In the recent past, the Kenyan startup ecosystem has been among the biggest in Africa. In the years 2021, 2022, and 2023, Kenyan startups raised a total of $450 million, $1 billion, and $800 million, respectively, in venture capital, according to Africa Big Deal. This has helped it maintain a top-four position in Africa across the three-year period. This success is, however, not reflected past the seed stage in most of these startups.

Fingo, a Kenyan startup, managed to raise over $3.5 million in venture capital in 2023. This is the same year Sendy, a logistics startup that managed to raise $26.5 million in venture capital, halted its operations, adding to the ten Kenyan startups that failed to make it past the seed stage in 2023 despite raising a lot of funding.

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Kenya has emerged as a hub for innovation and entrepreneurship in Africa, boasting a vibrant startup ecosystem that has attracted substantial funding in recent years. 

However, despite the influx of capital, many startups in the country face a significant hurdle in advancing beyond the seed stage. This paradox raises questions about the challenges these businesses encounter and the underlying factors contributing to their struggle for sustained growth.

While the seed stage has witnessed a flurry of activity, marked by substantial funding rounds and promising initial developments, a concerning trend has emerged: a notable proportion of these startups are finding it challenging to progress beyond this honeymoon phase of development. Despite raising impressive amounts of capital, these companies often face stagnation or even failure as they attempt to transition to advanced stages of growth.

High operation costs, tough market conditions, and failure to raise more funds are some of the reasons identified by LIDA Network as bottlenecks for these startups.

High cost of operation 

The cost of business operations in Kenya has been on a sporadic rise in the past years; in 2023 alone, the cost of fuel went up by 20%, the cost of electricity also went up by 40%, and Kenyan shillings depreciated by 24% against the dollar. These factors have squeezed the profit margin for most businesses operating in the country, even established businesses. Under these conditions, even well-funded startups find it hard to thrive because they are facing these challenges for the first time. 

Tough market conditions

Most of these startups face stiff competition from established multinational businesses operating in the country. Most of these multinational businesses enjoy a huge marketing and research budget, giving them an upper hand in the market. This competition makes it difficult for startups to gain market share, hindering their growth. 

This competition became even stiffer last year when the government lowered the corporate tax paid by foreign businesses operating in Kenya from 37.5% to match the tax paid by local businesses at 30%. This means that local businesses are no longer protected from the competition brought by foreign companies operating in the country.

Failure to raise more funds

After raising venture capital, most of these companies fail to raise more funds afterwards. While initial investments may help kick-start operations, the absence of sustained financial support makes it difficult for these companies to scale and navigate the challenges of expansion. 

Accessing MSE loans in Kenya has become difficult because of the high interest rates and high default rates. In an interview with Shadrack Otieno, who is the Business Banker of KCB Bank Oyugis Branch, he revealed that banks currently view startups as high-risk borrowers, and this is the reason why they shrink their budget for SME loans every financial year.

“Banks currently shy away from financing startups because they consider them high-risk borrowers. Those who are willing, however, offer these loans at a high interest rate, usually above 18%, which makes it difficult for businesses with a small profit margin to pay them back. This is the reason why most of these SMEs end up defaulting on bank loans.” Shadrack Otieno revealed this in an interview with the LIDA Network. The Financial Sector Deepening survey showed that 60.7% of MSEs defaulted on their loans last year alone. This discouraged banks from further issuing loans. Apart from the banks, very few institutions are willing to fund these startups, making it difficult for them to raise more funds as their financial records may not be encouraging.

Copying models of established businesses

Some of these startups do not conduct market research of their own to determine the gaps available in the market; they simply borrow from what has worked for established businesses and replicate it. This model of operation for startups was preached against by the author of Zero to One, Peter Thiel. Some of these startups even try to borrow from businesses abroad and try to implement the same in Kenya, not knowing that the markets are very different.

Market research is a very important phase of business development; skipping this phase has led to the fall of some well-funded Kenyan startups.

Is there hope for aspiring entrepreneurs? 

Despite the fact that current startups are facing numerous challenges, some of which are beyond their control, Ruth Moraa, who is a business banker at KCB Bank Homabay Branch, still insists that there is hope for aspiring entrepreneurs. In an interview with LIDA Network, she stated that market research would help these startups navigate through most of the challenges they are facing.

Most startups are struggling because their founders fail to conduct enough market research before going out to seek funding. Market research will help an aspiring entrepreneur raise funding because investors will only throw their money into a business when they are convinced that they will make a profit. Market research will help you identify existing gaps in the market that you can exploit to earn profit. Extensive market research will also help you to identify possible challenges that you will face when running the business; this will help you prepare well to encounter the challenges.” Ruth Moraa stated:

Running a business requires a lot of training. An aspiring entrepreneur should therefore learn some of the skills required to run a business, like accounting, to increase their chances of running a successful startup. A common trend with failing startups is that tech enthusiasts, some of whom lack the basic skills required to run a business, start and run them. Teaming up with a business specialist can lead to the success of a new business. It is also important that you hire or get the services of a stringent financial advisor. VCs, grants, and all other funding channels are not free money.

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While Kenyan startups continue to attract record funding, addressing the challenges hindering their progression beyond the seed stage is crucial for the long-term success of the country’s entrepreneurial ecosystem. Through strategic interventions, such as enhanced mentorship programs, diversified funding sources, and supportive policy reforms, Kenya has the potential to transform its promising startups into sustainable, globally competitive enterprises.