Fairly recently I wrote a piece on “The ICT Funding Gap in Kenya“. We noted the existing gaps as far as funding is concerned particularly at the earliest stage of a tech startup. But it seems there is another side to the funding coin.

In the recent past, the situation has radically changed in terms of the availability of funding particularly for software based startup funding at the seed level. Whereas, we’re not quite there yet, the situation is definitely not what it was even as little as a year ago. There’s more funding in the ecosystem and more funds willing to risk investing in early stage startups. And based on how things are currently progressing it may well be that the tables could soon turn or are already turning to a situation where the pressure is on startups.

Following a discussion with some of these funds, I found they too are having certain challenges with funding startups.

100% Commitment

One of the main concerns of some of these funds is basically that they’re finding that local startup founders are not willing to commit 100% to their ventures. The founders are going about they’re venture, not because they believe in it or are sold out to it, but more of as a side project, what here could be termed as a “side hussle”. The founders have a few more projects on the sidelines that they’re not willing to let go of to pursue this particular one that they’re seeking funding for.

Seed funding is a rather risky affair as it is, investors at this level are comfortable with that risk, but would want as much as possible to keep that risk within what is manageable. If a founder is split on what they want to do, and are not sold to one project and committed to giving it their best shot, then that presents an even greater risk for the investor. This “hussle mentality”, drastically reduces the chances of success and hence the chances of the investor making a return on their investment.

Perhaps, on the other side, I could see why some local founders may have this “hussle mentality”. You see, unlike other parts of the world where a history of the success of tech startups has been established, such is yet to become clear here. In a manner of speaking, as far as the history of tech startups and innovation goes here in Kenya, it’s still the equivalent of those first few million years post the Big Bang. Yes, there are a handful of success stories at varying degrees, but we’re yet to see a good number of them. Perhaps, this leads to some founders thinking they need to spread their risk – if this doesn’t work, I still have this and that. Basically, hedging their chances of success.

But that does work from an investor point of view, the investor is thinking, “I’m risking my money on your venture, you’d better be committed to it”

Good ideas alone won’t cut it

The other concern that came out is this myth that good ideas alone are good enough. Christina Tamer of Invested Development said it this way:

Technologies and businesses must be market-driven. It’s important for entrepreneurs not to confuse market need with market demand. Just because people ‘need’ something or could use it, it doesn’t mean that they’re demanding it as a market and are willing to purchase.

Many startups are founded on the idea of what the market ‘could‘ use. What they ‘might‘ need. Or what is perceived to be something people would want versus what they actually need. Or on the other hand what just sounds like a good idea to the founder, or what has worked in other markets.

This simply calls for market research, which it seems, few tech startups are doing. One might argue that it could be out of the reach of most startups to afford doing comprehensive market research, but even without rolling out such an effort there is a level of research that one could carry out with little or no money. Simple things like talking to the right people such as either people who would be the target market for the product or service, or experienced people from that sector.

There definitely are ideas that take off based on a deep intuition by the entrepreneur on what the market needs or anticipating what people could use, and even foreseeing what future needs to be. But even then some market research helps to clearly define the market and then build on that. A clear market means less risk for the investor, and higher chances of making a return on their investment.

Coupled with this issue of defining markets is the issue of defining a workable business model for the startup.

The NGO/grant money effect on valuation

This is probably one of the most interesting insights I got, because I had never thought about it. If you’re in any way involved in the tech community here in Kenya, you will probably hear of a NGO backed hackathon or contest quite often. The idea is usually to provide grant money to people who come up with good ideas to solve some (usually social or human) problem. And there’s big money to be won in most if not all cases.

What some of the funds are identifying as a potential downside to this is that it’s creating not businesses, but simply people who come and put something together just for the prize money. Not only that, it blurs the lines as far as how to value a startup in the earliest stages. It’s feeding more to this “hussle” mentality instead of producing solid tech-based businesses.

Perhaps investors need to also come up with more IPO48 type events that are not just about creating cool technologies that don’t translate into business but actually finding good ideas and people to run with those ideas and then investing in them over the long term versus just giving them prize money. This is what gave good ideas like M-Farm the muscle to move ahead instead of dying at the level of just having won some prize money.

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13 comments

  1. Mr. Majani Reply March 21, 2012 at 2:25 pm

    Many of these points are true. You did not talk about one important factor though: that the overwhelming majority of investors in Kenya are ‘impact’ investors who are looking for non-profit startups to invest in. The techies setting up NGOs and looking for grants are logically following the money.

    • Will Mutua Reply March 22, 2012 at 2:09 pm

      An interesting observation, Majani…

  2. Christina Tamer Reply March 21, 2012 at 6:03 pm

    Thanks for sharing the other side! Now to get the two communities in sync.

  3. eVA Fund Reply March 22, 2012 at 10:52 am

    Hi Will,

    One again…spot on!

  4. Muchiri Nyaggah Reply March 22, 2012 at 2:24 pm

    Great observations Will!

    You’re right, research doesn’t need to be expensive. With as little as KSh10,000 in hand, a techpreneur can carry out a study in a rural community. We simply need to empower the start-ups with the basic tools to get the job done.

  5. Gidei Oscar Reply March 22, 2012 at 3:08 pm

    a good read, now having the other side of the coin

  6. Lukanga Reply March 26, 2012 at 12:20 pm

    Hi Will, these are many good observations. I totally agree that the lack of commitment is a threshold for me as a potential investor. I also agree, that NGO type initiatives are distorting the landscape.

    In recent weeks, I have seen only one single start-up that got everything right: they had a very good idea (nothing NGOy at all), what they wanted to do and whom they wanted to serve. They first talked to their potential customers and then built their prototype. After that, they talked to potential investors with a business plan in hand (short, but full of facts), asking for a very small investment (about USD 800) to carry out a more substantial market research. After that, the investor will decide on a larger chunk of finance.

    They did not even aspire to enter competitions or be listed with their idea in blogs. They were first looking for customers, then for investors. They selected one specific focus area, even though the product has wider applicability. They diligently cross-checked every single one of their assumptions.

    These people have side projects to cross-finance their time, but if you are as well able as they are to document your progress and your ambition, then it is much easier for an investor to step in. It’s not what you can get away with, that will build a successful project, it is what you do truly well.

    • Will Mutua Reply March 26, 2012 at 1:22 pm

      Thanks for the comment, Jasper. Any chance you could share who? :)

  7. Pingback: Investor-Startup Meetup at Startup Garage | Afrinnovator

  8. Ola Pettersson Reply March 27, 2012 at 9:42 am

    Interesting viewpoint. I’d be interested to hear whether people feel that with this reasoning, “NGO money” or “challenge funds” (ie grants rather than loans to start-ups) are doing more harm than good?

    Or are there areas or sectors where this kind of initiatives are needed, for example because there is not enough profitability for private companies to engage? If so, which are those areas?

  9. Walter Oriedo Reply March 29, 2012 at 4:56 pm

    Great point outs there, great piece.

  10. Hassan Reply January 17, 2013 at 5:33 pm

    Will,

    Well said. Validating an idea with target market is the road to building a business. i came across this http://leanstartupmachine.com/validationboard/ which allows entrepreneurs to validate every aspects of a startup idea rather than assuming what the market wants. Its time to change the mentality of building cool products to win grants and instead build products which the market needs it right now!

    Great thing we have incubators which host our great entrepreneurs. The hubs should start focusing in changing the mentality building “cool” products to building viable businesses.

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