals don’t invest. Further more, according to our research, Kenya does offer a cost advantage in launching startups, and I believe this can directly be attributed to the presence of donor funded hubs- but scaling a startup is whole different matter if the startup can’t attract and pay for talent to scale or is simply just chasing donor money and not built the right habits and talent, its a problem for growth. The low failure rate of startups that attract donor money should give you pause- many startups SHOULD fail but don’t. Yes, donor money might be propping up startups- this should not be surprising as Government and donor money is not necessarily market driven- Silicon Valley is largely market driven. But this post is not about if all problems can be solved in a market driven manner, and by definition not all problems can be solved by startups. I respect, Daniel Isenberg (Former Harvard business school professor on entrepreneurship, now at Babson) view that the policy (donor or Government) should not necessarily to create as many startups as possible, but also focus on scaling them– something the Kenya startup scene badly needs. Lots of startups propped up by donor money should not be the end goal if these are really startups that will scale and create high quality jobs.

Reminder on startups definitions from our investment thesis part 1:

1. Survival Entrepreneurship: In Africa’s high unemployment market characterized by low skilled informal/semi formal businesses- impact investors, many with experience in microfinance or financial inclusion, target these entrepreneurs in their mission to help communities climb out of poverty and earn a sustainable income. If not the entrepreneurs directly, they target the base of the pyramid as customers for the startups for basic services like water, solar lighting etc…
2. Lifestyle Business: Business of up to 5-25 employees with founders wanting to control their destiny, often the business can be a family one. This is actually a dominant form of entrepreneurship in Africa and around the world, there are very few Zuckerbergs…
3. High Growth Venture: Typically characterized by a founder with a bold vision, highly skilled technical ability, willing to take a big risk and willing to bring on partners (inc. investors, strong cofounders) to make their mission a reality. ..

Investors coming to Kenya are starting to feel the hype and Santa Clause is not real:  The media is extremely dangerous in Africa and even worse the western media’s view on Africa. Sam says that “us investors” revel in the media to get investment exposure like that’s where our money comes from (he should come on one of my serious investor roadshow trips). But has he wondered to ask what happens when serious investors read the media then come to Kenya and then see that hype is beyond the reality? They are not going to put down their money- they are not stupid, I have ZERO incentive to hype up the scene- there is a reason this bloomberg article says “tough love” and I am sceptical of social enterprises. You are just left with the hype money and serious investors is what makes startups scale. So no, I only use the media to tell the real story about Africa’s tech scene before investors find out about the hype, and trust me they know… The launch of this micro-site, Waterhole, is in part designed to counter the media’s distorted view on Africa startups- Audrey’s post on startup research costs that was retweeted by Google Africa, OPIC and reprinted at least twice shows that we are talking about the right things that are value add to the ecosystem- not hyping up a distorted view.

What worries me now beyond the media are various individuals, I will call this one person “Santa Claus”, who claims to be investor in 1,000s of startups in Kenya and takes advantage of the naive and continually changes his story (he blames the media- GO FIGURE!)- he runs business workshops, writes Op-Eds in the newspaper but when he is confronted of the facts he backs down. No real business person in Kenya has ever done business with Santa Claus to the level he claims- but the Kenyan Youth want to believe he is real. Having Santa Claus being part of the entrepreneurial scene in Kenya is NOT healthy- it adds to the hype. I have come to accept that its just part of the deal of an early stage ecosystem. Santa Claus would not get far in Silicon Valley but he does get far in Kenya.

M-PESA is not a startup and Kenya is not the entire Africa tech scene: Sam’s post ends with Africa is not for sissies. I agree- we are pan African fund and have embraced the challenges of investing in 15 startups in 5 countries- what we do is not for sissies. But there is a problem, M-PESA. Yes, the famous M-PESA. It got a grant from DFID UK and the major evidence/point that donor money is responsible for Kenya’s tech scene hype. Yes, did you also know that World War 2, the Cold War/Space Race helped lay foundation of the internet? Yes, Government funding does help lay down important infrastructure- and M-PESA and broader mobile payments in Africa should be viewed as an important infrastructure. But lets get down to startups. M-PESA is not a startup, it was a project that was actually scaled by Safaricom and Vodafone (IP is held by Vodafone). This is a very well known fact and its very easy for Kenyans and the media to claim it as a homegrown invention founded by Kenyans. M-PESA is so tied to Kenyan psyche that many don’t want to believe that there might be alternative challengers out there. The fact that the promised M-PESA API has taken forever to arrive should remind Kenyans who really controls the M-PESA infrastructure we all love and celebrate so much. But I believe in time we will get what we are all asking for. But lets not forget that VISA and Mastercard are not standing still and in Tanzania, Tigo Pesa is growing extremely rapidly- crypto-currency innovations are round the corner, even Equity Bank is springing up to challenge Safaricom. Any serious tech observers should know that nothing is invincible and disruption and change is ever present in the market. Just as quickly as Kenya is the king of mobile payments and defacto center of Africa tech, as quickly as other countries from Ghana, South Africa to Nigeria can claim the mantle. Nigeria alone has an economy large enough to make the Kenya scene pale in comparison for market growth. California, USA [is] was the undisputed King of global tech  because it had a large early adopted market for mainframes, desktop PCs and early internet connected devices for several decades along with the Government stimulation in world wars, cold war etc… Even a “gold rush”mentality . Now China is the emerging King. When you look at the African continent alone, you can’t ignore Nigeria and South Africa. Kenyans need to understand that they play in a global field. 27% of the capital deployed by Savannah fund to date is in Kenya, the rest is outside of that. Kenya’s biggest advantage in my view is as the regional business hub for East Africa- but its not ruler of Africa tech- especially to investors. Because NGO money comes to Kenya historically it colors the view of the true picture by creating the hype that is the centre of Africa tech.

Aid money fluctuates and not sustainable for Scale: We all know how aid flows change winds very quickly in Africa and that aid has been part of the problem in the broader African development space. Poor accountability and an influence that is not really tied to empowering Africans to solve their own problems. Nothing gets a donor’s heart racing than an African farmer being able to check market prices on their phone but pitch to them Africans creating their own game and they are suddenly not so interested. But the biggest thing about donors is that their inability to provide scale up sustainable funding beyond the goals they look for- they may heavily subsidize hubs but its clear that that money is not always going to be around and those hub managers will start to spend more time fundraising or look for a more sustainable source of funding.  With Kenya’s increasing security threats, we should not be surprised if these donors and NGOs start making drastic decisions. Its much harder to pull the plug if an investor has a lucrative investment, the risk is already priced in and foreign direct investment flows are set to increase in Kenya, donor funding on the other hand, on the decline- but its not clear if investor funding will ever flow in large amounts to the tech sector if it is hyped. Impact Investors help fuel the void but they come with their own biases. The true solution is for local capital- Sam talking about donor money as a necessity to me does not inspire confidence that Africans can solve African problems. There is money being made in Africa, the ultimate solution is that this capital join and compete in the tech ecosystem for returns, not for charity. Unfortunately right now that capital is seeking better returns elsewhere in sectors such as real estate (this is not specific to Kenya alone) and until we see a big exit/success stories, donor/NGO, impact money will compete against the very little private investor capital in the tech scene- it will be a competing narrative that is of course political. But it should be clear where Savannah Fund sits on this and why if you have read this far.

Pan-Africanism is the true path to scale: Silicon Savannah is not about just Kenya, it has come to symbolize it. Thank god we didn’t call our fund Silicon Savannah Fund. Just Savannah Fund labels as from Kenya enough. The Savannah can be found all across Africa not just Kenya. Some of the best startups originating out of Kenya have grown to multiple countries- these include Africa One Media and Cellulant- both of these startups have raised multi-million dollar private equity investment rounds.

When someone tells me “wow, you are in the centre of the African tech scene in Nairobi!”– I always reply “It is also the centre of the African NGO/donor scene”. That is the reality. My job is hence harder than when I go to South Africa and Nigeria given the competing narrative. And this Deloitte private equity confidence survey agrees.

I also think those who can harness the positives of donor/NGO money and also fundraise from serious investors are at a serious advantage, in our portfolio it’s Eneza Education. We are running our VC course end of July 2014 with our South Africa friends and the University of Cape Town Business School along with sponsors/donors to help startups raise serious money. I can play it both ways too if it helps with scaling startups, not just the “scene”.