By Caroline Theuri
Starting or running a business is not easy. From looking for capital, choosing a team to work with and managing the business’ day-to-day aspect. Whether it is the mama mboga (a lady who sells vegetables) or an established startup, sustaining a business demands a lot.
But compared to those that have not plunged into the business world, most startups offer viable solutions. In Kenya, unemployment rate has been on the rise since 2000, increasing from 16 percent to over 20 percent in 2016, according to data from the International Labour Organisation (ILO). The increasing numbers, ILO says, is due to inadequate training offered to youths that is unable to meet demands of the job market, or few formal employment opportunities.
However, according to a 2016 report by the Kenya National Bureau of Statistics (KNBS), over two million startups in the country closed down between 2011 and 2016, mainly due to challenges relating to high operation costs, inadequate funds and inability to keep up with market competition, justifying the realities faced by startups in the market.
Intriguingly, these challenges notwithstanding, Kenyan startups are some of the most funded in the continent.
In its working paper titled: Survey of the Kenyan Private Equity Landscape, published last year, World Bank reports that Kenya is the third country in Africa after Nigeria and South Africa that has seen the highest level of private equity investments which, as of 2015, stood at US$755 million.
In East Africa, however, Kenya takes the largest share of private equity deals, the KNBS report reveals. As of four years ago, the country had secured 61 percent of deals, followed by Tanzania at 30 percent. This begs the question: Why does Kenya present such a favourable ground for investors, especially venture capitalists, yet startups in the country close down?
According to Jason Musyoka, the manager of Viktoria Business Angel Network (VBAN), a venture capital firm based in Nairobi, most startups fail, but venture capitalists like themselves, look at certain factors such as whether the startup addresses a problem that can be commercialised before they invest in them.
“These include giving capital to startups that require an investment, at the opportunity cost that the startup will have for the Venture Capitalist, as well as whether the startup can be able to give back to the society,” Musyoka says.
Viktoria Ventures traces its journey to 2012, when two founders, Stephen Gugu and Yaron Cohen came together to help local innovators develop their business ideas. The company started out by holding demo days for the entrepreneurs and other early-stage ventures, where they would invite the innovators into a room and they would pitch their ideas.
But the venture capitalists would later realise that there wasn’t much progress, since there were not much investment ploughed back. Hence, in 2014, the business partners decided to change tact. They rebranded and joined a network of other venture capitalists comprising of 32 members who cut across different sectors such as fast moving consumer goods (FMCG), banking, tech and private equity.
The network has since enabled the firm get huge benefits. One of its most important aspects, Musyoka says, is that it helps them undertake due diligence. It also opens them to a floodgate of deals and speeds up time it takes to get funding proposals (known as deal flow), besides giving them an interactive platform. Additionally, VBAN offers Master classes on different times in the investment cycles, such as how to manage an exit.
According to Musyoka, a unique factor about VBAN is that it enables startups transit to the growth stage through funding, owing to the challenges startups get while trying to access funding for their ideas due to the common equity risk they bear.
This problem is not only confined to Kenya, but also in other countries such as the United States of America, where big banks have been shying away from lending small businesses in the recent past. According to the Wall Street Journal, loans to small businesses declined from $44.7 billion in 2014, from $ 72.5 billion in 2006.
In such a case, why would a venture capitalist bear such a risk? Why invest in startups yet other institutions are shying away from them?
Musyoka says that the opportunity cost for VBAN is that if they fund entrepreneurs, the latter can be able to create job opportunities for others and create a social impact in the communities where they operate.
The venture capitalist also projects if the startup’s idea can generate the necessary profits that can be ploughed back into the investment. The firm invests amounts ranging from USD50,000 to USD300,000 in the startups. The stake is in the form of a convertible note, which is a debt instrument that expires upon maturity of the investment.
“Just because something is risky does not mean it cannot be funded. A venture capitalist can leverage on their experience which can lead the startup to experience business growth. Another aspect is to plug the areas where it is risky, which can then help businesses to grow,” Musyoka says.
Among the many achievements Viktoria Ventures has so far has been to activate two deals, by bringing on board angel investors to a partnership that funds the startups. They’ve been able to close between eight to ten such deals, as part of the Viktoria Business Angel Network, spending a turnaround time of between three to four months to seal a deal. Angel investors, Musyoka says, should be able to understand the risk profile of the business they plan to invest in.
Even then, Musyoka says, it hasn’t been easy running the firm as getting quality deal flows is a challenge, more so tapping people to invest in a startup. Another factor is the risk element that is involved. As an angel investor, the manager explains, one bears the risk as an individual, while as a network the cost is distributed among different angel investors.
Musyoka, who holds an undergraduate degree in Economics from the University of Nairobi and a professional accounting qualification from Association of Chartered Certified Accountants (ACCA) from Strathmore University, says that his credentials have come in handy, especially when it comes to evaluating potential deals, sealing the deals and in portfolio management.
His advice to startups is to understand their customer so that they can come up with a product that is fit for the market.
“Be flexible and coachable, because then it is easier to reiterate on your product and get a good market fit. Also, network so that it can be easier to position yourself where funding is,” he says.