More Kenyan startups falter as funding bonanza ends

A majority of local startups are either shutting down for good or scaling down amid a tough business environment in their respective sectors. [iStockphoto]

Kenyan-based startups are facing their biggest test in years amid an increasingly difficult business environment.

Kenya's fast-growing technology sector, nicknamed "Silicon Savannah" has in the last two decades drawn huge foreign investor interest, supported by an improved business environment.

The country has emerged as a major player in the fintech space since telecoms operator Safaricom pioneered its M-Pesa mobile money service in 2007 for people without access to a formal banking network.

The innovation boom that followed the M-Pesa deal saw several copycat deals transform pioneer investors in Kenya's information and communications technology (ICT) sector into multi-millionaires as the investments they made decades earlier paid off.

But years later, several of these startups, which had hoped to continue cashing in on the craze, are waking up to a different reality.

Their dreams of making it big locally are slowly turning into a nightmare, a Financial Standard analysis shows.

A majority of local startups are either shutting down for good or scaling down amid a tough business environment in their respective sectors.

Recently, Watu Credit, which sells boda bodas (motorcycles) to operators on credit said through an internal memo it plans to retrench part of its workforce.

This is after a few years of what appeared to be its remarkable success in bridging accessibility constraints in the country.

Backed by Watu, an Africa-wide asset finance company providing loans for two and three-wheelers across seven countries, the local firm has been facilitating the acquisition of motorcycles for commercial use.

"Watu means 'people,' and people are at the core of everything we do. We are on a mission to change the future of last-mile mobility and financing in Africa. We support the dreams of those that are unbanked and underserved so that they have a chance to change the course of their lives," says Watu on its website.

Watu has raised millions of shillings from global backers to support its operations.

"The company has been experiencing a negative and downward trend on its key performance metrics being the sales volumes, debt collection levels, the operational expenses and losses due to write-offs on the non-performing loans of the business," said the firm in an internal memo to workers seen by Financial Standard.

"This has affected the operations and financials of the company. Hence, the company is considering undertaking a restructuring exercise to ensure that the company is sustainable over the long term (the proposed restructuring)."

The firm said the restructuring may impact certain roles and lead to a redundancy situation for the employees occupying the affected unnamed roles.

"The purpose of this letter, therefore, is to issue you with a 30-day notice of intended redundancy should your position become redundant in the implementation of the proposed Restructuring," said the memo.

"During this 30-day notice period, the management of the company will hold mandatory consultations with all affected employees on the intended redundancy."

Financial Standard could not immediately reach the firm for more information on the challenges it is facing.

Watu, however, is not alone. Several other promising startups have scaled down in recent months in the face of a difficult operating environment.

Logistics firm Sendy, for instance, announced last October it had shut down its retail and supplier trading platform known as Sendy Supply and axed 20 per cent of its workforce amid funding challenges.

Sendy was forced to restructure amid a funding drought that has hit Kenyan startups as developed economies raise the cost of lending.

The company, which started operations as a delivery service before spinning off e-commerce and retail supply platforms, shut down the latter business line to focus on sellers placing goods in its warehouses for marketing and delivery.

Sendy Supply allowed retailers to make orders from different suppliers at discounts while outsourcing transport and logistics to the company.

"We have paused the Sendy Supply services, our solution that provides a platform for general retailers to purchase stock at competitive prices from multiple suppliers and manufacturers. This has effectively affected 20 per cent of our workforce," Sendy founder and CEO Mesh Alloys said.

The company said at the time it wanted to focus on fulfilment centres and transport business to leverage the uptake of digital commerce.

The Kenyan startup, which facilitates door-to-door deliveries between individuals and businesses, had previously expressed optimism about raising $100 million (Sh13.4 billion) to fund its expansion plans into other African markets, including Nigeria, Ghana, South Africa and even Egypt.

A similar strain is showing among other startups.

In June last year, Kune, a Kenyan food start-up founded by Frenchman Robin Reecht in 2020, closed its doors after saying it failed to raise Sh30 million from a French investor for operations amid rising costs.

The firm has also failed to raise money to finance operations, suggesting that investors mostly from the developed world are pulling back investments due to fears of recession and interest rate hikes.

Kune, which previously announced plans to expand to other Kenyan towns over a 12-month period as the demand for home-made healthy meals on order gained momentum, said it was unable to keep up with rising operations costs.

"With the current economic downturn and investment markets tightening up, we were unable to raise our next round. Coupled with rising food costs deteriorating our margins, we just couldn't keep going," said Mr Reecht in a statement last June.

These startups are casualties of private equity (PE) firms retreating to home markets, analysts say.

Before the current turmoil, many global investors had been making a beeline for Kenya because of its prospects.

A ready pool of users had turned the country into a centre of innovation, attracting major players in the world of venture capital, some with investments in top-tier investment firms in America's Silicon Valley.

Microsoft, for instance, opened a Sh3 billion office and labs for its premier engineering hub, the African Development Centre (ADC), after three years of operation in Kenya.

And in 2019, Chinese telecoms firm Huawei inked a loan deal to develop the Konza project at a cost of Sh17.5 billion. Many more entities have been bullish on Kenya's prospects.

"Africa is the place to be for European development financiers. It is a continent where jobs and investments are very much needed, and at the same time, it is the new frontier where opportunities abound, and life is getting better for millions of people," Finnfund Chief Executive Jaakko Kangasniemi explained recently while underlining why Finland's sovereign wealth company Finnfund has chosen Nairobi as a launchpad for its regional operations.

"Some of our best and most impactful investments are in East Africa, and we intend to make many more such investments in the coming years."

Mr Kangasniemi spoke when Finnfund opened a regional office in Nairobi, seeking to expand its portfolio in the local market where it has already made several investments.

"The location supports and streamlines the follow-up of the regional market and existing projects and collaboration with co-investors."

But there is also a new angle to why Nairobi's Silicon Savannah has fallen short of the start-ups and jobs promised.

Data shows only a handful of companies remain out of hundreds of start-ups premised in more than a dozen incubation hubs that were at one time spread across Nairobi.

Where did it all go wrong? For starters, a big number of start-up founders were drawn to Silicon Savannah by the hype and promise of prize money rather than by sustainable business plans.

The biggest and most prestigious of these awards was Pivot East, a pitching competition started in 2011 and organised and sponsored by mLab East Africa, iHub, eMobilis, the University of Nairobi and the World Wide Web Foundation, among other sponsors.

But amidst the gloom, a few firms have stepped up investments in Kenya.

The Finish Fund had followed other sovereign wealth funds in setting up a regional office in Nairobi in the recent past with eyes on local deals. Others who have done so include Proparco (French), DEG (German), CDC (UK) and FMO (Dutch).

A group of 30 technology entrepreneurs with links to Silicon Valley, for instance, also recently raised $200 million (about Sh29 billion) for investing in promising tech startups in Kenya and elsewhere in Africa.

The new Africa-focused fund backed by Stockholm-based Norrsken Fund said it would target to provide early-stage funding to promising startups and founders in Kenya and the region.