Startups turn to foreign aid as local investors shy away

Thursday, July 28th, 2022 10:00 | By

Most local investors are hesitant to support tech startups despite the country being known for producing innovative technological ideas that disrupt the world.

Startups support rapid socio-economic development, as evidenced by Twiga Foods and Sendy which support over 30,000 small businesses across their value chains, not to mention MKopa solar and Fintech companies providing electricity to rural areas and financial inclusion.

However, they have been given a wide berth by local individual and institutional investors, who prefer the traditional investment vehicles such as land, real estate and stocks.

A report by Global System for Mobile Communications (GSM) indicates that 80 per cent of local tech startups in their infancy are either self-funded or rely on financial kitties advanced by their family or friends.

A factor that Victor Agolla, managing director of Viffa Consult attributes to a hostile tax environment, lack of access to finance and absence of de-risking mechanisms.

“This is because usually, these startups have a risk element during their infancy as they have not settled on a business model yet,” he said.

The tax environment does not also favour venturing into the sector, with local investors citing Capital Gains Tax, which would eat into their profits when disposing of the startups. The tax is due for an upward review from5 to 15 per cent early next year.

They also lack de-risking mechanisms similar to the credit guarantee scheme offered to small businesses offering third-party credit risk mitigation to lenders through the absorption of a portion of lenders’ losses on the loans made to the startups in case of default, typically in return for a fee, according to Agolla. Many urbanite Kenyans hugely embraced online markets as a mitigation measure against the spread of the Covid-19 pandemic in March 2020.

Financial assistance

However, despite the promise the sector holds, Abdul Varvany, chief executive of Airduka, a local online marketplace said the investment scene in the country lags in comparison to growth, forcing startups to seek financial assistance internationally.

“Every business idea needs support, especially in the early stages. However, local investors, who matter, especially at those stages, show little interest in supporting startups,” Varvany said, a factor that has led to many shutting down in their infancy, with few accessing venture capital. According to the AfricArena 2021 report by Partech, an investment platform for tech and digital companies, in 2020 Kenyan startups raised Sh33 billion through venture capital investments, coming second to Nigeria’s Sh33.3 billion. 

The landscape has gone further to attract a pool of international investors including Microsoft and VISA, who have set up their innovation hubs in Kenya.  Google also launched its first product development centre, while AmazonWeb Services announced its AWS local zone cloud infrastructure.

Africa Startup equity deals in 2021 recorded $5.2 billion (Sh616 billion) as compared to $1.43 billion (Sh169.6 billion)in 2020 with 72 per cent of funding going to deals of over $20 million (Sh2.4 trillion).

Nigeria accounted for 34 per cent of the total equity funding with Kenya attracting 93 deals of which 74 per cent was seed stage, according to the Partech report.

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