Kenya’s Startup Struggles And The Road Ahead

Kenya’s startup scene is a testament to the nation’s innovative spirit and economic potential. Companies in the East African country raised $638 million in 2024, accounting for 29 percent of the $2.2 billion raised on the continent, according to Africa the Big Deal, an African venture investment analytics firm.

In 2024, the number of tech startups in Africa was led by Nigeria with approximately 3,360 startups, followed by Egypt with around 2,112, and Kenya with about 1,000. Other notable markets include Algeria, Tanzania, Tunisia, and South Africa.

Despite these impressive figures, African entrepreneurs faced financial strains in 2024. Bankruptcies and cost-cutting measures led to over 1,500 job losses, with 12 startups, including Kenya’s Copia Global, laying off 1,060 employees. The demise of Kenya’s food tech company Kune Food and recently, Nigeria’s edtech venture Edukoya shutting down further highlighted the vulnerabilities within the startup ecosystem.​

A 2024 Forbes article revealed that female-led startups receive less than 3 percent of venture capital funding, a statistic that has remained unchanged for years. Male investors often fund businesses aligning with their own experiences, consciously or unconsciously reinforcing a male-dominated startup culture. Female venture capitalists, though twice as likely to invest in female founders, constitute only 18 percent of decision-makers in VC firms. Moreover, female-led businesses are frequently viewed as riskier investments, despite delivering 35 percent higher returns compared to male-led ventures.​

​In a recent interview on No Hits Radio, Timothy Laku, a Fractional CIO/CTO with over 20 years of experience in IT operations, data, AI, cloud, and cybersecurity, shared his insights on the startup journey. He emphasized that the true essence of startups lies in their ability to identify and address societal gaps, turning innovative ideas into impactful solutions. Laku also discussed common misconceptions hindering startup success, highlighting the importance of strategic planning and resilience in overcoming challenges

​The discussion soon shifted to the “White Founder Perception” in Kenya’s startup ecosystem.  An analysis by ViKtoria Ventures, a consultancy and investment management firm based in Nairobi, reports that in 2019, local entrepreneurs accounted for just 6 percent of firms that raised over $1 million in Kenya. Additionally, despite the fact that foreigners only make up 0.15 percent of Kenyans, white founders led 70 percent of Kenyan firms that garnered at least $1 million in venture capital funding in 2018, according to research by US-based entrepreneur Roble Musse.

This disparity is rooted in investor biases favoring familiarity and trust. Laku observes, “We trust people who look like us. We have some biases, and make decisions based on comfort and on trust. And we tend to form trust bonds quickly.”​

Supporting this perspective, a Village Capital analysis reveals that 87 percent of disclosed investments in East Africa were directed to startups with at least one European or North American founder. Furthermore, research by Roble Musse highlights that white founders in Kenya are 47,000percent more likely to receive funding than their Black counterparts in the US, despite their minimal demographic presence.

​The recent suspension of USAID funding to African startups has introduced significant operational challenges. Without this financial support, many startups are struggling to meet essential obligations, such as paying suppliers and staff. This financial strain increases the risk of asset liquidation or complete shutdowns, jeopardizing the sustainability of these ventures. The abrupt cessation of funds has left startups with limited time to secure alternative financing, exacerbating their vulnerability.

Foreign investors, such as the European Union and British International Networks, actively invest in Kenyan startups. In contrast, local investors tend to favor established businesses over startups. Laku highlights that the lack of trust in legal systems deters investment in startups, as investors question the enforceability of repayment agreements.​

“Investors tend to favor businesses led by individuals they trust and resemble. In most cases an established business is more trusted, because it has its reputation to look at, it has a board and investing is easy.” Said Laku.

In this context, one might question the level of support from the local government in Kenya. A proposed Startup Bill mandated that startups allocate at least 15 percent of their expenses to research and development, while also maintaining 100 percent Kenyan ownership to qualify for government recognition and support. While the bill aims to strengthen local innovation, it could discourage global investors and potentially limit the ability of startups to scale internationally.

With several startups shutting down, attention turns to exit strategies like acquisitions, mergers and Initial Public Offerings (IPOs). Laku discusses the challenges and considerations involved in these paths, highlighting the need for strategic planning to navigate the complexities of scaling and exiting in the startup ecosystem. This topic doesn’t end here, continue this narrative by watching this episode on the dynamics of the startup world.