Startup woes expose disruption myth

OLX offices, March 2015. [Wilberforce Okwiri, Standard]

The past few months have seen several startups in Kenya close shop, scale down or report operational difficulties of some kind that have cast doubt on their future.

The collapse of these start-ups, some of which recently raised billions of shillings in investor financing, has exposed the underlying myth of "disruption" that drives much of the Nairobi "Silicon Savannah" narrative, and the problematic attitude of investors from the West that perpetuate this hype.

Last week, Twiga Foods laid off a third of its current workforce in a restructuring exercise that will see the company's headcount cut to 543, down from over 1,000 it had last year (see separate story on page 6).

In a statement, the company said the move was necessitated by a tough business environment where people's purchasing power continues to decline.

"The company has been on this transformative path to become a lean, agile, cost-efficient organisation, undertaking several interventions to adopt and sustain the business during these economic times," said the firm.

This comes months after the firm raised more than Sh20 billion in investment financing and raised more questions, which the company is yet to make clear.

"Twiga's transformed operating strategy, process re-engineering, supplier support, and talent optimisation is being set into motion with the company setting its sights on a future where Africa's food security is radically transformed by technology," the firm said in a statement.

The statement however stands in stark contrast to the vision of growth and prosperity painted by its co-founder and chief executive Peter Njonjo barely two weeks ago.

Mr Njonjo was touring the pilot project of a 20-000 acre maize scheme at Galana Kulalu whose rights Twiga Foods recently transferred to Selu Ltd, a firm that was recently revealed to be owned by him.

"The maize crop takes 105 days here so it means with irrigation you can do three crops a year, including a rotational crop," he said. "If you take that into account and the high yield, this has an opportunity of actually creating a huge transformation as far as maize is concerned."

"At least from the farming side, you will have direct employment of about 2000 people," he said.

"But the key thing is also that with these 2000 people, we are thinking of establishment of communities within this area. Think about the schools, dispensaries, amenities, shops and all sorts of infrastructure that will develop as a result of this."

The layoffs at Twiga are further puzzling considering the fact that the company received a Sh300 million boost from the Hustler's Fund for onward lending, on top of the billions in investor funds.

At the onset, Twiga Foods pledged that it would disrupt the retail distribution of agricultural products by bypassing the brokers and mama mbogas (greengrocers) to deliver fresh produce directly to consumers.

With time, the startup hoped to build a loyal customer base and generate revenues from subscription fees and commissions using a business model that could be scaled up even to other countries.

The firm was even used as a case study by the government's Distributed Ledgers Technology and Artificial Intelligence Task Force as an example of how emergent technologies could be deployed for good.

"Working with Twiga Foods, a Kenyan fast-moving consumer goods start-up, IBM has managed to fuse Blockchain, AI and big data, to develop credit profiles to access non-collateralised loans to hundreds of small-to-medium businesses, many of whom were owned by female vegetable vendors," said the report by the task force.

The report further claimed that the microloans are by far the most inclusive product offered to largely women vegetable vendors, which increased their order sizes by 30 per cent and their profits by six per cent.

Such numbers, while alluring to investors and foreign media outlets, are seldom put to the test. In the first place, startups are private entities and are not required to publish their financial results on an annual basis like listed companies.

This lack of public scrutiny of the corporate decisions of start-ups that are flush with cash creates an environment where the companies seem to stray further away from their core business.

This is partly because some of the problems that start-ups claim to disrupt are more a function of deep inefficiencies in the country's economy, such as a large degree of informality and a distressed consumer market.

Such inefficiencies mean that sectors like e-commerce make it very difficult to break through, for example, due to the lack of a national addressing system and a highly decentralised market served by everyone from informal boda boda messengers to food delivery apps.

The country's e-commerce sector is littered with the carcasses of brands that have attempted to break through the market for the last 15 years but failed.

Over the last 12 years, websites like Dealfish, Kalahari Kenya, Mocality, OLX, Cheki, Jumia and Masoko, among others, have all attempted a crack at the country's e-commerce sector, with varying degrees of success.

This made the odds against startups like Sendy and Kune Foods very steep, given that these companies lacked a unique value proposition to succeed where the others had failed.

These startups presented a digital solution to intervene in a practical problem in the Kenyan economy and convinced investors that it could be packaged and sold en masse to create a sustainable revenue stream.

However, not even the pandemic, with the opportunity for e-commerce it presented from the millions of Kenyans stuck at home, could revive the fortunes of Sendy and Kune Foods.

A study published in 2017 by Village Capital, and funded by the Bill and Melinda Gates Foundation established that out of 60 deals signed with tech startups in East Africa between 2015 and 2016 valued at Sh8.5billion, 72 per cent went to just three companies.

Startup founders are thus pressured to mould their company into a certain pattern that investors can easily identify - get into an accelerator programme, hire a European/North American executive - in order to attract funding.

This not only limits the capacity for the young founders to take risks and explore diverse solutions to uniquely local problems, but it also creates a closed system where approval and investment are doled out based on who knows who.

The result is that the once-visionary startups burn through their funding, are dismantled and the useful parts of their ideas are sold to larger companies with traditional operating models.

This ranges from distribution data generated by companies like Twiga Foods and Sendy, or laid-off engineers from Andela, who can be hired or re-hired to work for multinational firms at much lower costs.

The problems that these startups sought to disrupt at the onset were a lack of affordable programming education, high food distribution costs, and cumbersome product delivery networks.

These problems, however, continue to persist and await the next wave of disruptors and investors.