African tech startups raised $560 million in VC funding in 2017, a 53% YoY Growth according to a report by Partech Ventures with a total of 128 rounds in 124 African tech start-ups, compared to 77 rounds 74 start-ups in 2016.
The report adds that South Africa, Kenya and Nigeria were the top three investment destinations with 76% of the total funding, down from 81% in 2016 and off-grid tech, fintech & eCommerce led the pack.
However, most of these startups such as Twiga Foods, Fuzu, Zumi, and M-Kopa which has so far raised a staggering $151.8 million are based in Kenya but registered elsewhere by expatriate founders. Tech startups are not the only ones founded by expatriates, the bulk of Kenyan NGOs and social enterprises are expatriate-led leading to a question whether Africa is rising and whether Silicon Savannah is just an illusion.
Even the little innovations that have put Kenya on the map are not really Kenyan innovations led by Vodacom’s M-Pesa, US-registered iHub which has since been sold off to another international company and the US-registered Ushahidi. Kopo Kopo, which brought Lipa na M-Pesa mainstream was also founded by expatriates.
Martin Kasomo’s Lipisha did not pick up so well even though it has survived the tide of time. Bitpesa, which recently bought an international money transfer firm is an international digital foreign exchange and payment platform for frontier markets with operations in Nairobi, Lagos, London, Luxembourg and Dakar. It’s Ghana launch last week shows its continued focus on Africa as its home, but Nairobi lost out due to earlier fears about bitcoins by Safaricom and the Central Bank.
The Uhuru government is only interested in blockchain technology to help it identify its citizens, refugees and other property owners for revenue collection. Other third-party apps on blockchain in Kenya are not what the government is looking to nurture.
This pattern is not only restricted to startups, Non-Governmental organizations are particularly notorious for hiring expats, and paying them close to six times the average they would have paid a local professional in the same position. Former executive of the NGO board termed this pay disparity as scandalous, “It is unfair and unjustifiable that Kenyans are paid far less than their expatriate workmates in the NGO sector even though they are doing similar work,” he explains in a 2015 interview with Standard Media, “This goes against principles of fairness and justice.” He later went on to threaten the revocation of the license of any organization that doesn’t demonstrate attempts to hire locals or even the pay gap between Kenyan and foreign staff.
This cast a spotlight on the region and in came the expats by droves, and they have been tripping over themselves to get here since then. However much they are pouring in, the ratio between prospective startup founders and investors is disproportionate. There are far more expat founders than investors and this is starting to show in the pattern of venture capital funding for startups in the region.
So what does this mean for the African startup landscape? Let’s analyze the numbers.
African startups reportedly raised a few million shy of $600 million alone, according to Partech Ventures’ annual funding report of 2017.
These include startups based within and outside the continent. African based tech startups in particular raised a little north of $169 million. Safe to say a remarkable third of this statistic was recorded for fintech startups. South Africa, Nigeria and Kenya are the top three biggest investment destinations on the continent, particularly because of the booming tech startup scene, that pushed out shiny gems like Andela. Good numbers undoubtedly, but peeking behind the curtain reveals an ominous and in all honesty, a little unnerving pattern in the funding landscape.
This pay disparity is one in several catalysts fueling the influx of expats into the country (Kenya). Some other common factors are, the mild weather, large English speaking population, political stability, relatively low cost of living compared to their own countries, “cheap labor” et cetera, this makes Kenya, and most other African countries a popular destination for expats looking to start their businesses in Africa.
This is no crime whatsoever, the real issue is the funding dynamic. Local founders are constantly ignorant of the fundraising journey and a few that have raised claim to have been shortchanged by their expat co-founders who connive with investors. However, the challenge is that local investors channel their money into real estate and other business ventures such as manufacturing, import and export, large government tenders among others, ignoring the up and coming technology sector in the continent. Expat investors capitalize on this, and even they consciously or unconsciously elect to fund other expats as compared to local founders.
A 2017 study by Global Accelerator Learning Initiative (GALI), tries to explain why founders in emerging markets are largely underfunded despite being, quote, “as credentialed and committed as their high-income country peers, being more established and accelerator programs being as robust as those in high-income countries.” They have even founded a larger number of companies. However, raising capital for them is a nightmare, and most of them invest large quantities of their own money
Unconscious pattern recognition
There are quite a number of reasons of this and GALI gives a biggest one of them as
Investors look for entrepreneurs in Africa, that match what they are used to in Silicon Valley. They look for the usual “signs of potential”; a degree from an Ivy League, affiliations with a very lean select network of businesses. The research also revealed that “cultural bias might be driving the perception of lower entrepreneurial skills”, and that investors claimed emerging market entrepreneurs lacked experience, despite evidence to the contrary.
In a medium post, one entrepreneur based in Africa says the preference for expat founders is evidence of “faux commitment”. He explains, “Faux commitment — Many say that it shows commitment that the expats have left a relatively cushy life abroad but the reality is that they’ve not risked it all (their risk is cushily bounded; a safe “risk). They won’t go bankrupt, they don’t get large amounts of debt and, should it not work out, many fly back. Furthermore, they are typically here for a limited period and are not investing in the ecosystem for the long term. The local founders mortgage their careers (this is the only market they can work in — emigrating is not easy and many also have family commitments), financial future and all their social capital in an environment that frowns upon failure. These two sets of individuals are simply not taking the same type of risk and are not equally invested in the ecosystem and outcomes.”
In the post, the entrepreneur makes a strong point, as this, coupled with a poor local understanding and selection of bad businesses for investments based on their being founded by expats yields the disastrous result of low to no returns, this then sets off a domino effect. Other investors become apprehensive about investing in African startups because of the bad track record of the bad businesses that went bust.
However, we cannot place all the blame on the expats. Local entrepreneurs can be their own enemies for the most part. The post-colonial era is rife with the assumption that everything Western is better than what is present locally. A majority of Kenyans can easily trade their passport for another country’s anytime. On the other part, the belief that the presence of an expat founder in a startup gives it a sent of legitimacy, is false. Sendy, a local courier firm founded by a serial entrepreneur had to hire and give equity to an expat operations lead to raise the funding it has.
I do not dispute that most expat-ran companies are solving real problems on the continent, especially employment and capacity building, (whilst making a very pretty penny while at it), but its massively imbalanced for Africans. This is a trend that needs to change, investors need to do fight their default settings and look beyond color and accents.