Venture capital flows to tech startups

• Equity financiers scout for buyouts in Kenya as mobile and internet spur innovation

Kenya’s tech environment is bustling with innovations driven by mobile telephony and strong entrepreneurial spirit, but access to capital remains a major constraint.

This has created a magnet of venture capitalists in Kenya seeking to fund tech startups. Venture Capitalists are investors who scout for promising startups and small businesses with potential for huge profits. Venture Capital funds make money by owning equity in the companies they invest in.

Mr Brian Hirman, a co-founder of eVA Fund, says Nairobi is recording high growth of start-ups in digital, ICT, web and mobile.

“There’s a lot of entrepreneurship also motivated by Kenyan whiz kids who have studied in the US or Europe. There are lots of bright people with strong digital business ideas,” says Mr Hirman, whose fund has invested in Kenyan tech start-ups.

Pitching for cash

On October 18, 2010, at the Ihub incubation centre, five venture capital funds listened to pitches from eight startups. The forum was organised by the Kenya ICT Board as follow-up to the $3 million in content grants funded by the World Bank.

The Venture Capitalists, or VCs, on the panel were eVA Fund, Fanisi Venture Capital Fund, Africa Media Venture Fund, Grofin, and Open Capital Fund.

Startups that pitched included Gotissuez, a consumer online suggestion box, Eatout.co.ke, BrighterMonday, a recruitment portal, Pewahewa.com, a music portal, Paysure, a local payment gateway, M-Trader, creator of a mobile stock trading software and a public payphone that allows SIM card owners to plug in and make calls at affordable rates.

Even then, the role of VCs is widely misunderstood locally. Some think they are banks. While VCs claim African is yet to fully mature outside South Africa, techies have complained about “briefcase” ones that exploit them or make excessive demands that lead to collapses.

“Some VCs have no money, some have worked for international organisations and are frustrated with the slow development while others promise to give money and don’t; the best VCs are those run by people who started startups too because they understand,” says Mr Liko Agosta, founder of PesaPal, one of the firms funded by eVA Fund.

One VC offered Mbugua Njihia $10,000 (Sh800,000) for 60 per cent of Symbiotic Media and an exit in three years. “That money cannot buy full page adverts in the local papers for two days,” said Mr Njihia, CEO of the mobile media company.

The issue of capital seems to be a major bone of contention. Some funds claim they can only fund a minimum of $1 million while some companies may be interested in $200,000.

“There needs to be an understanding that big money doesn’t always help,” Mr Agosta says. “Maybe what we require is smaller amounts of money and the business will grow, some of the funds are not realistic, they claim to fund SMEs but the kind of money touted can start a manufacturing plant in Kenya.”

Local start-ups that have benefited from the venture capitalists are Verviant, Pesapal, Jumuika, Ratio Magazine, Paystream and TKM Maestro. TKM got Sh80 million for expansion from TBL Mirror Fund through Fanisi. Fanisi Venture Capital Fund recently invested $1 million (Sh80 million) in Paystream Ltd.

Dr Vincent Kouwenhoven of EVentures Africa Fund (eVA) says: “We are seeing excellent technology ideas particularly in mobile and many start-ups have high potential.”

As venture capitalists, Mr Kouwenhoven says they look for a clear vision of market potential, proven technology and entrepreneurial track record. And as such, he says entrepreneurs need to have clear business plan, realistic view on valuation and budget and a strong team.

“The future looks very promising. Nairobi seems to be destined to become the hub for webapps in Eastern Africa,” Mr Kouwenhoven adds.

eVA invests between $34,931 and $346,144 with a preference for businesses in Kenya and Ghana. Itd area of interest is internet and mobile applications and e-commerce. Some of the firms they have funded include Pesapal, Verviant, Jumuika and Ratio Magazine.