Ecosystem Deep Dive #10: Kenya - East African Pioneer
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Ecosystem Deep Dive #10: Kenya - East African Pioneer
Carried by early, market-creating innovations such as M-Pesa, Kenya continues to boast one of the hottest African start-up ecosystems to date.
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!
Pioneering innovation
Kenya has always been a heavyweight in the African start-up/innovation scene at large. The East African country enjoyed some key, early developments that allowed its ecosystem to flourish faster than its neighbors’. One of those early developments came in 2009 with the construction of TEAMS, an undersea fiber-optic cable that gave many Kenyans access to faster internet than people in the US. That project still carries its weight today, with 95% of Kenyans in urban areas having access to the internet. That boosted the timid but growing innovation scene that was already taking shape in the country, exemplified by M-Pesa, a mobile-money wallet piloted by telco giant Safaricom in 2007, and Ushahidi, a crowdsourcing platform launched to track election violence.
M-Pesa in particular would turn out to be what author Clayton Christensen refers to as a “market-creating innovation”, a concept he outlines in his fantastic book “The Prosperity Paradox”. According to Christensen, market-creating innovation “transform complex and expensive products and services into simple, more affordable products, making them accessible to a whole new segment of people in a society whom we call non-consumers”. In other words, a market-creating innovation introduces a whole new part of the population to a service/product, enabling entrepreneurs to capitalize on it. In M-Pesa’s case, Safaricom combined the concept of using a mobile phone as a “digital safe” for cash with a broad network of agents through which users could access their “real” cash. Today, 70% of Kenyan households use M-Pesa, a boon for Kenya’s private sector.
“MPesa created financial inclusion for millions of unbanked in the informal sector and its mobile payment system made it easier for B2B and B2C transactions, an unprecedented opportunity for entrepreneurs. In 2019, Vodafone reported that MPesa had an active customer base of 37 million who 11 billion transactions that year." - MEST Africa
Kenya’s start-up ecosystem, today
The Kenyan start-up ecosystem today is still one of the most active and attractive African ecosystems, even though the giant on the other side of the continent, Nigeria, claims the most impressive funding numbers. The tech talent and potential in Kenya is internationally recognized, with the country’s ecosystem often being referred to as “Silicon Savannah”.
In Kenya, the ecosystem is largely centered in Nairobi, the capital, although other cities such as Kisumu and Mombasa are marking their mark. Three of the most active sectors Kenyan start-ups innovate in are:
Fintech:
No surprise here, but fintech innovation is broad, whether it be lending, fundraising, remittances, insurance and/or investing. Owing to these innovations, the number of people accessing financial services in Kenya tripled from 26% on 2006 to around 82% in 2019. Encouraging legislation such as the recent regulation of digital lenders, should spur more innovation in the sector.
Some of the top Kenyan fintech start-ups include:
Healthtech
According to HBS, 60% of start-ups in emerging markets target basic human needs, with healthtech innovation taking a large part of the pie. I think we need a discussion around the so-called “privatization of healthcare”. While the term is inextricably linked to greedy big pharma, healthtech start-ups that find a financially viable solution to a population’s medical needs should be supported and work in tandem with existing, public medical infrastructure. In Kenya, a plethora of impactful healthtech start-ups exist, with two of them really catching my attention:
Afyakit: A social venture start-up, focused on improving health outcomes by providing actionable in-facility data to health sector players across Sub Saharan Africa.
Sisu Global: Designs and commercializes medical devices with and for emerging markets. They develop patented, clinically proven, high-margin medical devices that can be quickly deployed throughout emerging markets’ healthcare facilities.
Agtech (agriculture technology)
Agriculture is one of the most important yet grossly under-digitalized sectors in economies worldwide. Kenyan agtech start-ups are building full-stack solutions to bring the benefits of digitalization to farmers. Two really inspiring ones include:
Lentera Africa: Enabling farmers increase their yield through satellite based crop analysis and smart inputs.
iFarm 360: A platform that links smallholder farmers in Africa with large buyers using tech-enabled hubs.
Another “bonus” sector I would add are Kenyan start-ups specializing in helping African start-ups raise money from international investors, wether it be through investor-matching or legal restructuring. Two examples of those would be Raise and Pariti.
Ecosystem actors
Kenya’s start-ups don’t lack what are commonly referred to as ESO’s (entrepreneur support organizations), such as incubators, accelerators, co-working spaces, etc… Some actually argue that Kenya should stop creating new ESO’s and instead focus on growing and consolidating the couple ones that work. As Nekesa Were, director of strategy at AfriLab states,
“Opportunities for collaboration are bypassed in favour of duplication of programs and consequently funds that should ultimately support entrepreneurs are spread thin."
Neverthless, this necessary consolidation of the ecosystem around a couple successful initiatives and support umbrella organizations is already underway, with organizations such as ASSEK and Startups Savanna representing the interests of Kenyan start-ups and SME’s both domestically and abroad. Some of the country’s most renown incubators are:
For more ecosystem information and resources, I would recommend checking out this article, based off the book “Start-up Guide Nairobi”. Funding for the Kenyan ecosystem is pretty solid, with the country constantly ranking amongst the top African performers.
Government involvement
What’s interesting about the Kenyan start-up ecosystem is that it managed to flourish early-on without much “direct” government involvement, except obviously infrastructure projects such as the undersea fiber optic cables mentioned at the beginning. On the other hand, big corporates were immediately very involved in the ecosystem, pushed on by the fact M-Pesa was, in essence, a corporate innovation. This still stays true to this day, with companies such as Facebook, Google and Microsoft implementing offices in Kenya to benefit from the overflowing talent of the Kenyan youth (although some suggest this has an adverse effect on the ecosystem, as these big companies lure in the best local talent with high salaries, depriving local start-ups of their brightest local minds).
In recent years, the government has had to get involved in the ecosystem, especially on the regulatory front. The countries that are best managing and empowering their local ecosystems are the ones that:
Take a “regulatory sandbox” rather than a “ban all crypto” approach.
Work hand-in-hand with ecosystem actors to create new, relevant and sensible pieces of legislation.
Make a concerted effort to promote their country’s start-up ecosystem on the world scene (Start-Up Tunisia, La French Tech, Start-up Estonia)
In light of that, the Kenyan government has been working on and passing some interesting legislation in recent years, with the pinnacle of all that work taking the form of the 2020 Start-up Bill, which seems to be based off the Tunisian Start-up Act in the sense that start-ups needs to apply and get approved before taking advantages of the benefits offered under the Bill.
The Bill basically outsources the execution of this new vision to the newly-created Kenyan National Innovation Agency, who will be in charge of “creating partnerships among local and international business incubators; creating online directories of start-ups and incubators; and registering and certifying start-ups and incubators.”
Under the Bill, the Agency will subsidize the formation of start-ups, facilitate the protection of intellectual property innovations by Kenyan start-ups, provide support to enable the growth and development of registered start-ups and put in place measures for the granting of fiscal incentives, including tax incentives. - Bowmans Law
One of the questions I had when reading the Bill was that the provisions of the benefits only apply to start-ups who have their headquarters in Kenya; does that exclude start-ups that operate a “Delaware Flip”, a process that consists in creating a Delaware-based holding company in order to raise foreign capital? If so, that might hinder promising local start-ups to raise money from abroad, as foreign investors are often reluctant to invest in foreign entities. Pakistan’s recent move to allow local start-ups to create foreign holdings in order thus raise foreign capital has had an incredible positive impact on the ecosystem’s funding numbers.
The Bill was very recently approved by the Kenyan Senate, with no objections, which means it moves onto the next stage in the legislative apparatus. It is also a testament to the strong governmental support to promote innovation in the country.
Racism in the ecosystem
As the African start-up scene grows and develops, many founders from Europe and the USA shoot their shot at creating a successful African start-up, using developed investor and advisor networks in the “global north” to tap into potentially very lucrative African opportunities. Most of the time, these “mzungus”, the Kiswahili word for foreigner/white, often copy-paste successful concepts from the “western” start-up world to the African context. The most famous case of this trend is definitely Jumia, commonly referred to as “Africa’s Amazon”, the first African unicorn, which was co-founded by Jeremy Hodara and Sacha Poignonnec, two French, former McKinsey consultants alongside Tunde Kehinde and Raphael Kofi Afaedor (although both African co-founders left the company fairly early). The company is often subject to controversy, whether it be their questionable decision to IPO or their very “distributed” team that leads many to question the true African nature of the company.
I won’t pronounce myself on wether non-African CEO’s are good or bad for the African start-up ecosystem because the answer definitely isn’t binary. At the end of the day, almost 50% of start-ups in Silicon Valley are founded by immigrants. But then again, the context/history of foreigners in Silicon Valley isn’t even closely comparable to the context/history of foreigners in Africa. In Kenya, one of the country’s best performing incubator (iHub) was created by Erik Hersman, an American, in 2010.
What is undoubtedly a problem however, is the institutionalized racism African founders face when competing for funds with western founders starting companies in Africa. In Kenya, a $1M seed round raised by Robin Reecht, a French founder for food-delivery app Kune created huge backlash among the Kenyan start-up community, due to the ease with which the round was raised in comparison to how difficult it is for extremely talented African founders to even get an angel check.
In East Africa, 90% of disclosed startup investments in 2015 and 2016 went to companies with one or more European or North American founders." - Village Capital Report
In conclusion to this segment, foreign investment is good and needed for the African start-up ecosystem; but if western VC’s replicate the “"looks-like-me sounds-like-me" attitude in African markets, you’ll just end up with a bunch of western founders trying to “solve” African problems? Sounds familiar? Uncomfortable? Yeah, no one wants that.
Conclusion
The Kenyan start-up ecosystem is an extremely interesting case study, as it has had a very “unusual” early development. Indeed, the ecosystem was completely bolstered by a corporate innovation project (M-Pesa) and benefitted from governmental policies (underwater fiber optic cable) very early-on. Most ecosystems, like Nigeria, have an opposite growth, with gritty and visionary founders laying the groundwork for the flywheel to get going, before big corporates and the government even noticed something is happening. There is no “right” way of doing things but Kenya’s ecosystem trajectory is definitely fascinating.
Lots of exciting developments are likely to happen in the coming years for the Kenyan start-up ecosystem, as the Start-up Bill takes form, African start-ups gain more and more international attention, and the era of remote works enables Kenyan start-ups to tap into a wider talent pool. Two start-ups I’m excited to see develop are Flex Energy (pay-as-you solar energy) and Aza Finance, a “provider of currency trading solutions that accelerate global access to frontier markets through an innovative infrastructure.”
Question of the week: What is your opinion on western founders in the African start-up ecosystem? What are pros and cons? Tell me what you think in the comments!
See you next week, for a deep dive into Egypt’s start-up ecosystem.
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