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Kenya's technology push leaves investors cold

31 December 2014, 10:26

Nairobi - Kenya's technology rush gave hope that new ideas would help millions of Africans use their mobile phones to circumvent poor infrastructure but local start-ups are failing to draw major investors or create profits.

Lack of talent, problems in attaining seed capital and ideas that cannot be sold to a mass market or easily monetized have so far held back hundreds of Kenyan start ups.

Many were drawn to the tech sector by the Kenyan government's push for a "digital future", plentiful Western donor funding and foreign media coverage about "Africa's Silicon Savannah".

"From co-founders of Facebook to the biggest tech funds you can find in Silicon Valley, they've all been here to look and they have all gone home shaking their heads," said Nikolai Barnwell, a Nairobi-based director of 88mph, a tech seed fund.

His fund, which has seeded almost 20 companies in east Africa's biggest economy, is taking a break from investing in Kenyan start-ups to focus on Nigeria where he believes the tech ecosystem is more profit-focused and there is less "fluff".

At least 70 percent of start-ups in Kenya are "not earning enough to maintain business and living expenses for a small team," according to a recent "Digital Entrepreneurship" survey by GSMA, a global association of mobile operators. It's survey contacted more than 230 start-ups across Kenya.

Major exceptions include Wananchi Group, one of east Africa's biggest cable and internet-based phone companies, which is valued at over $100 million. Another is Craft Silicon, a software firm believed to be worth tens of millions.

Safaricom, Kenya's biggest telecoms firm, is a model of how technology can be used to financially include millions of people with mobile telephones but without access to traditional infrastructure such as the banks that are available to the wealthy or those living in cities.

Safaricom in 2007 pioneered its M-Pesa mobile money transfer technology, now used across Africa, Asia and Europe. It proved that money can be made from people who earn a few dollars a day. It generated revenues worth 27 billion shillings ($300 million) in the last financial year.

But similar ideas to harness that economic power have been elusive. Safaricom's chief executive, Bob Collymore, has urged entrepreneurs to innovate to solve Africa's inherent problems: access to water, healthcare and education.

"There's no shortage of innovation, there's just a shortage of useful innovation that meets need," he said in a recent GE Look Ahead interview.

"No roadmap"

With mobile phone use nearing 80 percent, cheap data and soaring smartphone uptake, Kenya provides one of sub-Saharan Africa's most appealing environments for tech entrepreneurs.

Kenyan farmers receive updates on the latest crop prices via text messages, while coffee-sipping urbanites can shop and hail taxis through smartphone apps. Yet critics say only a small percentage of Kenya's 44 million people use these services.

Forced to play catch up on development issues, engineers hope Africa can jump to the front of the technology revolution.

But Barnwell said talent tends to move into real estate or banking, sectors which offer huge rewards with less risk, particularly since many African investors have little understanding of technology.

Also read: Kenyans embrace mobile money transfers

"Tech is very risky and there are so many other low lying fruit for investment, why take the risk with tech," said Dorothy Gordon director general of the Kofi Annan centre of technology excellence in Accra, Ghana.

Jeremy Gordon, founder of Nairobi-based Echo Mobile, said recruiting is tough and tech start-ups spend a large amount of capital on engineering talent.

"Equity is less attractive to engineers in Kenya when weighed against salary, which is not surprising given the nature of the start-up space, availability of funding, and the Kenyan economy," he said.

Mark Kaigwa, founder of Nairobi-based tech consultancy Nendo, said Kenyan techies broadly focus on the business-to-consumer market that grabs headlines even though most of the profitable start-ups service the business-to-business segment.

"You have a swarm of developers who are looking at business-to-consumer apps but with no roadmap," said Kaigwa.

Shortage of investment, a perennial African problem, is another impediment. Early seed capital provided by the likes of 88mph and a handful of other funds is scarce. And with interest rates on Kenyan loans often topping 20 percent, bank debt is expensive.

It is a familiar problem to Echo Mobile's Gordon, who is seeking to raise up to $1 million for his cloud-based mass messaging platform that is used in eight countries, including Sierra Leone, where IBM is conducting Ebola-related community research through it.

Rather than pitching to Kenya's business elite, Echo Mobile is currently holding talks with U.S. investors.

"East Africa hasn't seen huge tech acquisitions or other types of exits, the events that make early stage investments truly pay off," Gordon said.

But there is hope. African economies continue to expand rapidly, Safaricom has launched super-fast 4G internet and 19 million Kenyans are expected to own smartphones by end of 2017.

"We will get another chance. People will come back when real money is ready to be made," said Barnwell.

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- Reuters


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