The following represents my totally unqualified and unsolicited opinions on a topic I know all of 1% about. And sometimes 1% is enough*
Why is important to know the difference between a Start-Up and an SME?
There was an outcry recently when an articled highlighted an interesting phenomenon about the local start up scene. The ‘Kenyan’ founders at the helm of noteworthy start ups were decidedly not exactly Kenyan. What is surprising is not this little reality of largely expat founders leading Kenyan start ups; what’s of more surprise is that we are surprised. No, this is not a rant about an uneven playing field (though it is), nor about an imbalanced financial system (hilariously imbalanced though it may be), but a somewhat call to action to understand our role in re-shaping this narrative.
You see, that article may have, rightfully, ruffled our feathers at the time, and then quickly moved to the back shelves of the mind. However, within the corridors of the Venture Capital/Private Equity juggernaut, every single day, for DECADES now, fund managers are sifting through mountains of proposals and pitch decks providing viable options of channeling virtually limitless cash reserves into a continent that is yet to assert its position on the global financial stage.
I actually do not fault the international financial system anymore. I probably wouldn’t have spent energy being upset in the first place had I known then what I know now. Or learning as I engage more with the local start-up ecosystem. You and I would probably have acted the same way, given the opportunity. Its really just natural to occupy any vacuum. Nature does this every time. Africa is the youngest continent (population-wise), blessed with natural resources and reserves of complicity in equal measure. As long as the west controls the flow of capital and we refuse to educate ourselves on how to make our strengths work for instead of against us, we shall continue to see ‘Kenyan’ founders offer solutions, lucratively, to our own challenges. We cannot play victim anymore. It’s within us to assert ourselves and invite the west as partners along a journey whose destination we are firmly in control of.
Do I have a solid solution? Most definitely not. But I’m learning where to start. So, lets indulge my immature hypothesis and use this to build a somewhat working formula.
First of all, let’s agree that there is a great need for SME’s. They form the backbone of our economy, and are vital in keeping our cash circulating. However, to make any meaningful economic progress, we need to seriously invest in understanding how Start-ups operate, and why they are the preferred model for more mature markets.
There is a common misconception that start-ups need to be tech start-ups in the traditional sense. While this is largely true in the west, we have some good examples of successfully exited Kenyan start-ups solve a purely agrarian problem. Twiga Foods comes to mind. A start up is an entity that identifies a huge challenge in its environment, and, amongst other things, leverages tech and/data to solve it. As a quick example, one only needs to consider that we are an agricultural economy that rarely employs technology or data to harness its power, presenting a low hanging fruit for any start up to make meaningful traction and thereafter, enormous success.
Away from agriculture, SME’s remain an untapped resource. Some of the businesses that you and I run, or interact with regularly, can be restructured to start ups. One of the main DNA of a start up is scalability. We can study some of these businesses and interrogate what we can change about the model to make it attractive for an investor to plough in cash in exchange for equity when the business scales. By the way, what is scaling? What is equity? What in tarnation is an exit? What is a Minimum Viable Product? And traction? What are all these difficult words trying to hide? The formula for start-ups is surprisingly simple in reality; where we falter is in execution. And this is what sets apart ‘Kenyan’ founders from Kenyan founders. Also access to capital markets. And networks. And Ivy League background. So yes, we have our work cut out for us.
Luckily, we ARE doing something about it. We have witnessed impressive executions like the erstwhile mentioned Twiga Foods securing 29.4m USD in debt financing (yes, dollars), and WorkPay’s 2.1m USD raise (dollars, once again). I mention these two amongst a myriad of many others because these are, top of mind, fully indigenous local start-ups that are trailblazing the effort to reverse this huge capital flight.
Investing in educating the youth about start-ups is key in demystifying the notion that this industry is warped against us. Expats, bless their souls, simply play a sport whose rules we seem not too eager to learn. Yes, they come with the advantage of a secured social net (in Kenya, the stakes are higher should the start up fail to launch) and yes they have access to capital markets, but as Twiga and WorkPay have shown, anyone can learn the game and score big.
The question one needs to ask themselves is, do I want a biggest slice of a very small cake, or a small slice of a really large cake. Identifying a problem, going through addressing it in a systematic way that earns revenue for investors and thereafter executing a profitable exit (merger, outright sale to large company, or going into an IPO like Mdundo or Homeboyz) is the simple way of defining a start-up. And start-ups represent the surest way of growing the size of a cake for all party guests, as opposed to trying to fight for the bigger size of a small cake which ideally is what an SME achieves.
Below are links to a few podcasts containing interviews of prominent founder’s and their journeys, current news in Africa’s start-up industry, as well as general information that is helping me slowly understand the local and international tech ecosystem’s zeitgeist.