The Kenyan innovation ecosystem is quickly maturing as Kenya cements its status as part of Africa’s innovation quadrangle consisting of Nigeria, South Africa and Egypt with a total of 50 tech hubs. Further, Kenya is ranked the third most innovative African country behind South Africa and Mauritius (Global Innovative Index GII).
The rapid rise of the startup ecosystem is correlated to the progressive development and continued maturity of the innovative entrepreneur support community in Kenya consisting mostly of hubs, incubators, accelerators and co working spaces referred herein as “startup intermediaries.” The Kenyan entrepreneurial support community has had notable success in hosting events that foster innovation such as The Nairobi Innovation Week, Nairobi Tech Week and SanKalp among others. But, is the intermediary approach in Kenya sustainable, and is it the right model to scale the country’s startups?
The Impact of innovation linked to Kenyan startups has been felt socioeconomically both locally and globally. The most successful and recognized innovation is mobile payments platform M-Pesa, born in 2007 in Kenya and currently operating in nine other countries: Albania, the Democratic Republic of Congo, Egypt, Ghana, India, Lesotho, Mozambique, Romania and Tanzania. M-Pesa has significantly contributed to financial inclusion in Kenya, as an estimated 70% of the adult Kenyan population uses M-Pesa, compared to only 31% using banks. Further, according to studies done by economists from MIT and Georgetown University, M-Pesa has lifted 194,000 Kenyan households (2% of Kenyan households) out of extreme poverty.
The innovation was interesting enough to prompt Mark Zuckerberg to visit Kenya and personally observe how it works on the ground and the impact thereof. Other notable startups in Kenya that have had an impact in various industries include Cellulant, Twiga Foods and M-Kopa among others.
These successes have led to an infusion of capital. According to a Partech Africa annual report on the financing of African Startups, African tech startups raised over Sh100 billion total in equity funding with Kenyan firms taking the majority of the funding in 2018. The report further states that Kenya attracted Sh35 billion (US$348 Million) in funding over 44 deals, Nigeria attracted Sh30.6 billion (US$306 Million) in funding over 26 deals, and South Africa slowed down compared to Kenya and Nigeria, with Sh25 billion (US$250 Million) in funding over 37 deals.
If we are to take the above local companies as startup samples, the question is, to what extent has the support of startup intermediaries contributed to the growth of these startups? The answer is not straightforward, but rather lies in understanding the predicament in which startup intermediaries in Kenya find themselves.
First, one must understand the form or shape of startup intermediaries in Kenya. According to the World Development Report 2016: Digital Dividends by The World Bank, startup intermediaries are grouped into four main types: academic institution-led, civil society-led, government-led, and hybrid-led. The civil society-led model is by far the most common according to the same report, constituting 79 out of the 117 documented intermediaries, and refers to Tech Hubs run by foundations, NGOs, activist/tech developer consortiums, or private sector firms unaffiliated with either government or academic institutions.
To assess the role of these startup intermediaries specifically in Kenya’s quest to sustainably and effectively support startups, we must evaluate the aspirations of startup intermediaries against the economic reality in Kenya.
There are two approaches startup intermediaries follow in Kenya, and challenges associated with each approach. The first approach is the Silicon Valley model in which the intermediary provides seed funding in return for equity stake while providing technical support through an extended acceleration program. The challenge with implementing this model in Kenya is that due to limited resources and an absence of significant external funding, local intermediaries are forced to seek more mature startups that are less risky because they present the opportunity for a shorter return on investment. This approach leaves earlier-stage promising startups to fend for themselves and raise funding outside of the intermediaries, robbing them of much needed bragging rights and most importantly capital.
The second approach is the ecosystem builder approach that focuses on building and providing a pipeline of technical skills. These intermediaries identify as innovation spaces, tech hubs, co working spaces and entrepreneurship hubs among others. The challenge these players face is an overreliance on external funding as the main revenue stream, which undermines the sustainability of the intermediaries.
Possible solutions to the structural issues facing Kenyan intermediaries include locating the intermediaries outside of prime real estate areas, which should lower fixed costs and enable startups to finance their operations with minimal fees. Another recommendation is to explore collaborations between startups and local corporations. Corporate partnerships represent a win-win relationship for both parties involved where startups access funding and resources while corporates access innovation. This corporate innovation strategy can be implemented by intermediaries running sector or industry-based accelerators either fully funded by corporates or funded through grants.