Venture Capital has risen to become the 6th most important source of finance for Kenyan entrepreneurs. There is quite a gap between this and the other top go-to sources for money.
You know the other 5. But Venture Capital (VC) is different. It is a bank and your rich uncle at the same time. A bank because it makes you jump through hurdles for that funding but there is a willingness to stick with you for a decent amount of time.
It sounds good enough. So, why is it getting bad rep in Kenya? I have heard both those who have endured venture capital funding and those observing from the sidelines brush it off as waste of time.
Others have issues with the entire set-up – like the, perceived, need to have a token white person on board to impress the venture capitalists. Thomas Sankara did his best to unravel this in a polemic on Medium. The actual Thomas Sankara was killed by France.
Many more dismiss it entirely as being out of their reach or scope. You cannot blame them. Venture Capital is associated with the tech sector and their preferred sectors of investment in Africa reveals this.
Just as you would guess, there is data that shows software and internet as the most funded sectors with more than 20% share each. The ‘e’ versions of commerce, agriculture and education follow closely. Retail, popular with women entrepreneurs in Kenya, gets only 3% of venture capital funding.
This is a problem because it is consistently found that they have a positive influence on performance of enterprises. All the things you would want to improve in your business do just that. Revenues, profits and assets all increase.
Management also gets better. This is because venture capitalists bring on board money and their experience for the medium-term gain that both of you eye. Are there, then, other underlying issues that are being missed?
Attitude of VC firms towards Kenyan entrepreneurs
You will not be pleased to know that a study by Village Capital confirms that Venture Capitalists, in the region, do have a negative bias towards entrepreneurs. It was labelled ‘The Pattern Recognition Problem’.
An investor surveyed says that this bias acts like “a filter” since conducting due diligence is quite some task, in these parts of the world. They therefore look for, excluding, indicators like who your daddy and mommy are, where you went to school or what accelerator program you were involved in.
That’s bad but it’s not too different from the signalling that is involved, today, between university graduate and employer or parent and school. Just as you have with premium bottled water, many have chosen to believe that some institutions of learning produce better students by default – so everyone fights to go there. Do you see how flawed human beings are?
This means that only “well connected elite” come close to funding. No surprise that you’re going to have expats in that category, taking 90% of funding. By the way, expats refer to white immigrants. The best we can do for the rest of you is “highly educated immigrant.”
There is more…
Obviously, that is not the whole story. We are all about both sides of the coin. The foreigners dominating venture capital in Kenya cannot be expected to appreciate local norms. Referencing the same aforementioned findings, Kenyan entrepreneurs need to improve on their managerial competency so that visions can align.
We know that corporate governance is a problem in Kenya. That is why 5 Poles were tasked with rescuing KQ. When it comes to MSMEs, there is a limitation to technical and entrepreneurial skills. It must be appreciated more that even if a VC firm comes on board, you’re still needed to steer the business to meet the exit time-frame.
There is also need to pool skilled and creative teams. Team is what gives the foreign investors confidence.
It’s pitiful that one said that, “it is hard to find mid-level career people trained to think creatively.” And went further to describe products as “vanilla” and “rinse and repeat.” Don’t forget that it is at this mid-level skillset that Kenya’s labor pool is based upon
Moreover, biases will not go anywhere. For one, you have two sets of people who think differently. Here is a good article on holistic (ours) vs reductionist (theirs) thinking.
There is a good example there on how these two mindsets would associate panda, monkey and banana. You and I are likely to link monkey and banana but an individual from the West would go panda and monkey, because they are both animals.
The only way to have more risk tolerant venture capitalists would be for domestic wealth to opt to invest in entrepreneurs. After all, the cost of acquiring customers in Kenya is considered to be high. They are more likely to appreciate the way things work in the local business environment.
Do you see that happening? If no, someone clever has to find a means of pooling money from them and others towards entrepreneurs. But is there trust for that?
We found that trust was one of the barriers to developing crowdfunding in Kenya. The reason trust is important is because business relations in Kenya are pretty informal, which means we should redefine what corruption actually is – in another place at another time.
