Building a better mechanism for funding African Start-ups.

A few weeks ago, a notable Kenyan innovation, BRCK, secured Series A venture capital funding of about 1.2 million dollars. BRCK is a kind of a modem router that lets users access the internet in the remotest of regions. Previously, BRCK had raised about $170,000 dollars from the fundraising website, kickstarter. BRCK is one of the many innovations that have come out of Ihub, the others being Ushahidi, a disaster monitoring site, that has also gone global.

And yet, BRCK is a notable exception to the general lack of funding for startup businesses. Too often, banks seem to be making quite cheap money from the real estate and the personal loan industry, that many would deem it extremely risky to lend to start-ups, especially the intangible ones in the IT or internet and e-commerce industry. What then are the options for start-ups looking for funding?

Most would turn to their savings, but this is not sustainable in the long run, especially if the venture is a new innovation that will take time to pick in the market. For small start-ups that only require a few thousands of shillings, personal savings could be effective. Also, some micro enterprises could turn to

the micro finance sector to get the much needed shot in the arm. The large scale businesses, which might need hundreds of millions, or billions of shillings, will turn to the mainstream financial banks for loans. But what about the businesses that neither require too little capital, nor too much capital, may be something in the range of a few hundred thousands, or a few millions? The problem gets tricky for such businesses, as they are too small for mainstream banks, but again, too large for the micro-finance sector.

Which is why, we would then need to fill the gap of the missing middle, to address this shortfall. Banks have come up with numerous small and medium scale business financial solutions, but this is mainly for the established businesses that have documented cash flow systems. They are not for the businesses that are just starting out? The Kenyan financial industry must then wholly strengthen the venture capital sector, and ensure that it is capable of solving these great challenge. In any economy, it has been shown that the small scale businesses provide livelihoods only for the founders, and in fact, many end up straining in the businesses just to keep the business afloat. On the other hand, the large scale businesses, although making billions in profit, do not create enough jobs that is commensurate with the profits generated, resulting in what is known as ‘jobless growth’, in which a high economic growth does not result in creation of large number of jobs. Economists lament that the middle ‘high growth’ companies are the ones which create the most high quality jobs, that leads to an expanding middle class that can then provide a large tax base for the government.

The venture capital industry in Kenya must therefore actively seek out these promising ideas that are likely to result in a large number of high growth companies. Even in the developed world, the trend is the same. For example, Germany does not have as many large scale and superstar companies as the US, but nevertheless, it has largely been able to avoid the recession as the small and medium enterprises have acted as the engine of growth for the economy. This was not the case with the US, where the big companies have been accused of hoarding away profits and not creating enough high quality jobs for the millions of jobless Americans. This then, is a vital lesson that the Kenyan policy makers, and the venture capital industry, would do well to learn from.