Lessons for local entrepreneurs to end streak of failed startups

Kenya’s start-up ecosystem is littered with failures. In recent months, many start-ups have closed shop, while more are teetering on the edge, uncertain of their future.

Firms like Copia, Gro Intelligence, iProcure, Rejareja, and Lipa Later have, in the last two years, joined what seems like an ever-growing list of companies that tried but died.

Others, such as Twiga Foods, have been holding on but are among those that are unsure of their future, having laid off employees since 2022 but yet to figure out the Kenyan market.

In all these failures, Kenyans and other observers have noted the billions that investors, mostly venture capital firms, have sunk and now guarantee that they will never get returns.

The scale of these failures is huge, with investors, mostly venture capital firms, having poured billions of shillings into these companies.

Copia, for instance, has absorbed an estimated Sh15.9 billion, Twiga Foods Sh23.4 billion and Gro Intelligence Sh11.5 billion. These sums are a stark reminder of unfulfilled promises and guaranteed non-returns. 

Even established players like Twiga Foods, despite raising significant capital, are on the brink, having undertaken multiple employee layoffs since 2022 as they struggle to crack the complexities of the Kenyan market.

The failures are usually due to a mix of factors that range from poor policies to economic headwinds. Additionally, founders sometimes get it wrong in terms of timing or product development.

But despite the shock and even founder-bashing that is common in Kenya whenever start-ups of this scale go under, a seemingly lone voice notes that this is normal in the world of innovative and high-growth start-ups. 

“Venturing across the world is a risky asset class. Failure rate is usually quite high,” said Regional Managing Director for Endeavor, Maryanne Ochola.

“And everyone who is in that space understands that. So that’s why, if I’m thinking as a venture capital investor, I will invest in 10 businesses, knowing very well that nine are probably going to fail. But that one will go for the races. It will be 100 times. And then the return will cover, end with profit for everything.”

“That is the only way you fund innovation. Because if we all waited for you to go, prove it, then come back, nobody will stick their neck out to try a crazy idea. When you look at Silicon Valley, that’s how all these ecosystems are built.”

She explained that such firms are characterised by a high level of innovativeness and are high-growth but also “very risky”.

Dominant actor

In the few instances that such companies survive the start-up phase, they can give their funders a return, which at times compensates for losses they incur in financing ventures that fail. 

“They also have ideas that they expect will capture the market very fast and become the dominant actor over a short time. But before they become the dominant actor, they will be loss-making, and that is why they need to be funded, and some are constantly fundraising,” said Ms Ochola.

“There are investors who are looking for founders with crazy ideas. They will then fund them, knowing well that one of them will get it right.”

“And that’s the mindset we need to have, especially around failure… we need to understand that failure is part of the system. It’s designed that way. And that’s why the loudest voices are not coming from venture when it comes to these companies that have not worked. The loudest voices are coming from people outside because they don’t understand.”

Endeavour brings together such minds, creating an atmosphere for founders to continue innovating and bringing unique concepts to the market while connecting them to mentors and financiers.

In Kenya, among the founders that Endeavour has worked with is Ken Njoroge, the founder of Cellulant, who now mentors and invests in start-ups that are part of the Endeavour ecosystem. 

It is also with the understanding that such founders, especially those coming fresh from failure, might be shunned, even ostracised, for “blowing billions.”

The organisation also operates a $600 million (Sh77.4 billion) commercial fund that lends to entrepreneurs within its ecosystem.

“Our job is to make people understand the venture ecosystem and for us to actually embrace that failure, which enables us to understand what works and what doesn’t work,” said Ms Ochola, citing e-commerce where firms that tried it in Kenya registered heavy losses in the initial years but have demonstrated the gaps that if addressed would make it easy for local firms to launch e-commerce firms thrive with ease.

“Because of the companies in e-commerce and borrowing on their experiences, we now know that the cost of last-mile delivery is too high, and we need to invest in infrastructure for the last mile. Because nobody will be able to serve certain markets profitably.

“We should take the lessons on why start-ups fail and what investments we need to make so that the next generation that ventures into that area has a chance of success.”

Ms Ochola noted that a key disconnect in policy making has been bundling all entrepreneurs into one category. Thus, a high-risk but innovative start-up is treated similarly to other SMEs, oblivious of the uniqueness of certain cadres of companies. 

“The difference between a founder in Kenya, and generally the developing markets, the founder in the Global North is out of 10 things, the founders in developed markets are in control of seven things. In our markets, they are in control of three things,” she said.

“What our founders are saying is that we need to be bold with our policy. Speed in terms of execution is one of the barriers that a lot of start-ups face. Aside from removing barriers on the policy side, the government also needs to act with speed.”

Initial phase

Other than policy, they also face difficulties in securing the type of financing that they need, which is usually high and over a short period of time, while giving them some leeway during the initial phase.

“We all agree that a lot of these business models are loss-making for a while because you’re trying to acquire market share,” she said.

Ms Ochola noted that while local financing for start-ups has been forthcoming, it is barely enough, adding that local financing in any market is preferred as local investors understand local nuances. High risks start-ups in Kenya are largely financed by foreign venture capital.

“We need more local capital, because local capital is smarter, it moves faster and it comes with advice, connections and networks,” she said, adding that Endeavour is pushing for a founders-led funding ecosystem for start-ups but also to have founders get a say in policy formulation.

“Founders make the best investors for fellow founders because they understand what it takes to build a business, and the question for us is how do we make Kenya a founder-led ecosystem. We should also have the loudest voices at the policy table being people who have actually built businesses because that will make the ecosystem grow even faster.”