Optimistic visions of technology-led development, characteristic of broader narratives of Africa rising, have long animated investment in Kenya’s Silicon Savannah.
Yet, over the past two years, prominent tech firms such as Sendy, Swvl, WeFarm, Copia Global, iProcure, and Gro Intelligence have either closed down, entered administration, or exited Kenya, and others such as MarketForce360, Twiga Foods, and Wasoko, facing cash shortages, have downsized, heavily restructured, or pursued mergers. This is all the more puzzling considering that the above tech firms, promising innovative solutions to complex market challenges, had collectively raised over USD 800 million.
Table 1: Tech firms and total funding raised
Agtech/ FinTech | Total Raised (USD) |
Twiga Foods | 195 million |
Wasoko | 144 million |
Gro Intelligence | 125 million |
Copia Global | 120 million |
Swvl | 100 million |
MarketForce360 | 42.5 million |
WeFarm | 32 million |
Sendy | 26.5 million |
iProcure | 17.2 million |
Sources: CrunchBase, DisruptAfrica, TechCrunch, BusinessDaily, Semafor
Now the wider technology and development ecosystem in Kenya and Sub-Saharan Africa faces a moment of collective reckoning. After such enormous injections of cash, how could technology firms be struggling? And given the close ties between development funders and the technology ecosystem, could development funds have been used more effectively?
Some analysts have emphasised strategic errors and inadequate management capacity as potential culprits for startup struggles. While African entrepreneurs certainly face challenging operating environments, such firm-level explanations only partly explain why so many firms have faced similar crises in such a compressed time period.
This article analyses macro-institutional factors— specifically the startup financing ecosystem— to explain the fragility of the current system and to identify potential paths forward.
How do early-stage African technology ventures secure much-needed startup capital in an operating environment often considered too high-risk for traditional banks?
The funding trajectory of Twiga Foods is instructive, and it parallels that of many other startups in Nairobi. Twiga secured their initial funding through a mix of angel investors, concessional finance, and impact investors, supplemented by grants from USAID and GSMA aimed at enhancing “farmer services, financial inclusion, and food safety.” This blended finance strategy, common in Nairobi, uses development and impact funding with favorable terms to kickstart growth.
Subsequent funding rounds typically attract major venture capital (VC) investors who take equity in the firm (i.e. a share of ownership) in exchange for funding.[1] For Twiga, Goldman Sachs and a Goldman Sachs spinoff, Juven, were significant backers in a $30 million Series B round and a $50 million Series C round, respectively.
While development funding blended with equity-based financing offers a clever pathway to invest in high-risk startups, it does not come without its costs— chiefly, intense pressures to scale. Venture capital firms themselves raise funds from high-net-worth individuals and institutional investors (such as pension funds and sovereign wealth funds), and given the risks and long holding periods associated with startup investments, fund managers need to deliver returns that significantly outperform public market indices.[2] Dollar-denominated VC funds investing in the Kenyan market must also factor in foreign exchange risk further driving up performance demands.
Often, dominant venture capital strategies operate under the assumption of a harsh power law. Over 50% of investments in a portfolio are expected to fail, while a select few can yield returns of 100 – 1,000×. Fund managers, therefore, select for startups with the potential for exponential growth alongside minimal fixed costs. (These are typically tech firms.) And once they invest in a firm, VCs will push them to scale rapidly. Even if most firms in their portfolio fail, it is the very few firms which do succeed— i.e. grow exponentially and achieve significant exits— that will determine the overall profitability and reputation of a VC fund and its managers.
So, what does all this mean for technology entrepreneurs in a funding ecosystem dominated by venture capital?
First, entrepreneurs must develop scalable business model to attract investors and offer a compelling narrative for growth potential. Solutions that identify and address local problems are considered too inconsequential to warrant investment.[3]
Second, savvy investors typically pressure entrepreneurs to hit certain growth targets. Doing so facilitates exits to larger investors looking for high-growth opportunities in later funding rounds. To hit these targets, entrepreneurs often use investor funds to reduce prices, offer easy credit, or roll out ambitious marketing drives to boost sales and quickly capture market share. And if a firm is deemed to not be growing fast enough, investors will push entrepreneurs to pivot to find a better “product-market fit.”
While this approach prioritises rapid growth over the health of company balance sheets (and over organisational identity and mission), it works in so far as firms are able to move to the next funding round. But in 2020 and 2023, as foreign capital pulled out of African markets in response to the pandemic and to high US Federal Reserve interest rates respectively, it proved catastrophic. Firms which had counted on raising a new round were left without investors. And in some cases, funding that had already been committed never came through. Many firms, already stretched in their efforts to scale up, were unable to cope, entering administration or otherwise closing down operations. Other firms, like Twiga, which were able to secure bridge financing or had cash reserves, limped on while downsizing, restructuring, or merging with other firms.
Despite its limitations, venture capital plays a crucial role in funding high-risk technology entrepreneurship and has invested an estimated 21.4 billion dollars into Africa over the past decade. However, the prevalent growth-at-all-costs mentality does not align with the needs of many communities and enterprises. With over 90% of African tech ventures relying on equity financing, technology entrepreneurs face a stark choice: scale rapidly or fail. While this strategy may work for investors (and even that is not clear in the African context), it creates fragile ecosystems and concentrates wealth among a few successful firms.
What, then, can be done to build more resilient innovation ecosystems in Kenya and in sub-Saharan Africa?
To diversify the innovation landscape, we must develop alternative investment strategies. A recent study highlights one such approach that yielded promising results in a limited-resource context. Kim and Kim (2022) — open-access link here — examined two Detroit technology incubators with differing approaches. One pushed ventures to seek VC financing and rapidly scale up. This meant encouraging founders to think early on about how their business model could scale, and venture ideas initially tailored to meet specific local needs pivoted to ones that could address more universal and readily exploitable demands. Yet, in the push to scale rapidly, most ventures failed, and many of those that survived to scale ultimately left Detroit in search of larger markets.
In contrast, the second incubator encouraged ventures to “scale deep.” That is, instead of tailoring entrepreneurs’ business models to suit VC needs, the incubator supported entrepreneurs to: identify and serve local needs, creatively leverage available resources (e.g. develop bespoke partnerships and cost-shares for mutual benefit), and cultivate relationships with local funders, and, in so doing, grow sustainably. While this “bricolage” approach generated more modest returns, it achieved a much higher survival rate and had a positive multiplier effect in the community as firms hired workers, exchanged resources with one another, and slowly began to stand up their own ecosystem.
This approach, developed and piloted in a context with limited funding for entrepreneurs, may similarly translate to the Kenyan context. Rather than focus exclusively on high-risk, high-reward models of funding innovation and rapidly scaling enterprises, we may consider alternative and more patient approaches that support entrepreneurs in building deep roots and support networks and allow them to grow over time. These enterprises may grow more slowly but are ultimately more resilient.
However, funders and entrepreneurs who currently seek to “scale deep” are swimming upstream, fighting against powerful commercial interests and social imaginaries that have tightly linked innovation with Silicon-Valley-style entrepreneurship.
How, then, can institutions be built to support innovative firms focused on “scaling deep”? Below are three suggestions:
This is not to suggest that venture capital should be done away with, nor to fetishise localism. There is a need for investments to support entrepreneurs that aim to develop more universal and scalable solutions. That said, a technology ecosystem that exclusively supports hyper-scalable business models is not only fragile, it also does not effectively leverage the creativity of entrepreneurs operating at smaller scales.
Thus, rather than focus on optimising for scale or for return on investment, a key focus should be to build institutions that support more diverse models of entrepreneurship. If done well, such efforts would foster greater resilience and responsiveness to local needs and create more robust and sustainable innovation ecosystems in Africa.
[1] According to Disrupt Africa, 90-95% of African startups that raised capital from 2021-2023 relied primarily on equity financing from venture capital.
[2] A good benchmark is 3x over a 7–10-year period.
[3] The TAM (VC lingo for total addressable market) would be considered too small.
[4] In exceptional cases, such as the biopharmaceutical sector in the US, strategies that aim to have a higher proportion of firms survive and succeed (even if each generates lower returns) may yield returns comparable to high-performing VC funds in the technology sector.
[5] In this context, we refer to venture funds as any fund that supports innovative entrepreneurs (e.g. DFIs, impact investors, among others included).
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