Tuesday, January 09, 2007

EADB Venture Capital

The East African Development Bank is proposing to set up a venture capital fund to invest between $100,000 to $1 million in companies who have turnover over $100,000 and are prepared to give the fund shares in exchange for capital invested. Expressions of interest to be sent to venturecapital@eadb.org

State of the VC

Is Kenya ready for VCs? Do we have the expertise and are they necessary?
The regulations for the VC industry are yet to be formalized and the Acacia Fund remains the only venture capital firm licensed by the CMA. But there are other players such as ICDCI, investment advisers, investment companies, and entities like Transcentury who can arrange equity-based financing for viable companies.

Given the archaic company laws and endless court processes, entrepreneurs in Kenya have to be very careful about who they let in as equity partners. They feel better off borrowing from a bank that they can pay off and walk away from after a while instead of having VC as partner/co-owner.

The VC route is more suitable for established companies who have a good long-term understanding of their requirements and the benefits that are offered by different equity partners.

A more viable, non-VC option for start-ups is the government’s proposed youth enterprise fund which was gazetted in December. (read more)


sijui said...

Yes, yes, yes we need venture capital funds ESPECIALLY if the originators are local/indigenous. Caution is definitely a necessity especially if you look at the experiences of Africa Online under Ayisi, others whose potential was short-circuited by clueless, short-sighted 'equity partners'. Lessons can be learnt from that, and it is understandable why small and mid sized companies prefer to forge it alone HOWEVER that attitude is a handicap to business development. I believe if we have more indigenous VCs who have intimate knowledge of the market and 'speak our language', and rigorous background research is done by both parties, it can be a win win scenario for all involved. It is an idea whose time has definitely come.
P.S. I would also argue that start ups are in a better position to exploit this than fully established firms who in some regards are 'already set in their ways' and less flexible to the concessions inherent in such a relationship. Either way, good news!

Anonymous said...

VC is early stage Private Equity (PE) with a different approach than late stage PE. Acacia and ICDCI are late stage PE firms - they have lower risk threshholds and are looking for immediate and stable returns coupled with a longer investment holding period. VCs go for high risk, early stage, high return potential opportunities. If a team of doctors at KNH discovered the cure for malaria today, they could go to Barclays but the venture would probably be way above Barclay's risk threshold added to which, the doctors may not have the collateral to cover the $0.5-$10MM that they would need to develop the drug over five years. Also there would still be no cashflow to service the debt. The doctors could reach out to GlaxoSmithKline who would likely require that the doctors sign over the licensing and patent rights to the drug. They could talk to a few rich Kenyans who not aware of what would be required to take the drug to market would forever be worried about their investment and probably not even offer the necessary infrastructure to make it happen. But what if they could get in touch with Sequoia Capital's Biotech group? Now we are talking liquidity, management expertise (which the doctors prob don't have) and a whole slew of contacts to choose from, distribution channels and development support; and a huge payoff if the IPO is successful. VC is the best option for start-ups. VCs look to exit in 3-5 years at a 4X to 25X return on investment. I would actually be worried more over whether Kenya has the capital market depth to provide the opportunity for a VC firm to exit at a 5X multiple after 5 years of working with the start-up. Google, Paypal, Apple, Cisco, Yahoo and Oracle all got their financing from Sequoia Capital and are now very successful. Sequoia invested in Youtube.com 3 months after it went live and when they sold the start-up to Google, their payoff was well over 20X of their initial investment. And contrary to your assertion, there are people that are African and well versed in PE and VC dynamics... and were born and raised on the continent, worked there and cut our teeth there; and most importantly understand the language of business on the continent - only we may find it harder to trust our own than we would if someone came down from Acacia's London office.

Anonymous said...

You are rarely objective when it comes to banking in Kenya. I have noticed that in a number of posts and replies you defend your source of livelihood (i.e. the Kenyan banking system).

There is a huge market for VC's in Kenya especially as we move from 'Jua Kali' type business to light industrial productions. It is this segment of the economy that the banks tend to ignore. While this could be solved through micro-financing, it is possible for investors to fund this revolution in return for a piece of the pie.

Take the case of the struggling Uchumi supermarkets, this is a business with a lot of potential but banks have no interest in ownership of the company. Through private equity ventures Uchumi could be revived.

Anonymous said...

VC's is definately the way to go if we are realise our dream of becoming industrialised by 2030 or 2020 for that matter.

Unlike banks there is involvement which with proper focus can take us far

bankelele said...

sijui: There's a role for VC firms, but not everyone (Startups) who thinks they deserve VC interest will get it. Companies must be very careful about who they invite as equity partners - given out legal processes.

Ssembonge: Banks are NOT the best partner for entreprenurs. At every stage of a firms growth (where funding is required) there is an appropriate source. For Jua Kali's startup's - it's savings, grants, friends & family, - not bank's or VC's. Unless VC's remodel their valuations and analysis criteria to firt the Jua Kali sector, only large companies will get the funds. Commercial banks gave (their) depositrs to Uchumi - and will give more, but they have no interest in gaining equity - just their cash back

kenyanentrepreneur said...

How can you say that banks are not the best partners for entrepreneurs? VC firms are a relatively new phenomenon and really only took off when the internet boom started taking place.

99% of entrepreneurs are not going to to get VC funding and if you don't have friends or family with capital, a bank loan is the only option!

VC firms tend to attract a very specific type of entrepreneur (usually well educated, technologically savvy, young software engineers)

Try asking a VC firm to give you money to open a kiosk or a hamburger joint (it aint gonna happen)


sijui said...

To Anonymous,
All I say is AMEN! I would like to hear your thoughts on the following:
1) do you know if there is underlying interest within VC circles to explore financing for emerging agri-business on the continent? I mean specialized industrial exploitation of primary commodities such as bio-fuels, etc. I know the Chinese and Brazillians are already making massive investments in a few select countries such as Ghana, SA so the potential is definitely there.
2) what is your opinion of the budding interest of a few progressive governments on the continent to set up VC funds? Again, SA, Botswana, Ghana others have already formally established some with initial endowments in the $10-$50 million range. Are they doomed to failure like all the other 'state-sponsored' interventions? Are private VC firms shepherding and collaborating behind the scenes? Or is it a wait and see approach, with private firms holding back to assess their viability?

I see positive movement afoot, so I wanted to get inside perspective on whether this is a one day wonder.

Mashatall said...

Sounds like you have a good grasp of the private equity field.Am currently involved in a project that will require Venture capital.problem is most of the VC firms based in the US do not cater to startups investing in Africa.Are there any early stage VC firms within the East African region? And can you offer your services as a consultant for startups as we try to set up ventures?
Good resource here, but was just wondering if you could possibly shed some more light on VC firms investing in early stage companies.

Anonymous said...

Opening of an Over The Counter (OTC) desk at NSE can foster development of small-to-medium sized VCs.

Anonymous said...


Check out the LuSE comments on www.investinginafrica.blogspot.com

The AIMS was supposed to be the "board" for small firms but the costs & conditions of listing scares them away!

Anonymous said...

Mashtall, the current issue of financial post (http://www.financialpost.co.ke/Pages/archives.html-issue 112)covers this issue and has a company which is linking entrepreneurs with "angel investors".

All the best.

coldtusker said...

MainaT - Please post the link on your blog as well... If the link is too long, blogger chops it off...

BTW, I think Mumias (the firm) will do well over the next 3-5 years. Note I am talking about the firm not the price... I have no idea about the price!

Mitzy said...

Whenever you start a company which seeks venture capital, you have to consider "the exit" - how will the VCs get a return on their investment? The two most common routes are being bought out or going public. Being acquired can be nice in that you get a relatively instant return, provided the buyer is a public company in good standing and their value is much larger than the acquisition price. But it is also the end of the line - your business is absorbed into another company.

Anonymous said...

CT-already have link to financial post on our blog
-will do a longer post or respond to Bankele as to why I've been and remain bearish on Mumias on our blog.

Anonymous said...

Hi All,

Pretty good discussion going on here and I couldn't help putting in my two cents worth.

I agree with Bankelele that businesses do need to be careful who they let in as equity partners given the legal difficulties of unwinding such relationships in this country.

However, it is also true that the time for VC in Kenya has dawned. After many years spent trying to get CMA to gazette some guidelines for VC, this has now been done (albeit poorly). There are also no less than three VC operations set up or in the process of being set up that I know of and this should no doubt be good news for entrepreneurs. The only problem is that they are all not willing to take start up risk (yet?) but some will look at a business with around 3 years. One appears to be chaffing to try going lower but for that we must wait.

kenyanentrepreneur said...

I always assumed that VC firms did well in an economic environment that produced or nurtured individuals who were able to come up with creative and innovative ideas, especially as it relates to technology.

Do those individuals exist in Kenya? especially in light of an educational system that emphasizes rot memorization over creativity and intelletual freedom.

I think people on this board get too hung up on "running the numbers" and the discussions turn to things like PE ratios, management structures, ROI's, etc. etc. ...all of that is irrelevant if you don't have a culture that nurtures innovation in individuals.

There's a reason why the best entrepreneurs in the world are coming out of America.

isibingo said...

Great postMyAfricaToday

isibingo said...

MyAfricaToday Media is a multi-media content service provider, systems technology developer and one of the largest electronic distributor of African news and information worldwide. Registered in United States, with offices in Michigan, Dar es salaam, Nairobi and Kampala., MyAfricaToday is one of a family of companies that aggregate, produce and distribute news from across Africa to tens of millions of end users.

Kumekucha said...

Vituko Kenya,

Mediocre ideas/projects - are they worth spending money on?

So last night after reading this article on 'VC' - My boss and I decided to look around for potential internet/online business ideas in Kenya. We were very excited when we ended up on a website that promised to be 'your guide to knowledge' - kenyacolleges.co.ke - whoever this is must have enough money to hire a developer to consult on this website and advertise on nationmedia. But the quality of the website is questionable. The question I have for all of you is, why is it that Kenyan web-entrepreneurs never really understand the question of quality. My boss is interested in investing in such projects but when you come across such projects like kenyancolleges.co.ke you wonder whether - people who manage these projects have sought the relevant expertise or they are in a rush to get their ideas to the world. Are there any kenyan web properties that I can show a serious investor to put in some money. As for the owners of kenyacolleges.co.ke - first they need to pull that site down and get some quality control folks to help and then stop advertising - it is an embarrasment. I was embarrased to show my boss (Non-kenyan)

Any ideas?

Anonymous said...

Wololo .. Vayeee!

Yenyewe kizungu ni ngumu and Kenyan entrepreneurs need some exposure, otherwise...:
We should have a Kenyan Bureau of standards for Internet sites.

Direct quote from the above mentioned website: Under the articles link:

"We documents all the colleges that are part of our initiative and we further go a step ahead by registering you, whether you are a student or a college and become part of our client base. We provide information that can be found nowhere; a collation of all the information found in the newsprint, websites of the colleges and other institutions of higher learning."

Sijui said...

KE and Kumekucha,
I would argue there is nascent entrepreneurial energy in the country that just needs to be mentored and polished. God knows the shallowness of our education system has made it abundantly clear that we mass produce civil servants and line managers NOT innovators and pace setters. That being said, enough folks have tarmacked for there to spring up organic entrepreneurial energy that is a real break from the past i.e. non reliance on political patronage and god fathers.
I'm not saying there is a revolution, what I'm saying is that there are budding entrepreneurs in the IT, real estate, marketing & advertising, fashion design, business services fields who have enormous potential and can compete globally with just a little more polishing.
P.S. You'll get to know most of them through social networking not on the web......

Anonymous said...

Sigui: I am with you on your line of reasoning-as far as the level of entrepreneurship that exist in Kenya today.

However, I am not 100% sure where I stand as far as whether the VC's are really a necessary component of Kenya's financial framework at this point. Even the most sophisticated small entrepreneurs can find themselves moving down a slippery slope if the laws are difficult to enforce. But, given that this is not unique to Kenya, alone maybe I don't have a point. Afterall, we here stories about entrepreneurs here in the States losing their companies to VC's so often that it's not even news anymore. If a company has proprietary processes or technolgy however, and does not give the rights to the VC, it is more difficult for the VC to gain value from taking the company-this would work in the favor of tech firms.

But on the otherhand, my father in law in Kenya is a respected businessperson and has no problem obtaining financing. Whereas, his younger brother who is not very established and does not have collateral has been unable to secure traditional financing. For that reason, it is difficult for me to see the sources of financing for the smaller businesses or cash-hungry businesses as an "either-or" proposition. Unless there is something thatwould prohibit a business person who has been denied a loan from going to a VC and getting financing or vice-versa, is there?

Sijui said...

My profuse apologies for going completely off tangent.......and sorry Bankelele for taking the liberty on your blog....but I came across this fascinating article on Sino-Africa relations that I had to share. I can vouch for the distributors of the article i.e. Imani Ghana (they are a pro-capitalist/liberal democracy think tank founded by Ghanaians who are intent on effecting change in public policy to this end......and yes they receive heavy sponsorship from 'conservative' patrons in the West)
Anyway, I think the article brings a fascinating and insightful dimension to the analysis of China's role in Africa.
It goes deeper than the natural resources/human rights debate. What does this mean for African entrepreneurs? If Chinese SMEs are coming to perfect their innovation on the continent, what are the implications for us?

bankelele said...

kenyanentrepreneur: It's true banks are not the best partners for entrepreneurs. Banks' don't have the pateience and often entreperenurs don't have the security that banks need (friends or family are best)

Oh and I'd put up our (elementary) education system against the US one anytime!


for agri-business., I'd advise on seeking research grants of which there are a variety

Mashatall: good luck with your venture. I can't think of asny early stage VC firms - though there are some companies that trade office/factory space for equity. Also EPZA's

Kenyanomics: The profitability and dislosure requirements are off-putting

MainaT: Thanks for the link

Agamemnon: Agree, there's a role for VC's but with the company laws we have, it would be a nightmare. There are firm's operating as VC's but they are not VC firms because the CMA rules/guidlines for VC's are not ready. They will apply for proper licensing afterwards

isibingo: good luck

Kumekucha: It's sad but many compnies don't realise having a good (up-to-date) website is - or how often new partners check & judge a company based on their site.

Sijui: How can we improve the education system? I think we churn out good students, but they lack opportunities. Maybe we need to emphasize more entrprenual skills at schools
- nice Asia Times article

reville said...

hey there!!

i have a firm, startup though but don't have the cash to get the resources i need and for actual startup and to get off the ground.
i would appreciate any help i can get from you, plus if you can direct me to some VC firms here in kenya, i'd greatly appreciate it.

thanx in advance!


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