The startup ecosystems in Nigeria, Kenya, and South Africa make up the three most-funded startup hubs in sub-Saharan Africa. But unlike in Nigeria and South Africa where local players generally hold sway, the startup scene in Kenya is dominated by a population of foreign founders that some may describe as an inordinate amount.
In Kenya, expat founders raise much more money than local founders, as expat-founded startups are many times more likely to close investment deals. It appears there’s a long-standing bias towards foreign founders; it’s kind of a diversity hole and the country’s startup ecosystem now seems to be rigged against locals.
As per data compiled by WeeTracker, Kenya-based startups raised a total of USD 428.9 Mn in total disclosed funding deals recorded in 2019. Expat-founded startups were the recipients of 87.8 percent of that sum, raking in a staggering USD 376.7 Mn.
That year, some 63 Kenyan startups disclosed funding deals, and 41.2 percent of those startups were founded by expatriates. A year prior, startups founded by foreigners accounted for 52.2 percent of the total number of startup funding deals disclosed in Kenya.
In fact, some of the most-funded startups in Kenya almost always have a foreign (usually white) co-founder. Perhaps, Cellulant and Wananchi are the only genuine exceptions.
Such foreign dominance is not the case for any other key startup hub in Africa, besides Kenya.
In attempting to explain the overwhelming dominance of expats in Kenya’s nascent tech startup scene, Bernard Momanyi Nyagaka, Co-founder & CEO at Onesha Technologies Ltd., said:
“Most investors who put in money in startups take huge risks due to the unproven nature of business models for these businesses. To reduce their risk, they hedge against startups that have founders who have no experience either in the corporate world or domain expertise in the field that their startup is operating in, or they take a risk on referrals they get and people they know really well.”
He added, “I tend to believe that there are hundreds of Kenyan startups doing amazing things but aren’t getting the spotlight because they either have minimal revenues or haven’t raised as much cash.
“It’s time we changed our perception of what really makes a startup successful in the long run; which should prove of building a repeatable and scalable business model even if that takes 10 years instead of cash raised.”
Evidently, it’s as though foreign nationals who are building a business in Kenya are just so great at what they do, or the locals just really suck. But there’s also a third option; maybe the entire startup-venture capital system is currently set up to favour foreigners and marginalise locals.
“The issue of capital raise in the Kenyan startup space is a bit complex than it seems because it’s a mix of micro factors on the foundations of a startup and macro factors on the maturity of VC capital in that market,” Nyagaka told WeeTracker.
“In Kenya’s case, angel investments and venture capital go to founders that have built something meaningful before or is more likely to go to founders who happen to come from markets where startups have become a success since they have a ‘first-hand observation’ on how to build upside for capital that they receive.”
Nyagaka’s submission seems quite plausible and probably even encapsulates some of the less-talked-about principles behind the concept of venture capital. But there’s a flaw in that the bias is not always fuelled by business interests, pedigree or track record. Sometimes, or perhaps more often than not, it’s more of raw bias borne from physical identity and personal affiliations.
If not, how then does one explain how expatriate founders who lived in Kenya for zero years before founding their startups accounted for up to 65 percent of startups that raised funding in the country in 2018? If it’s really about business, how does that make sense? Unless it’s really about something more primordial than it is empirical.
Harvard Professor, Laura Huang, states thus in her paper titled “The Role of Investor Gut Feel in Managing Complexity and Extreme Risk”;
“If they (investors) relied solely on pro-con lists, or what the hard numbers look like for the company at their current state, probably none of these investments would be made.”
She continues: “Gut feel is the factor that allows them to invest despite what might seem overly risky.”
As serial entrepreneur, Roble Ega Musse, aptly put it in a recent Medium post, “This gut-feeling is borne from the investor’s years of experience, seeing what has worked and what hasn’t, but it is also influenced by the investor’s worldview, including their biases. VCs in Kenya are mostly expatriates, and it’s their worldview, their biases that are playing a significant role in creating this funding disparity.”
Indeed, there exists a natural, though unimaginative human longing for what is familiar, for predictive patterns. And it follows that investors are more likely to be sold on the idea of a “white Mark Zuckerberg’ than a “brown Elon Musk.”
In Kenya’s tech community, this is manifested in the form of huge capital preferentially doled out to expat-founded startups while local founders with identical or even better resumes/offerings remain sidelined or shortchanged.
“If you look at the profiles of most of the expat founders, these are people who have worked for consortiums like McKinsey, PwC, BCG, Google, Endeavour, etc. How does this help, it buys you social capital which reduces your lead time when soliciting for introductions to VC funds,” explained Nayagaka.
With that in mind, it could be said that past and present connections, rather than current capabilities and capacity, is a huge factor in determining who gets what.
In 2017, Village Capital revealed in a study that more than 90 percent of funding for East African startups go to expat founders (most early-stage investors in East Africa are expats themselves).
That said, there’s also some kind of disconnect between entrepreneur quality in emerging markets and investor perception — particularly when those investors are from elsewhere.
In 2016, the Global Accelerator Learning Initiative (GALI); a partnership between the Aspen Network of Development Entrepreneurs and Emory University, researched why foreign VCs are lukewarm about investing in startups in emerging markets that can’t lay claim to at least one expat co-founder.
All talks of deficiencies in skill, exposure, knowledge, education, experience, desire, and commitment were dispelled when a study of 2,400 founders in emerging market revealed that they were, in fact, at par with, and even in some cases, ahead of their peers in the west, with respect to those terms.
Delving deeper, the GALI research stumbled upon something that seems even more troubling; investor bias. A portion of the research reads; “cultural bias might be driving the perception of lower entrepreneurial skills”, and that investors claimed emerging market entrepreneurs lacked experience, despite evidence to the contrary.”
In his book “Un-Silicon Valley,”, Musse researched the founders listed on the Kenya Startup Funding Report for 2018 prepared by Founders360.
Musse figured that 70 percent of startups in Kenya that received a million dollars or more of Venture Capital (VC) investment in 2018 were led by a white expatriate founder. This is in spite of the expatriate community making up only 0.15 percent of the population.
After crunching some numbers, he came upon the mind-boggling conclusion that “white tech startup founders are 50,000 percent more likely to get funded in Kenya than in the USA.” He reiterated that he specified “white” because the overwhelming number of expatriate founders in Kenya are white and he believes it is an issue of race.
Per the research, it was also gathered that “75 percent of expatriate founders held non-technical degrees. Sixty-five percent held an undergraduate degree and only 15 percent could be considered experts with nine years or more of specialized experience in the field they were working on.”
By all accounts, Kenya holds its own on this front. With close to 49 universities, the country is a known breeding ground for professional talent. Like Nigerians, Kenyans in the U.S. even outdo some immigrant groups from Europe and Asia in terms of education and earnings, according to Musse.
At the moment, there’s absolutely no established evidence that local Kenyan founders are at an educational and experiential disadvantage relative to expat founders.
This should, once again, dispel any talk of the overwhelming majority of capital finding its way to foreign founders in Kenya due to a skills gap on the part of the locals.
It also counters any claims to the superior know-how of expats since, in truth, local entrepreneurs are better equipped and adept at solving local problems due to their first-hand knowledge of the lay of the land.
Featured Image Courtesy: Techpoint