Investors avoid African startups that only have local faces
When Kune Food was established in Kenya last year, the company quickly raised $1 million in seed capital to solve a problem that seemed non-existent. Last month, barely 10 months into operations, it closed.
Kune’s business model was to “provide good food at a cheap price and create a strong food culture”, a shortcoming that founder, Frenchman Robin Reecht, identified within three days of his stay in Kenya.
The investment drew mixed reactions, with many Kenyans taking to social media to talk about ‘white privilege’ when it comes to funding startups.
Research from investment platform Partech Partners shows that although startups funded in Africa are growing six times faster than elsewhere in the world, raising seed capital remains the biggest challenge for entrepreneurs.
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“Despite designing and creating all the prototypes, my startup stalled because getting the funding to take it forward was hectic,” said Eddy Gitonga, the founder of T-bin, a company that makes solar-powered bins that separate waste.
Mr Gitonga said East Africa that the only investors who have shown interest in financing his innovation require too much equity with little financial contribution, and he refuses their offers. Statistics show that the majority of startups that received over $1 million in funding in 2019 were founded by expats, or both foreigners and locals.
In Kenya, where startups received around $140 million in funding, 65% were founded by expatriates and 24% by a mix of local and foreign founders. Only 6% were started by local entrepreneurs, an analysis by Viktoria Ventures, a Kenyan venture capital firm, has revealed.
Uganda had only one local company, out of six startups that received funding over $1 million during the same period.
In the rest of the continent, 45% of all startups outside of Kenya, Nigeria and South Africa that raised over $1 million were founded by expats and only 32% had local founders. .
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Sirak Mussie, the founder of Flocash, a pan-African fintech company, said foreign founders have an advantage over their African counterparts because the majority of funding flows come from the West.
He added that his company, which now boasts annual revenue of around $6.38 million, has stagnated for four years as he struggles to raise funds to build the infrastructure needed to power it. ‘company.
“Funding is traditionally more available in more developed markets, so it makes sense that they give it to the people who can convince them the most,” Mussie said.
Although his company was ranked second among the fastest growing African companies by the FinancialTimes in May this year, he says they had to overcome several obstacles to succeed.
“In Africa, the main challenge for startups is to sell their innovative ideas to get them accepted by people, and to raise funds to build on their business models and foundational infrastructure,” he said.
Robert Karanja, president of the Association of Start-ups and SME Enablers of Kenya, said African entrepreneurs are disadvantaged by a range of factors, including lack of capital to conduct experimental operations, inexperience and inability to ensure the necessary regulatory requirements.
“Foreign founders usually present a better case because, unlike Africans, they are usually experienced and can finance their experimental operations themselves before seeking the first round of funding from investors,” he added.
However, research conducted in 2017 by the Global Accelerator Learning Initiative and Deloitte found that entrepreneurs in emerging markets are just as skilled and committed as their counterparts in the developed world.
Research has shown that emerging market startups attract less investment due to a “mismatch between what investors and entrepreneurs are looking for” and, in some cases, due to cultural biases of investors.