Funding options for startups in Africa are quite limited – Co-founder, Kinyungu Ventures

Tony Chen, Co-founder of Kinyungu Ventures chats about startups and venture capital in Africa.


Kinyungu Ventures, an east African advisory firm that invests in early-stage startups in Africa published a white paper that revealed the continuous wide misalignment between traditional venture capital models and the African market.

These mismatches influence how startups and funds maneuver as well as what results they expect and produce. The paper tackled the assumptions that drive venture capital (VC) investing norms and how well they apply in Africa.

Africa has a large market but it is also fragmented. These fragments consist of consumers with limited purchasing power who are likely to be a utility- and price-sensitive. These consumers are difficult and expensive to acquire and retain because they don’t tolerate fully digital modes of distribution.

Silicon Valley VC requires outsized returns that African markets can’t necessarily provide at the same scale due to the market dynamics. Startups are beginning to adjust their operating models to better align with market realities.

Nairametrics had a brief chat with Tony Chen, Co-founder of Kinyungu Ventures on how this misalignment is affecting startups in Africa. Speaking on the misalignments between the traditional venture model and the African markets, Chen responded by saying that since markets are potentially large and still very fragmented, solutions can differ given different locations.

“Traditional venture capital is taken from the Silicon Valley environment which has crucial assumptions that may be true in America, but are largely false in Africa (and really, in most markets around the globe). For example, the model assumes huge, global markets, easy/inexpensive routes to acquire and retain customers, and deep funding options at every stage of business.

“In Africa, markets are potentially large, but still very fragmented. A solution that works in Kenya doesn’t necessarily work in Uganda, or vice versa. Customers are hard to acquire and harder to retain, as many foundational, infrastructural elements (e.g. affordable data, efficient logistics) make reaching customers problematic and expensive. And oftentimes, funding options, even as startups grow, are quite limited.

Chen who has had over 10 years of investing in several start-ups in Africa also notes that investors must invest in companies quickly, spur them to grow and understand when to quickly sell.

“In addition, most funds are set up with a limited time window – you must invest in companies quickly, push them to grow as quickly as possible, and then sell quickly. This overemphasis on growth (and an underemphasis on profitability) often limit the start-up’s ability to withstand the many external shocks inherent in the environment, such as post-election chaos, new regulation, corruption, and increasingly unpredictable weather.

“This insistence on shorter time horizons is at odds with research that shows that much of the value creation in frontier markets happens over a longer period of time – perhaps more so in the second decade,” he said.

As people get new ideas every time, new startups are springing up every month. These startups will be on the lookout for funding. Since Kinyungu Ventures is also interested in investing in businesses, Chen outlined what he considers before investing in a startup

Chen said, “Different investors use different criteria to determine what start-ups are most investible. For early-stage ventures in particular, we believe the most important element is the character and personality of the founding team.

“Will they have the resilience to get through difficult times? Will they have the curiosity to keep learning from every success and every failure? Will they have enough shared common values and good communication skills to weather the inevitable disagreements that will arise?

“Business models are also important. Strategy, unit economics, and financials are important. However, many early-stage start-ups are currently still a pivot or two away from the ‘actual’ business they will build. The right team will have the characteristics to find a unique solution to solve big problems on the continent.”

After raising capital, staying successful will become a new problem for a startup as more competition arises. Chen insists there are numerous factors that impact the success of an African startup, but two are most important for him.

Entrepreneurial energy and creativity are paramount. The market landscape is constantly changing. Unexpected shocks will occur. The best entrepreneurs will thrive in this environment, relishing the opportunity to keep solving problems and to keep innovating.

Team is also paramount. I’m not just talking about the org chart. The team also includes anyone and everyone who wants the venture to succeed – board members, family members, friends, and other stakeholders. The best entrepreneurs are able to draw people towards their vision, even if they’re not on the payroll. These people are often able to open doors, offer timely advice, and gently point out the entrepreneur’s blind spots.

Speaking on what startup sectors VCs should be paying more attention to Chen noted that the fintech sector has been gaining a lot of attention in recent times.

“There are certainly ‘hot sectors’ in Africa. For example, fintech has received a lot of attention and seems to be most likely to draw a broader set of investors. However, VCs will continue to pay attention to their area of focus where they can add the most value outside of the capital,” Chen said.

In concluding, Chen advised governments to support the digital ecosystem “by spurring entrepreneurship through policies that reduce the cost of capital, streamlines bureaucratic processes, and encourages foreign investment.”

“Tunisia’s start-up act largely seems like a decent model to follow,” Chen adds.

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