Savannah Fund looking for 'the winners' among Africa's tech startups
"The best startups tend to be foreigners who come in because they have toiled," says tech fund boss.
Kenya is positioning itself as Africa’s technology hub with the construction of multi-million dollar Konza Technology City about 60km south of Nairobi. This is one of many efforts by the government and private sector to transform Kenya into Silicon Savannah.
The success of mobile money transfer service M-Pesa and crowd sourcing platform Ushahidi, as well the establishment of iHub, a co-working space that has become Kenya’s unofficial tech headquarters, have helped to propel Kenya’s technology industry. The sector has overshadowed that of other African countries, attracting numerous foreign entrepreneurs, investors and international media attention.
Mbwana Alliy, founder and managing partner of Savannah Fund, an African focused early stage tech seed fund and accelerator, says that while Kenya holds a lot of potential, it has a “noisy ecosystem” that and can be “distractive”.
Founded in mid-2012, Savannah Fund has invested in 10 startups in Kenya, Uganda, Ghana, Nigeria, Australia and two registered in the US. The fund invests in “high-risk, high-return startups” and plans to double its number of investees to 20 by the end of the year.
“We tend to find better startups the further away we go from Nairobi. So Ghana, Uganda have been pretty good as far as deal flow mostly because I think they are not distracted and are focusing on business. There is a lot of noise in the ecosystem here,” says Alliy.
“It’s the same thing I have seen in Silicon Valley. The best startups tend to be the foreigners who come in because they have toiled and… they don’t take anything for granted. So when [Ghana-based company] Ahonya gets here they are like ‘wow M-Pesa, we don’t have this, testing lab…’ They take advantage of everything.”
Alliy told How we made it in Africa that since the launch of Savannah Fund, Kenya’s technology industry has improved in many ways but there is still a long way to go.
“I think it has changed but it is not enough. It is a long road… ecosystems are built over decades. So, this is a road that I am on for a long time. It’s now a year and a half [and] we have seen some movement in terms of perceptions [and] startup quality,” he says. “We are trying to brand ourselves away from the impact grant space and more of serious venture capital. We are seeing more and more better startups coming to us.”
Savannah Fund runs an accelerator programme that seeks to bridge the skills and experience gap of entrepreneurs in the region. The fund’s third accelerator class is open for applications until February 15.
The programme is a “three month class of hands-on mentoring”. Startups are given US$25,000 to prove their ideas and when they graduate they receive support finding more investors.
The accelerator programme admitted only seven startups in its first and second classes out of more than 200 applications. The highest number of applications come from Ghana, Nigeria, Egypt, Kenya and Uganda.
“We want to focus very heavily on helping the startups. Would you want to have 10 children? Our style is getting more involved with the startups so I think four or five [per class] is enough to get investors excited. I don’t want to be the accelerator that has 20 startups and when people come to demo days they are three hours long and investors can’t even remember the startups. It’s like watching 20 trailers at once in a movie theatre. Are you going to remember them all?”
Looking for winning entrepreneurs
But with hundreds of young tech entrepreneurs seeking funding and mentoring, isn’t this a small drop in the ocean?
Alliy notes that while he would like to live in a world where everybody can be a Zuckerberg, the reality is “not everyone is going to build a really great high-growth startup”.
He explains that there are three kinds of entrepreneurs in Africa: survival entrepreneurs who just make enough to support their families; lifestyle entrepreneurs who run barbershops and restaurants for instance, that are neither high-growth nor attractive to investors; and the third kind – which Savannah is looking for – are entrepreneurs who run high-growth, high impact and high-risk businesses.
“We are trying to look for the winners.”
When considering entrepreneurs for funding or admission to the accelerator programme, Alliy looks for a “twinkle”.
“Most of the times the startups are really far away, the Skype call drops a lot [and] the accents can be very hard to understand. I try to look for something that really gives me confidence that this is a good startup. Even when I look at an application and I see some potential and there is some weirdness that I may not like, I still try to search for something or a twinkle in the eye.”
He cites the case of Ghana’s online shopping site Ahonya.com, which has turned out to be the “most successful” startup from the accelerator programme. Alliy says the founders of Ahonya impressed the fund with their approach to gaining traction and commercialisation. The business made $500,000 in revenue in the first year and is currently raising follow-on funding.
“Startups are very risky… entrepreneurs are not perfect but we want to take them from where they are to a place where they are going to be stars,” says Alliy. “I don’t have to remind you that revenue and growth is what we are about. We are not about winning competitions.”
Savannah’s startups employ a total of 50 people. Of the 10 startups, five have raised $6m in total in follow-on funding. With the exception of mobile app biNu which was founded in Australia and now operates an office in Cape Town, South Africa, the other nine companies have at least one African co-founder.
Despite the success stories, Africa’s “rich uncles” have not yet bought into the potential of the technology industry.
“Part of my mission is over time to try and educate local investors. The local investors think that it is all play and [tech startups] can’t make real money and they [investors] can make quicker money elsewhere… in easier options [like] bonds, buildings, mines. Startups mean dealing with all the dramas… and it takes a long time to get your money back. It could be 10 years. I think [this attitude] will only change when we have a high-profile exit that is local.”
Too early for exits
However, Alliy adds that it is “too early” for major exits.
“People are not happy that I invested in biNu but that is probably the most likely at the time to have an exit.”
While currently most buy-outs are likely to come from global firms, Alliy says local companies should also consider buying out innovative startups instead of copying them.
“We have to teach local corporates how to buy companies. If you are a [telco] you probably think the best way to innovate is to do it in-house in lab coats while the rest of the world knows that the best way to innovate is sometimes to buy companies. Was YouTube part of Google at the beginning? Android? You want me to go on?”
Entrepreneurs also need to do their part by building quality startups and looking beyond their countries for growth.
“[You have] to think multi-regional and global unless you are in Nigeria or South Africa.”
Local startups also need better management, corporate governance, marketing and distribution.
“I think their benchmarks right now are relative to each other and what we need them to learn is that their benchmark should be relative to the rest of the world. So I think the challenge is getting them to understand what their competition looks like,” says Malaika Judd who manages and mentors the accelerator startups at Savannah Fund.
It’s now or too late
Alliy points out Ethiopia and Nigeria as very attractive markets owing to their large populations.
“South Africa is interesting because it is a big market and we have seen good companies come out of there in the past and had exits. So you can’t ignore it,” he adds.
While Tanzania, where Alliy is originally from, is still lagging behind, he is hopeful that the country’s technology industry will pick up.
Alliy is bullish about Africa’s technology industry and notes that now is a good time to invest. He warns that investors who wait until everyone is making money before they come in risk missing out on the prize.
“Getting in early means you are able to make returns later.”