Excitement and investor appetite for the East African region is growing. Kenya has been long declared the Silicon Savannah of East Africa and Ethiopia has followed suit with its moniker Sheba Valley. The entrepreneurial culture and energy are high. Walk into any coffee shop in Nairobi in the Kilimani area and you are bound to see; energetic entrepreneurs furiously working on their laptops, spirited meetings between investors and entrepreneurs, lively discussions around deals, deal closures and finding that elusive African unicorn.
The problem is Kenya and East Africa is not the Silicon Valley and replicating the Silicon Valley model is misguided. Taking valuations as an example. Volatility, early stages of investment markets and difficulties with exits make valuing enterprises significantly more complex and time-consuming. Adding to that is the FOMO (Fear of Missing Out) phenomenon which investors suffer from.
When investors see a startup that has received funding, interest piques and fears of missing an opportunity surface.
What this has led to is money following money with the same few usual suspects that are good at fund raising being funded. These are then touted as African success stories with the majority of other enterprises trying and failing to raise capital.
As such, instead of focusing on chasing capital, focus on the five things below and you may find capital ends up chasing you instead!
Value Creation- Solve a key challenge for your customers
In order to do this, you have to understand the demographics of the market. For example, in East Africa the mass market consists of low-income consumers many of whom lack access to basic goods and services. If you are able to service this market and solve challenges such as the limited ability to pay upfront, poor infrastructure and latent demand, you will be creating much needed value for customers.
Profit- Earning money
There is a real temptation to focus on scale and revenue over profit but both are important. There are a significant number of businesses in East Africa that are generating good consistent revenue but rarely make headlines. For example, Ikirezi, a Rwandan social enterprise that processes essential oils that are used in the cosmetic industries has sustained average year-on-year growth of 29%-77% since 2016. Interestingly, Ikirezi turned down external investment focusing on organic growth.
Business models- Innovative ways of working
Interesting models in East Africa have included aggregation, pay-as you go, franchising and tiered pricing systems. Many of these address the core challenge of lack of upfront financing for the mass market. Other sector focused innovations are cropping up. Examples include non-invasive diagnostic toolkits for affordable health-screening, last mile distribution platforms connecting smallholders and customers and virtual learning changing how students prepare for jobs for the future.
Scale-Replicating the business
How easy is it to replicate your business? What are the infrastructure requirements? Can the same distribution networks and supply chains be utilized? Technology can play a huge role as an enabler for scale and tech enabled are becoming common. Whilst challenges such as connectivity, cost of data are present generally in East Africa, the overhead costs of technology companies during expansion are relatively low compared to other mainstream companies.
Talent- Hiring right people
Does your business have the right team to carry out its mission? As businesses grow, they usually need more people. Hiring the right people can help you grow your business and job creation is also a key metric that impact investors and donors are looking for. However, look beyond number of jobs only. What types of jobs are you creating, where are the jobs being created? Some enterprises are intentionally looking at empowering traditionally excluded informal sectors. A great example is Jibu LLC, an enterprise which provides clean drinking water created 500 jobs in rural areas in 3 years.
Deals and deal closures will always be considered “sexy” and so the focus of media and discussions. However, stay focused on these 5 factors and you might fund that you no longer need to chase investors!