This post is one of a series in which I’ll present analysis and attempt to draw conclusions about the overall tech ecosystem in Kenya.
A few weeks after my arrival, L’Oreal acquired part of Interconsumer Products Ltd making Kenyan entrepreneur Paul Kinuthia a billionaire. Success stories like these are important for convincing investors and top local talent to take a risk on new ventures. So when will we see a big East African tech exit?
Success stories could be built along models proven in the developed world and adjusted for the local environment – the Kenyan Google, Facebook or Amazon. Assume they serve users over mobile web with the same efficacy that the originals served users on desktops. This gives them access to the richest quartile of the Kenya population – 4 million adults with a median annual spending of about $1000 (KIHBS 2006). This makes the local consumer market less than a thousandth the size the US and scales exit valuations down into the single or double digit millions.
I think it’s more likely that local successes will be built along uniquely Kenyan models. One idea I’ve heard a few times is to disrupt Western Union by enabling direct remittances from US bank accounts to M-Pesa mobile money. Our new venture would seek to make remittances more convenient and much cheaper than the current 12% average. Kenyans in diaspora send about $600m home from the US every year. Assume we can capture about 15% market share (Western Union’s closest competitor) and receive 3% of transactions (after M-Pesa and wire fees). This gives us annual revenues of $2.7m.
Kinutha’s billions from the L’Oreal transaction are denominated in Kenyan Shillings equivalent to about $35m. His real-world exit and the hypotheticals above suggest that:
- Tech entrepreneurs shouldn’t expect to found a company in Kenya and land in San Jose 5 years later in their new 737.
- A good exit will place founders among the wealthiest Kenyans and could be a big driver for growth in Kenya.
- Tech VCs aren’t likely to see the same absolute returns per investment. Money goes farther here so this doesn’t preclude good returns on a portfolio of smaller investments.
Suppose you want at least a small jet or don’t have the resources to vet and support a large portfolio. You’ll probably need to approach very different markets than you would in the US. You could:
- Target key consumer spending categories like food, housing and transportation. Food spending is moving from small vendors into hypermarkets, real estate is booming and people are struggling to get around. Each of these are multi-billion dollar segments undergoing transitions ripe with opportunity.
- Offer core business services to large markets like tourism, agriculture and manufacturing. Supply chains are inefficient, energy is unreliable and individual sectors operate far from best practices (e.g. use of fertilizer). These are all multi-billion dollar problems waiting to be solved.
- Tap the global market. For the most part, Kenya is still developing the infrastructure and skills to be competitive in global markets (more on this later). You can already see Shop Soko and some freelancers at iHub leading the charge.
Africa is not the US and it’s important to adjust focus and expectations accordingly. Sadly for nerds like me, I doubt the big success stories in the next 5 years will be tech-centric. That doesn’t mean ICT won’t play a crucial role – before anyone builds Amazon they need to build UPS and I bet the winner will make good use of mobile technology.