Only 6% of tech investments over 1M USD in Kenya goes to Kenyan founders
Only 6% of tech investments over 1 M USD in Kenya goes to Kenyan founders
Over the past few years, there has been a lot of discussion around technology investment in Africa. This comes after tech innovations from the continent have gained global recognition over the years thus drawing investors to the continent. A study by the African Private Equity and Venture Capital Association found that North America-headquartered investors accounted for 42% of all African venture capital deals in the last five years. However, closer analysis into tech investments revealed that in 2017, 90% of investments went to expatriate founders with only 10% going to local founders. The report challenged the African startup ecosystem as well as impact investors and three years later, 67% of investment went to expat-founded startups.
While there has been progress, an article from The Guardian titled ‘Silicon funding for Africa, but not for Africans’’ further revealed that only six per cent of startups in Kenya that raised over a million dollars were local founders and 94% were expats. Contextually, this presents a serious problem, as tech innovations in the continent are not only impact-driven startups within their communities but also form the basis for building tomorrow’s infrastructure in the continent. This therefore, not only indicates that impact investors have not been effective but also raises questions on the society being created if expats are the only ones building its infrastructure and technology. Impact investment should be about causing positive sustainable social change and by not enabling local entrepreneurs access this investment then who builds this future?
Why is it like this?
An article by the World Economic Forum revealed that most impact investment firms in Africa source funds outside of Africa and therefore, make investment decisions outside of Africa too. Consequently, further evidence indicates that investor bias on local entrepreneurs results in fewer investments on local founded startups despite having a better chance of long term impact and financial return. This implicit bias can be attributed to evidence indicating that most impact investors lack clear policies and structures with long processes between initial meetings and disbursement of funds.
Further, even for impact investors with existing policies most favor entrepreneurs with business models common in high-income economies thus, excluding local entrepreneurs. This approach overlooks that local entrepreneurs have deeper market insights, social capital, and political networks that are needed for business growth and long-term sustainability. These factors are less valued during the due diligence process resulting in investment in startups with high potential for failure or missed opportunities on investable startups for investors.
How we can optimally invest in Africa
While some progress has been made over the past few years, there is a need to do more in addressing these gaps in accessing investment. This requires rethinking current investment approaches in the continent by impact investors to an efficient model. Impact investors and donors should prioritize supporting local youths and entrepreneurs as opposed to expatriates. Further, they should incorporate local business networks in their investment decision making process.
- Experience suggests there is a need for much greater knowledge of local markets and a need for greater transparency in their interactions with entrepreneurs.
- Donors/investor consortia need to invest in locally-managed entrepreneur support networks to help find and support new businesses.
- Using local business experts who provide local political awareness and insights avoiding mismatch between northern impact investor expectations and the local entrepreneur’s hopes and capabilities.
The World Economic Forum article further highlights the need to promote standards of good practice for engagement of impact investors with entrepreneurs and vice versa. This good practice should include trust and honest communication with clear investment and decision making process. Our aim at Inclusive Africa is to create system change and help impact investors