The startup ecosystem in Africa was shaken up late last year when 88mph, one of the active seed-funding companies in Nairobi, announced it would change its strategy to focus investments outside Kenya, in cities like Lagos and Cape Town.
The move, along with the departure of other businesses, has raised questions about whether Nairobi, and to a larger extent Kenya, provides a viable environment for tech startups.
88mph has pumped US$1.7 million into 20 startups, but officials have been reported as acknowledging that they have not succeeded in raising most of the companies they’ve invested in up to the next level.
Even some well-established companies, such as SleepOut, a holiday accommodation finder, moved from Nairobi to Mauritius last year, citing difficult business conditions in Kenya. In addition, South Africa-based e-commerce business Kalahari closed its Kenyan and Nigerian offices after they failed to be profitable back in 2011.
According to Manuel Koser, managing partner of Silvertree Capital, a South Africa-based investment firm, location alone does not determine the suitability of where to do business, but cannot be ignored.
Silvertree Capital has invested in startups in both Nigeria and South Africa. The companies they have invested in include e-commerce giants Jumia and Zando.
“If you have a longer-term growth plan then Nigeria is a good market, and for rapid profitability, South Africa is much easier,” Koser said. He added that in South Africa, good infrastructure aids business while in Nigeria more capital is needed to turn a company profitable.
In Silvertree’s experience, it is tough for a company to turn a profit within a year in Nigeria, but it’s easier to do so in South Africa. The estimated time to profitability is a key issue Silvertree considers. So far, Silvertree has not invested in any Kenyan startups, though it is still studying the market.
Since the evolution of mobile money in the East African nation, Kenya has been tipped to be one of the most promising countries to invest in. With mobile penetration rates of over 80 percent and high technical knowledge among the population, it has been considered a good breeding ground for investments.
Some international tech companies, like IBM and Avaya, have not shied away from basing their businesses in Nairobi. IBM has one of its research labs in Nairobi’s Catholic University while Avaya has its African headquarters in Nairobi. The mobile operator association GSMA also set up its first African office in Nairobi in 2013.
In 2014, though, the GSMA itself released statistics on business startup funding in Kenya, under the GSMA Digital Entrepreneurship study, and the numbers were low. Only 6.7 percent of startups had attracted venture funding, the study found. Other sources used for funding were family, friends and loans.
However, according to Intelligent Community Forum, a Canadian organization that ranks developing cities across the globe according to innovation and broadband penetration, Nairobi is one to be reckoned with.
Nominations to the organizations “Smart21 list” rankings are analyzed by a private research company, and Nairobi made it to the list for two consecutive years — 2014 and 2015. Innovation such as mobile money services, widely embraced in Kenya, are seen as enhancing people’s lives. The only other African cities named in previous Smart21 lists are Cape Town, in 2008, and Nelson Mandela Bay, in 2009 — both in South Africa.
Robert Bell, co-founder of the Intelligent Community Forum, surmises that first, positive developments in democracy are burnishing Kenya’s image as an attractive place for investment, innovation and growth.
A second issue is market liberalization for information and communications technology companies, which has helped companies like mobile services provider Safaricom, maker of the M-Pesa mobile money service. “Safaricom’s rise has made news around the world and created a model of entrepreneurial success that others can follow,” Bell said.
Also helping foster growth among startups “is the investment by private-sector companies in creating a more innovative economy, from Manu Chandaria’s business school and incubation centre to Microsoft’s 4Afrika Youth Device program,” Bell added.
Even as Cape Town is tipped to have advanced infrastructure as compared to Nairobi, the Kenyan city still has some advantages to it.
“The Cape Town nomination [to the Smart21 list] told the story of a city struggling to provide the basics of sanitation, clean water, electricity and telecoms — while still finding creative ways to bring information and communications technology to citizens, businesses and government,” Bell said.
In Nairobi, however, “we see the potential for balanced development that spreads prosperity broadly and uses ICT to improve living standards faster than physical infrastructure can be created,” Bells said.
Bell suggests that having easy and inexpensive processes for building businesses and, hence creating a low barrier to entry, can spur company growth in any community. Having a supportive ecosystem can also bring business, education sectors and government together to foster growth of startups.
Location is not as important as other business ingredients, according to Leonard Kore, an analyst at IDC.
” ‘A region’ is hardly the most important factor when considering a start-up,” Kore said. “However, the right startup in the right region would have a support structure, existing network and exposure. For technology, it would be a community of like-minded individuals — whether this is a network of startups, academic institutions, corporate incubators, mentors, adequate infrastructure whether utilities or connectivity,” Kore said.
He added also that patience, vision and capital are aspects that businesses and startups cannot ignore. And it applies regardless of where the business is based.