In Kenya, technology start-ups attract a lot of attention from the media, investors and government. There are numerous events, investment funds, and platforms dedicated to the growth of tech companies. It is sometimes easy to forget about other industries.
Crowdinvesting platform LelapaFund is hoping to shine the light on the opportunities of investing in start-ups in other sectors, primarily those manufacturing consumer goods. Consumption of basic goods is on the rise due to a ballooning population and an emerging middle class. Entrepreneurs are starting small businesses making everything from soap to yogurt to cosmetics – all previously the domains of multinationals. However, many struggle to access financing.
LelapaFund wants to mitigate the financing challenges of such businesses by linking them with investors in Europe.
“In Kenya it is challenging for [such] SMEs to be visible to investors [because] channels do not exist for them in the same way they do for tech companies. Tech dominates the narrative here and we are trying to diversify that narrative a little bit because there is a lot of creativity and growth potential. We are seeing a lot of imported products at a price point that could quite easily be achieved by Kenyan manufacturers,” says LelapaFund founder and CEO Elizabeth Howard.
LelapaFund was founded last year by the South African-born Howard, and American entrepreneur Jerry Crossan. The platform scouts for small companies that serve the emerging middle class and prepares them for investment, ensuring they are formalised, accompanied by expert technical assistance partners where needed, and fulfil due diligence requirements.
It then presents these companies to its network of investors which includes the African diaspora, and people in Europe with links to Africa.
The SMEs can raise between US$50,000 and $1m from multiple investors via the platform in exchange for equity. For its work as an intermediary, LelapaFund generates income by charging the investors a 3% fee on amounts they invest in a business.
“Initially there was no formal equity solution that enabled early-stage SMEs to get shareholders who could bring something beyond capital to the company. We know those potential shareholders do exist in the diaspora and beyond, and are very interested in investing in African companies in a straightforward, secure and transparent way. So we wanted to create an end-to-end solution where they could find these opportunities easily and support the whole transaction online, from sourcing the deals to facilitating the actual financial transaction and the shareholder agreement,” explains Howard.
LelapaFund says it has received “hundreds” of applications from SMEs in Kenya.
“We have received applications from companies in bio-fuels to food products to innovative wearable tech. I have met with book publishers, dairy farmers, even someone who wants to set up the first helicopter advertising company for Nairobi. There is just a great need for financing for small businesses,” explains Crossan.
Tapping the diaspora dollar
There are millions of Africans living in the diaspora, who sent home an estimated $60bn in 2012.
“I don’t expect the diaspora to suddenly diversify massively into high risk SMEs. But I do expect some of them, especially the ones that would be considered as affluent or high net worth, to start making small investments for financial gain and to get a better understanding of how running a business in Kenya works. The experience as a minority shareholder you can get by participating in an active company is very valuable,” adds Howard.
Some of the challenges LelapaFund faces are helping companies prepare for equity investment and shareholder relations – often this is an entirely new concept. Howard adds that the equity crowdfunding industry is evolving fast, hence keeping up with legal and regulatory frameworks has been a challenge.
“It has also been a challenge trying to get the African diaspora to understand this as an asset class, and to think about diversifying some of their remittances into investments,” says Howard.
Over the next five years LelapaFund plans to expand across East and West Africa, choosing fast-growing countries with favourable regulatory environments that protect minority shareholders.
“We hope to make a dent in the $140bn SME funding gap in Africa. One of my biggest medium-term goals is to see one of the companies that successfully raised on LelapaFund list on the Nairobi Securities Exchange,” says Crossan.