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The Nairobian

Kenyan tech start-ups face funding problems, says report

Business

By - Macharia Kamau | Apr 21, 2014

By Macharia Kamau

Local technology start-ups are having difficulties accessing financing due to a mixture of factors, including financial institutions and venture capitalists (VCs) shunning tech enterprises at their early stages.

A recent report by the GSM Association (GSMA) shows that over 80 per cent of Kenyan technology companies in their early stages are either self-funded or rely on funds advanced by family and friends.

Such financing is unreliable and has seen many start-ups close shop before they come to fruition, as the source of funds is not focused on the long term.

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Failure by local entrepreneurs in technology to understand the needs of the financial services sector has also played part in denying the start-up ecosystem financing.

The report, Digital Entrepreneurship in Kenya 2014, shows that 60.3 per cent the technology companies are funded by the entrepreneurs, 20.3 per cent by family and friends.

Venture capital firms – which included private equity – have financed just 6.7 per cent while angel investors have financed 1.9 per cent. Banks on the other hand have financed 1.3 per cent of the companies during their early stages.

This is in contrast with the case in other markets – especially developed markets – where venture capital firms and business angels account for the bulk of investors in tech start-ups. In Silicon Valley, for instance, venture capitalits and angel investors account for 64 per cent of the capital to start-ups.

“A lack of business angel networks in Kenya makes the funding gap at the early stage more severe,” said the GSMA report. Heavy reliance on family, friends and self-funding is largely attributed to local financial institutions and venture capital firms being risk averse.

Low risk appetite

According to Harry Hare executive producer, Demo Africa, a platform that showcases innovation by tech companies in the region local banks and VC’s have a low risk appetite in the region and therefore will not invest in start-ups because start-ups are risky business.

“They are used to putting money in low risk projects such as infrastructure and other traditional brick and mortar businesses where they are assured of a return,” he said.

Mr Hare noted that entrepreneurs have also not understood how the financial services sector and its players operate.

He added that the tech start –up eco system is still in its nascent years and there is a lot of learning to do from both the start-ups and investors.

“Start-ups don’t seem to understand how the investment community operates and local investors don’t seem to understand the value in the start-ups. They therefore can’t see the opportunities,” said Hare.

“There needs to be some alignment where start-ups realise that investors are interested in products that have a clear business model, not just a nice looking set up which they cannot monetize,” he added.