Summary

The general perception is that capital flow to startups in Kenya is disproportionately absorbed by foreign owned businesses. In this review, we find that while the evidence confirms this perception, the choice of characterisation qualifying the imbalance – locally versus foreign owned enterprises, is superficial. Underneath this dichotomy we find that experience, exposure and strength of networks among founders, which appear to form the basis of high-growth scalable businesses, are the key predictors of successful capital raising regardless of the citizenship of the founders. This is supported by a profiling exercise assessing the common characteristics among 36 founders of successful locally owned startups in terms of capital raising across Kenya, Nigeria, South Africa and Egypt. The fundamental question from this review remains; how do we enhance experience, exposure and strength of networks among entrepreneurs within our ecosystem?

Underneath this dichotomy we find that experience, exposure and strength of networks among founders, which appear to form the basis of high-growth scalable businesses, are the key predictors of successful capital raising regardless of the citizenship of the founders

Introduction

The challenge of improving investment capital flows into early-stage locally owned businesses in East Africa is widely recognised. While there is consensus that this challenge exists, there are divergent opinions on why this is the case and even greater separation on what can or needs to be done to improve outcomes. This paper outlines the imbalance in capital flows between these two classes of businesses and broadly discusses some of the underlying factors. There is no universally acceptable definition of the phrase “locally owned businesses”. In some contexts, the phrase is used to describe businesses: i - headquartered in the country of incorporation regardless of the founders’ origin; ii - whose majority shareholder or shareholders are nationals of the country of incorporation; iii - that have the founder, or at least one of the founders being a national of the country of incorporation; and iv - whose main operations are within the country of incorporation. In this paper, the phrase is used to define businesses whose largest shareholder or shareholders are

nationals of the country within which the business is headquartered. The phrase is not to be confused with “local business”, which implies that operations or market outreach only cover the country of incorporation. Although the terms “entrepreneurs” and “business owners” overlap in some cases, the first refers to individuals who identify, build and operate for-profit ventures while the second refers to owners of for-profit ventures, some of whom do not necessarily build and operate the ventures. “Start-ups” are new and for-profit ventures whose business models are untested or unproven, therefore all start-ups are new businesses but not all new businesses are start-ups. “Early-stage businesses” in this discussion include both start- ups and conventional businesses. The data used in this paper is from secondary sources including analysis done by the World Bank Group, East Africa Venture Capital Association (EAVCA), and Disrupt Africa among other sources.

This paper starts by mapping capital flow from venture capital funds and private equity funds into Kenya, South Africa and Nigeria for comparative purposes with the appreciation that only a small proportion of this is absorbed by early-stage businesses. A distinction is made between flows into locally owned and foreign owned businesses and the Global Entrepreneurship Index (GEI)1 is used to explain the disparity across these countries. Focus then moves to discuss investments among African countries with the highest flows into tech- enabled start-ups. In order to understand the characteristics of the founders of locally owned businesses that have raised substantial amounts of capital ($3 million or more), the paper profiles them with the aim of establishing the common features, which perhaps are the determinants or at least the predictors, of success. “Success” here being the ability to raise substantial capital. Finally, this paper mentions various challenges facing locally owned businesses and efforts to address these challenges.