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.
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.