Venture capital flows to tech startups
Tech investors at the iHub offices at Bishop Magua Centre on Ngong Road, Nairobi. Stephen Mudiari | Nation
By JEVANS NYABIAGE jnyabiage@ke.nationmedia.com
Posted Monday, November 8 2010 at 16:00
In Summary * Equity financiers scout for buyouts in Kenya as mobile and internet spur innovation
Kenya’s tech environment is bustling with innovations driven by mobile telephony and strong entrepreneurial spirit, but access to capital remains a major constraint.
This has created a magnet of venture capitalists in Kenya seeking to fund tech startups. Venture Capitalists are investors who scout for promising startups and small businesses with potential for huge profits. Venture Capital funds make money by owning equity in the companies they invest in.
Mr Brian Hirman, a co-founder of eVA Fund, says Nairobi is recording high growth of start-ups in digital, ICT, web and mobile.
“There’s a lot of entrepreneurship also motivated by Kenyan whiz kids who have studied in the US or Europe. There are lots of bright people with strong digital business ideas,” says Mr Hirman, whose fund has invested in Kenyan tech start-ups.
Pitching for cash
On October 18, 2010, at the Ihub incubation centre, five venture capital funds listened to pitches from eight startups. The forum was organised by the Kenya ICT Board as follow-up to the $3 million in content grants funded by the World Bank.
The Venture Capitalists, or VCs, on the panel were eVA Fund, Fanisi Venture Capital Fund, Africa Media Venture Fund, Grofin, and Open Capital Fund.
Startups that pitched included Gotissuez, a consumer online suggestion box, Eatout.co.ke, BrighterMonday, a recruitment portal, Pewahewa.com, a music portal, Paysure, a local payment gateway, M-Trader, creator of a mobile stock trading software and a public payphone that allows SIM card owners to plug in and make calls at affordable rates.
Even then, the role of VCs is widely misunderstood locally. Some think they are banks. While VCs claim African is yet to fully mature outside South Africa, techies have complained about “briefcase” ones that exploit them or make excessive demands that lead to collapses.
“Some VCs have no money, some have worked for international organisations and are frustrated with the slow development while others promise to give money and don’t; the best VCs are those run by people who started startups too because they understand,” says Mr Liko Agosta, founder of PesaPal, one of the firms funded by eVA Fund.
One VC offered Mbugua Njihia $10,000 (Sh800,000) for 60 per cent of Symbiotic Media and an exit in three years. “That money cannot buy full page adverts in the local papers for two days,” said Mr Njihia, CEO of the mobile media company.
The issue of capital seems to be a major bone of contention. Some funds claim they can only fund a minimum of $1 million while some companies may be interested in $200,000.
“There needs to be an understanding that big money doesn’t always help,” Mr Agosta says. “Maybe what we require is smaller amounts of money and the business will grow, some of the funds are not realistic, they claim to fund SMEs but the kind of money touted can start a manufacturing plant in Kenya.”
Local start-ups that have benefited from the venture capitalists are Verviant, Pesapal, Jumuika, Ratio Magazine, Paystream and TKM Maestro. TKM got Sh80 million for expansion from TBL Mirror Fund through Fanisi. Fanisi Venture Capital Fund recently invested $1 million (Sh80 million) in Paystream Ltd.
Dr Vincent Kouwenhoven of EVentures Africa Fund (eVA) says: “We are seeing excellent technology ideas particularly in mobile and many start-ups have high potential.”
As venture capitalists, Mr Kouwenhoven says they look for a clear vision of market potential, proven technology and entrepreneurial track record. And as such, he says entrepreneurs need to have clear business plan, realistic view on valuation and budget and a strong team.
“The future looks very promising. Nairobi seems to be destined to become the hub for webapps in Eastern Africa,” Mr Kouwenhoven adds. eVA invests between $34,931 and $346,144 with a preference for businesses in Kenya and Ghana. Itd area of interest is internet and mobile applications and e-commerce. Some of the firms they have funded include Pesapal, Verviant, Jumuika and Ratio Magazine.
Mr Paul Ohaga of Fanisi Capital says they look for business ideas that are sustainable in the long-term.
“Innovative ideas that seek to solve tomorrow’s challenges not today’s. We need to be assured that the business will still be relevant tomorrow,” he says.
Recently, Kenyan-based technology firm, Virtual City, won $1 million in Nokia Innovation Challenge Award with a solution aimed at streamlining the supply chain for distributors and retailers.
Just two weeks ago, 20 equity firms from the US jetted into the country to scout for IT start ups. They were hosted by Savanna East Africa, an investment group keen on investing in East Africa’s booming ICT sector.
Boot-camp
Savanna East Africa CEO Philip Verges said Kenya and other East African states have become attractive to investors due to the arrival of the fibre optic cables which has increased internet access and lowered bandwidth costs.
“There is a huge growth potential in technology in East Africa, but that development is hampered by the lack of financing,” Mr Verges said. “We have witnessed a technology leapfrog in the region and believe this will be boosted by consistent and standardised access to capital.”
Late September about 20 Indian companies toured Kenya to scout for buyouts in software and business process outsourcing. IPO48 is another initiative held over the October 29-31 weekend at Strathmore University to help start-ups get funding. It is a boot-camp style initiative to connect the tech crowd in Kenya.
It brought together entrepreneurs, programmers and designers to build mobile and web services in just 48 hours. AkiraChix, the all-girl team, emerged winners, taking home Sh1 million for the M-Farm, a mobile-based market that creates transparency for agricultural produce so that farmers and brokers can achieve better prices for their produce.