The Two Ecos

The Kenyan startup ecosystem has two faces.

There is the visible, well structured ecosystem established in and around hubs, co-working spaces, accelerators, and myriad events doted by venture seeking startups, investors, and other knowledgeable actors.

The other is a more curious affair. Its invisible, unstructured, consisting of isolated, mostly profitable startups built by pragmatic, gritty founders who from day one are bent on getting to profitability as quickly as possible, and, are generally unfamiliar and/or unconcerned with the entire concept of venture capital.

Since August 2017 I have spent every single day canvassing, researching, or thinking about the Kenyan eco and it’s dynamics. On March 21st this year, after 15 years living and working in the Silicon Valley I boarded my final flight out of San Francisco as a resident of that corner of the planet. After many months of work, research, and soul searching I had made the decision. Placing all the chips on the table, I took the plunge and moved back to pursue purpose. Mine is to contribute to changing the African narrative by helping to build the next cohort of great African companies. Our vision at IAF is to within the next 15 years be able to stand back and gaze at the Silicon Savanna skyline populated with branded neon signage of homegrown tech companies just like Oracle has done in Westie.

Africa can also build nice things godamnit!

As of April this year I have been embedded in the local eco, doing the exhilarating work of seeking out investable startups for our locally capitalized seed stage fund, networking with amazing ecosystem actors, learning from many and advising a few startups. Core to our investment thesis is a belief that some the best startups will emerge from the invisible eco, which we have aptly dubbed “Chini ya Maji eco”.

Our approach as a fund is to roll up our sleeves and get busy injecting strategy, structure, talent, culture, execution know-how as well as capital into the most promising, post traction startups to help them navigate the “valley of death”, establish predictable growth and move them on to Series A.

With this approach we have a bias towards “Chini ya Maji” founders whose startups demonstrate the fundamental ingredients for investability; product-market-fit, revenue, organic growth, a talented team and a learners mindset. However, this does not mean we eschew founders from the visible eco, that would be silly. We believe brilliance is evenly distributed and subscribe to Big Pun’s famous bumper sticker mantra, “I don’t discriminate, I regulate every shade”

As we have set about executing our thesis we have found validation to suggest there is indeed something here. So far we have found 5 of these interesting “Chini ya Maji” startups building products addressing meaningfully sized markets. They all have some common characteristics; bootstrapped, scrappy, severely capacity constrained, actively not fundraising and not much of a strategic plan beyond build, sell, repeat. A couple of more things they have in common, the techie founders are also sales. They all want growth but because they are caught up in the day to day running of the business are unable to come up for air to strategize and plan how.

What these entrepreneurs demonstrate in the hustle required for achieving product-market-fit and actually selling their product is tempered with a glaring lack of scale-up knowhow. Without the knowledge of how to move from fledgling, reactive startup to a proactive growth machine executing an effective market dominating strategy these promising startups will find it very difficult to progress beyond the bear-hug-bootstrap stage. The founders will grow old and tired at the wheel, never getting past a relatively small customer footprint. It is highly unlikely that they will occupy a high rise office tower in Westlands :(

The bear-hug-bootstrap is the archetypal Kenyan approach to building and running a business. With such a posture a business’s potential is limited to the founders psychology, knowledge, skills, capacity and network. It is quite rare to find local entrepreneurs who develop complex, robust business operating systems (BOS) like Twiga Foods set out to do from day one and by all accounts seems to be executing quite well. A BOS scales on its own, transcending the original founders. Larry Ellison probably can’t find Nairobi on a map but Oracle dominates the Westie skyline. How bout dat?

The bear-hug-bootstrap strategy works well for old-school, hyper local, brick and mortar, retail, trade, and even service businesses. However, it is a total mismatch for software product businesses which do not suffer from limiting constraints of their old school cousines; inventory, supply chain issues, customs duty etc. A company whose value lies in its software is limited only by the founders imagination, ambition, execution knowhow, and resourcefulness. A software business is a very different animal all together, requiring a completely different mindset and strategy to effectively capitalize on. It is in many ways very much an intellectual endeavor. See A16Z content section.

Imagine if Bill Gates opted for a bear-hug-bootstrap growth strategy for Microsoft? The unfortunate reality is majority of our “Chini ya Maji” founders are stuck in a mindset that will make it impossible for them to build great companies. There is gold in them hills folks, but picks and shovels won’t do, earth moving equipment is required.

Good software businesses tend to grow fast and require rapid investment to instantiate an effective business operating system (strategy, talent, structure, process) to manage scale and most critically an internal innovation engine that continuously monitors the pulse of the business itself as well as the competitive landscape within which it operates to ensure it is doing the right things to continue growing.

This is hard, especially for a startup.

All tech entrepreneurs need the support of a robust ecosystem to effectively execute their business thesis. This is why at IAF we employ what we call a Smart Capital approach, which essentially combines pre-investment business strategic planning and post investment execution support along with capital. Our 20 years of direct startup operator experience plus a network of best in class local domain experts makes this possible. We are essentially a much, much more scaled down version of the A16Z thing without the billion dollar fund.

There are many reasons underpinning the dominance of the bear-hug-bootstrap mindset in Kenya but I believe these 4 contribute the most;

1. Small market 2. Low trust 3. Lack of capital 4. Knowledge deficiency.

Small Market Legacy: Working with startups in Silicon Valley offered me amazing insights into why and how startups work. One of the keenest was the understanding that Silicon Valley could only have existed in America. The core reason being America provides a massive, predictable market for entrepreneurs and investors to bet on as the rewards for getting a winning product to market in America are massive. As a result the mindset for American entrepreneurs is building a business operating system that transcends them and that can meet market demand. That is what success looks like for American founders.

In contrast Kenya is a much, much smaller market in every dimension. Most successful local entrepreneurs have traditionally not had to address a business whose market stretched beyond Kenya’s borders and some times not even beyond Nairobi. With such a backdrop for reference “Chini ya Maji” founders may struggle to truly visualize a market beyond Kenya. If your addressable market is reachable by the outstretched hand why deviate from the tried and true bear-hug-bootstrap approach?

What people maybe failing to grasp is their Total Addressable Market for a good software product is at minimum Addis to Lusaka. As Ethiopia opens up it offers a significant opportunity for Nairobi tech startups. Drop the bear hug friends, you can’t bootstrap your way across Eastern Africa forget about West Africa.

Low Trust Reality: The fact of the matter is Kenya is a low trust society. There is not one person I know who has not experienced corruption, robbery, or extortion in one way shape or form. So much so that it has come to be accepted by many as a viable means to getting ahead. In this context there is not much incentive for an entrepreneur to build a business that spreads beyond their watchful eye, and by definition this is a small business. With this most-unscrupulous-takes-the-spoils backdrop how can entrepreneurs be expected to trust anyone let alone investors? The safe bet would seem to be bear-hug-bootstrap. Trust is a foundational enabler for commerce and economic development. It is actually a form of currency.

Lack of Capital: This has been written about and discussed ad nauseam so I will give it short shrift. Suffice it to say that IAF exists to alleviate the early stage capital problem. Without early stage capital and entrepreneur support Africa will remain poor. It’s that simple and that serious!

Knowledge Deficiency: Because necessity is the mother of invention business practitioners in the developed world are constantly pushed by market forces to innovate just to maintain an edge on their competition. For instance modern venture capital was invented and continues to be shaped by Silicon Valley. Wall Street brought us Hedge Funds and other exotic financial instruments some that led to the global financial crisis :( Big markets place heavy creativity demands on business folk and the knowledge developed quickly disseminates into the surrounding landscape ratcheting up business sophistication in a virtuous cycle. Such acquired knowledge typically spreads across borders in people’s heads, a slow and inefficient process (but now the Internet so that is changing). The point is local Kenyan founders who are not exposed to cutting edge business practices and ideas powering growth in the developed world are at a disadvantage. The current break neck pace of change is having real impacts on long standing business practices everywhere. Whether we like it or not the average Silicon Valley founder is light years ahead of his/her “Chini ya Maji” counterpart from a startup building knowhow and access to knowledge standpoint. Better ecos build better companies faster.

Final Thoughts

As a startup enabler it is my goal to minimize the pain of mistakes and lost potential that wrong mindset and uninformed practices impose on our eco. The key lever is knowledge dissemination and mindset shift for our most capable entrepreneurs. Today’s global economy is driven by knowledge, ideas, and skills as much as by capital, commodities and assets. Software is indeed eating the world, and in this context the Silicon Savanna must recognize the moment in which it finds itself in and deploy the appropriate strategy to capitalize on the opportunity at hand.

To me this simply means investing in our most demonstrably capable entrepreneurial talent aka “Chini ya Maji” founders, exposing them to cutting edge startup building best practices and helping them access experiences (trips to SF and Shanghai) that transforms their mindsets and unlocks their true potential.