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Investors pump Sh33 billion into Kenyan start-ups

By Wainaina Wambu | August 4th 2021

Kenyan start-ups defied the Covid-19 pandemic to record an increase in capital raising activities in 2020.

The country had the highest Venture Capital (VC) investment per capita in Africa at Sh630, the State of Tech in Africa report shows.

This is as the country raised Sh33 billion through VC investments ranking second in the continent to Nigeria.

Nigeria raised Sh33.3 billion, becoming Africa’s top-performing market in 2020. However, the report noted that many start-ups that raise capital in Nigeria aren’t incorporated there, in stark contrast to Kenya.

Kenya realised Sh3 billion in 52 deals in 2020, averaging Sh636 million per deal ranking second after Ghana for the highest average deal value.

The values of deals in the Kenyan market fell by 46 percent while the number of deals stayed constant at 52.

“VC investment into Kenya as a proportion of Gross Domestic Product (GDP) is the highest in Africa at 0.32 percent of GDP which is higher than the same ratio for Asia (0.27 percent) and Europe (0.16 percent) but behind North America (0.57 percent) and the US (0.61 percent),” said the report by AfricArena, a African tech accelerator.

Across Africa, start-ups in financial technology topped the list of highest amounts raised at Sh38.6 billion, followed by agricultural technology (Sh19.4 billion), off-grid (Sh16 billion) and health technology (Sh15.3 billion).

Venture funding in the agricultural technology sector remained highly concentrated with 79 percent of the equity funding in the sector flowing into Kenya, said the report.

Some of the top deals included the single largest one in Africa – Sh9 billion raised by Gro Intelligence which is an Artificial Intelligence firm providing decision-making tools, solutions and analytics to the food, agriculture and climate sectors.

Kenya was cited as an easy country to do business in and also has a high number of expatriates making it more appealing for foreign investors. Further, the Kenyan market was cited as the source of the innovation pay-as-you-go solar power products.

The World Bank’s Ease of Doing Business currently ranks Kenya fourth in Africa and fifty-sixth globally.

“This innovation was largely as a result of the prevalence of mobile money in the region which then attracted early impact-focused investors, paving the way for more traditional investors to start investing in the region.”

The country, however, trails developed economies and other regions. For example, during the period under review VC investment per capita in US was about Sh43,200, while in Europe was Sh4,860 and Asia was Sh2,052.

Off-grid energy deals can only continue to rise.

As the report notes, about 600 million homes in Africa still don’t have access to reliable energy.

“The application of renewable energy technology has the potential to bridge this gap, with a surge of startups emerging with innovative solutions and approaches,” said the report.

Over Sh15 billion was invested into startups in the off-grid sector in 2020, said the report with the vast majority of funded startups in off-grid tech deploying solar fintech solutions.

A notable deal in 2020 was by Kenya-based clean energy leasing company Solarise which raised a Sh1billion Series B funding round to scale further across the continent.

Series B rounds help take the business past the development stage enabling it to deepen market reach.

According to the report, off-grid tech startups raise larger rounds as it is capital intensive to reach scale and the slow path to profitability for business models typically built around providing access to power to low-income populations via pay-as-you-go services, said the report.

The report shows that VC deals in the health technology sector were more diversified geographically compared to previous years.

“This shows opportunity for financing promising startups operating in fragile healthcare systems in the continent. This is further supported by the 115 percent increase in the number of deals done,” said the report.

One notable deal in Kenya was by e-health startup Ilara Health which raised Sh405 million in its series A funding to expand its diagnostic reach.

Series A funding follows the seed funding and is intended to propel the scaling phase of the business.

By 2023, Africa is projected to raise Sh660 billion in VC deals and the report highlighted factors that will spur this.

One of them is regulatory reforms that are expected to address the competitive gaps of many countries after their adoption in the next three years. Kenya is expected to pass a start-up act by the end of this year.

Further, initiatives from Europe aimed to set up programs to connect its own tech sectors and corporates to opportunities in the continent.

Increase allocation of capital is also on the rise as more foreign investors make acquisitions of African tech companies.

Other factors include an increase in valuations and the intensification of investment by Development Finance Institutions (DFIs) both via direct investment and increased allocation to VC firms, said the report.

The report however notes that from a global lens, Africa’s tech ecosystem is still “minuscule.”

In 2020, VC’s invested Sh423 million per day into African start-ups this is against Sh46.5 billion per day in the US.

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