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A new 2023 report by the African Venture Capital Association (AVCA) has revealed that the African continent has seen over 20 startups close shop, seven of these were Kenyan-based startups.
The Kenyan startups included Sendy, SWVL, Kune Food, SkyGarden, Notify Logistics, WeFarm and iProcure. Copia has been the latest victim, just entering administration a few days ago.
Kenya often lauded as the “Silicon Savannah,” has gained a reputation as a vibrant hub for technological innovation and entrepreneurship in Africa.
With a young and tech-savvy population, improving infrastructure, and a growing middle class, the country seems like a promising landscape for startups. However, despite these promising factors, many startups find the Kenyan market challenging to navigate.
Prof Fred Ogolla a Nairobi-based Economist and Governance Expert, says that funding is the main killer of start-ups in Kenya.
“While we have witnessed an increase in venture capital inflow into the African continent, the amount available for early-stage startups is still limited. Many startups rely on bootstrapping or small amounts of seed funding, which often prove inadequate for scaling operations or even sustaining day-to-day activities,” says Prof Ogolla.
AVCA report also stated that Africa attracted a combined $4.5 billion in venture capital and venture debt investment in 2023, across 603 deals.
West Africa maintained the top spot for the third consecutive year, with Nigeria as the most active country both in the region and on the continent by deal volume.
While Southern Africa was the only region to register positive year-on-year growth in 2023 at 20%.
The continent also attracted over 781 investors who were active in the venture ecosystem in 2023, in a mass exodus of close to 400 unique investors compared to 2022.
Prof Ogolla, “ Our economy has been subject to fluctuations, with periods of high inflation and economic uncertainty. Such instability affects consumer spending power and investor confidence. When the economy is unstable, potential customers are less likely to spend on new or non-essential services, directly impacting startup revenues.”
Despite Kenya emerging third as the most promising investment hub for venture capital investors, a new report by The Big Deal reveals that African start-ups have raised $780 million by mid this year.
In Kenya navigating the complex web of regulations and bureaucratic procedures is a major hassle for start-ups.
The law in Kenya is so complex that most start-ups find it difficult to maneuver. Churchill Ogutu , an independent Economist based in Nairobi ,“We should borrow a leaf from Rwanda where it is easier to register a business and have it running in less than 48 hours, while in Kenya it can take months for the relevant authorities to issue operational licenses.”
He describes Kenya’s start-up landscape as saturated market which has continued to affect the profit margins of most of the start-ups.
Ogutu “When we have start-ups operating in a saturated market, they tend to struggle to differentiate themselves and attract customers, leading to their eventual shutdown. This limitation restricts the customer base that startups can tap into hence leading into trouble when they cannot achieve the scale needed to become profitable.”
Economists argue that another vital aspect that hinders the growth of start-ups in Kenya and Africa at large, is the lack of ability to build consumer trust.
“Kenyans are unique people and once you fail to gain their trust, you cannot survive in this market because they don’t fear to critic you at all. They will always demand better services and when you fail to deliver on it, they move to that company that can offer value for their money. Most start-ups in Kenya struggle to gain the trust needed to build a loyal customer base hence they end up shutting down because they do not trust the service they are offering,” comments Dr Ogolla.
A 2023 World Bank Group survey states that Kenya has a young population but the country still has a gap in the specialized skills required for certain industries.
Mr Sani Suleiman Sani, Programmes Officer, Paradigm Initiative pointed out that most start-ups in Africa often need expertise in areas like software development, data science, and digital marketing.
“The shortage of skilled professional’s forces startups to either pay a premium for talent or settle for less experienced individuals, both of which can hinder growth and innovation,” Sani adds.
Sani further hinted at the high employee turnover within the start-up ecosystem affects their growth trajectory.
“What we have realized is that most skilled workers often move to more established companies that offer better pay and job security. This turnover disrupts operations and can lead to a loss of institutional knowledge. For a startup, losing key employees can be a significant setback, sometimes leading to the collapse of the business.”
Dr Ogolla also stated that Kenya’s taxation policies are unfavourable for startups.
Joe Harvey a tax expert noted that the high tax rates and complex tax regulations in Kenya have created a significant financial burden for young companies. “As a country, we lack tax incentives for startups and small businesses means that these entities do not receive the support they need to grow and contribute to the economy. Instead, they are often saddled with tax obligations that can stifle their growth and, in some cases, lead to their closure.”
Most of the start-ups in Kenya lack proper governance and management skills hence this hinders their sustainability growth.
Harvey, “It’s one thing to start an idea but it’s another thing to sustain it for long without a proper strategic plan on what should be done at what stage and who should do it. Today in Kenya most founders of start-ups- lack the necessary experience and skills to navigate the complexities of running a business. This inexperience can lead to poor decision-making, inefficient operations, and ultimately, business failure.”
He further acknowledged that the majority of the start-ups in Kenya lack mentorship and support networks.
Hence this leaves many startups without the advice and connections they need to succeed.
While Kenya has made strides in improving its infrastructure, challenges remain. Inconsistent power supply, limited access to high-speed internet in rural areas, and poor transportation networks can hinder startup operations. Startups that rely heavily on technology or need to distribute products across the country face significant obstacles due to these infrastructure deficiencies.
The rate of technological adoption among consumers and businesses can also impact startups. While urban areas like Nairobi have seen rapid tech adoption, rural areas lag. Startups offering digital services may find it difficult to gain traction outside urban centres, limiting their market reach and growth potential.