Kenya: Investment Landscape

I have just completed a little under a week in Nairobi. It was a very enjoyable and enlightening experience — as well as being my first footsteps in East Africa.

After a quick tour of the picturesque Karen Blixen Museum, I met with a couple of local VCs to discuss opportunities in the region. I was curious to establish what sort of businesses were being started in East Africa, what the local risks were and to try to start building a picture of the investing landscape generally.  In no particular order:

  • Bitcoin & Mobile Money. Kenya’s M-Pesa is according to some reports involved in 70% of Kenyan GDP. Given the 1% merchant fee, this means its owner, Safaricom, might be generating gross revenues of 0.7% of GDP from this mobile payment system. Copy-cats such as EVC (by Hormud Telecom) in Somalia have pretty much replaced cash: that country may indeed (somewhat ironically) to all intents & purposes be the world’s first cashless society. These high penetration rates probably mean that bitcoin (via payment systems such as the excellent Bitpesa) are going to find it hard to break in, except for transactions such as overseas remittances.
  • Economic Openness. Of the big economies of the region (Kenya, Uganda, Ethiopia, Tanzania), Kenya probably offers the easiest path for overseas investors: it has been a relatively open economy for a long time, particularly compared with Ethiopia and Tanzania, so foreign investors can be fairly confident that what they put in, they should be able to get out again. Having said that, sadly there is still corruption so careful due diligence is key.
  • China. Although this is changing, being less commodity-oriented than, say Zambia, the East African economies have been less adversely affected by the significant weakening of commodity prices. However, as with Zambia, China has made infrastructure deals locally that governments are already in some cases coming to regret. As in other African countries, when the Chinese offer money for infrastructure projects it turns out to be a bit of an illusion: they bring their own companies, who import Chinese workers & materials. Thus there is little or no “multiplier” effect (although clearly the local economy still benefits from the new road, railway or whatever).
  • Logistics. Kenya’s not a small country: 45 million people covering an area a little smaller than Texas. Although it has some great roads, it also has some absolutely terrible ones. This means that getting raw materials & finished goods around the country becomes a significant challenge and represent a much larger cost than in Europe or the USA. Driving outside of Nairobi, I saw fully-laden trucks doing less than 10km/h – the road between Mombasa on the coast and Nairobi is, I hear, literally nose-to-tail with trucks crawling along. One study I was told about suggested that the most efficient form of transport here in some circumstances was still the donkey. Another study pointed out that small farmers in Kenya receive substantially lower prices for their goods than are available at the port or other main market-place — in some cases as much as 75% lower; but when these researchers investigated the costs for the farmer of actually getting their production to that market, they found little evidence that intermediaries were squeezing value from the farmers: transportation costs & losses due to theft, wastage, contamination etc were all far more important. This would suggest that there is massive scope for enhancing the incomes of small farmers by improving logistics — something that should not be beyond the wit of man.
  • Education. As I mentioned in another post, Kenyans spend ~45% of their income educating their kids. Yet inconsistent teaching in public schools & very large class sizes means results can be very poor. Bridge International Academies, a company founded in 2009 and backed by Zuckerberg & Gates as well as Pearson has been seeking to address this problem. Bridge-trained teachers read scripted lesson plans & classes are much smaller than in state schools. Teacher absenteeism is substantially lower than in the state sector, too. The approach is not without its critics, as the WSJ article highlights: for example, many of the teachers are themselves barely out of school and the training provided is nowhere near as extensive as a ‘full’ teaching qualification. But the statistics speak for themselves: a 0.32 StDev gain in reading & a 0.51 StDev gain in mathematics.
  • Agriculture. Kenya has 6 million small-scale farmers and agriculture represents more than 27% of GDP. Complex logistics are not the only problem: other issues include lack of price transparency, fraud & theft. It is difficult to quantify the impact these challenges have on productivity & farmers’ incomes; to date I have not been able to locate any studies that look at this.
  • Manufacturing. Many Kenyans are self-employed or work for very small-scale enterprises making all sorts of goods including jewellery & other ‘craft’ type products.  For some, this is subsistence-level whilst others may be substantially more successful. What they all have in common though is being limited in their access to markets.  Given the existence of the internet and high local penetration for mobile money, there’s no real reason a Nairobi artisan couldn’t set up a Shopify shop and tap into global demand for ethically-produced, almost-unique items; yet in practice that doesn’t seem to be happening. What these artisans need is a “bridge” to the world.

I met with a number of businesses that are seeking to solve these problems, or helping other businesses solve them.

Many of my meetings were arranged by Growth Africa. They help early stage businesses hone their business plans, polish their presentation materials and raise working capital. I could not have been more impressed with the standard of the firms they’re working with and would recommend any young entrepreneur thinking of starting a technology business meet with them.

Below I feature the four early-stage companies I was most impressed by. Again, in no particular order. Although in some cases I highlight the positive social impact of these start-ups that’s not to say I don’t think they also all look like great standalone investments (subject to due diligence, of course).


Essentially, social selling. If you have a fan-base on Facebook, Pinterest or whatever, and you have products to sell (including digital music, event tickets or physical goods), why go to the trouble of setting up a separate shop on say Shopify (and risk losing the customer to a competitor) when you can sell direct from your FB page? Very smart, articulate founders; slick software; sensible revenue model. With 120 million Facebook users already in Africa, there should be plenty of scope for growth in this kind of application.


Soko offers jewellery from over 1,000 local artisans via a single portal; slick ERP software allows them to hold very low inventory of unfinished products. They can help artisans with training and also with working capital to invest in additional tooling. Finished jewellery is sold both wholesale & retail and the revenues are growing strongly. If you believe at all in “trade not aid”, this type of business is one NGOs should be taking a serious look at, as the positive impact on local communities can be huge.


By providing a platform that allows small-scale farmers to group together into collectives, tracking inventory levels, offering trusted transportation partners & connecting suppliers & consumers, iProcure is making the agricultural supply chain much more efficient. Again, the social impact to remote rural communities is potentially significant.

Mara Moja

Although Uber exists in Nairobi as well (presumably) as in other African cities, there’s a problem. Star ratings for drivers are all very well, but the Kenyans don’t really trust them. Instead, they’d rather use their ‘usual’ driver. And if he’s not available, they’ll ask a friend if they can borrow theirs. Mara Moja has cleverly turned this into an app by using people’s social media profiles & relationships to highlight to a rider those drivers that are used by people in their network. According to their research, a Nairobi rider would rather use a 2-star rated driver with connections to their friends, than an unknown 5-star driver. Which is pretty amazing.


Investing in Africa has never been regarded as easy by most people; it still has significant challenges, but for sub-Saharan Africa excluding South Africa I’d say Kenya was a very interesting first port of call for anyone looking to play the “Africa Rising” story. Nairobi has certainly earned itself a reputation as the strongest local technology hub and from what I managed to gather over just a few days it is now spawning some very interesting ideas and startups.

Grammar Schools

There was significant controversy recently over the UK government’s decision to allow the Weald of Kent Grammar School in Tonbridge to open an ‘annexe’ in Sevenoaks, 7 miles away. Opponents argue that this is a new school, even though the 8 minute journey time (by train) is far less than some pupils currently spend getting between scattered units of some schools that supposedly have a single site. The school will offer places for 450 girls.

I have long been a supporter of selective schools — having benefited from a Grammar School education myself, I feel it would be at the very least hypocritical for me to oppose allowing others to enjoy the same opportunities. Most Labour MPs, sadly, disagree: the go-ahead for Sevenoaks was described as a “hugely backward step“. Yet many Labour MPs were themselves beneficiaries of this system and might well not have been in a position to enter politics otherwise.

Selective education is a political hot potato. There are a number of issues generally raised:

  1. We should be raising standards for all pupils, not just the most able.
  2. “Creaming off” the best pupils into grammar schools disadvantages those “left behind” at comprehensive schools.
  3. The Sutton Trust, which promotes social mobility, highlighted research that less than 3% of pupils in grammar schools were entitled to free meals, compared with an average of 18% in the areas they serve. This implies that grammars are no longer serving the purpose for which they were intended, namely to improve upward social mobility of smart kids from poor backgrounds.

I think this last point is the most interesting. When I was getting ready to take the 11+ in the mid-1970s, there were no private tutors parents could turn to: one day, we took the test and then we hoped for the best. These days, there’s an entire industry focused on serving parents: some kids have years of private tuition before taking the 11+… even if they’re already attending private school! Middle class parents have reacted rationally to a ‘market incentive’ — grammar schools are scarce, good & free – Tonbridge’s GCSE results see 99% getting five A*-C grades compared with 63% nationally. But this is eminently addressable:

  • 11+ test results can be adjusted to take into account the socio-economic status of the pupil’s parents, just as they currently take into account the pupil’s proximity to the school (the test in Essex for example deliberately biases against outlying villages probably to save money on transportation costs).
  • Create a means-test that disallows parents who could potentially afford (say) private education.

Let’s look at two graphics. The first, from Oxford University, shows social mobility as measured age 27 for four cohorts. Note the substantial drop in upward mobility between the 1946 cohort and the 1980s one, for both men and women:


Now, let’s have a look at the number of grammar schools in UK over time (from BBC):


I’m sure there are many explanations but for me, one of them is that England went from educating 25% of its young people in grammar schools, to giving just 5% the same opportunity.

This is political dogma preventing smart kids from getting a good start in life. It’s got to stop.

Wage Inequality: How Not to Fix It

There was a great little piece on Business Insider this morning about Patricia Arquette’s acceptance speech at the Oscars. It got me thinking.

Let me start by saying that I am a firm believer in equality in all areas: male/female, black/white, whatever. Whilst there are undoubtedly differences in individuals’ capabilities that’s what makes the world an interesting place and there is absolutely no justification for discriminating in favour or against someone simply because of their gender, race or any other trait.

I’m just not at all convinced that legislation is always helpful. Take the following example. When my two sons were younger, they attended the local Preparatory School. One of the women teachers there went on maternity leave several times, returning briefly between each stint to teach for maybe a term. This is difficult for both the kids and the school to manage: they have to expend management time locating & interviewing temporary teachers to cover the role, and then even if those teachers are fantastic, they have to let them go when the original employee deigns to return. The kids likewise have to adjust to repeated changes of teacher. Like it or not, as chief executive of a business like that, wouldn’t part of you be saying to yourself (not out loud, for obvious reasons), “Why hire women [who go on maternity leave] when we can hire men [who generally don’t]?”

This is not an isolated example. In a small business where perhaps there is a single employee in a key role (say, specialist lawyer, CFO, etc) how can they deal effectively with this situation? Often, by not hiring a women of child-bearing age in the first place. I’m pretty sure this is a common occurrence – it would certainly help explain the gender pay gap.

Now, I fully support the idea of both parents wishing to spend time with their children, especially when they are pre-school age, as there’s plenty of evidence that this is a great thing from a social and educational point of view. Giving fathers the same rights as mothers to take parenting leave is all very well — but it doesn’t solve the problem, it makes it even more difficult for small businesses to know what to do.


This article first appeared on LinkedIn 23 February 2015

Putting the Gini Back in the Bottle

An article by The Economist on Twitter caught my eye a couple of days ago.

It shows that the wealthiest 0.1% of Americans control around 22% of the nation’s wealth — almost exactly the same proportion as the bottom 90% of citizens. This hasn’t happened since the late 1930s and the article seems to be lamenting the passing of a period where wealth was more evenly distributed.

One problem here is that there probably isn’t any really good data on income or wealth inequality going back further than the early 1900s; because I’m pretty sure that if there were, we’d see that the post-WW2 period was the outlier.


I’m not arguing that wealth inequality is necessarily good, just that it’s probably natural.

I’m not too concerned about the Paris Hiltons of the world…. “rags to riches and back again in three generations” comes to mind; I’m sure they’ll fritter it all away if they’re not smart enough to look after it — or their parents will follow Warren Buffet and give it all away rather than passing it to his offspring.

At the other end of the spectrum though, think about the technology sector, for example. Innovations like Apple’s App Store have made application development tremendously accessible: it’s literally now possible for a team of maybe half a dozen teenagers with a good idea and some coding skills to put together an app in a relatively short space of time that could gross tens or even hundreds of millions of dollars in revenues. Not every app is going to succeed, but how many pursuits were there in, say 1965 (when I was born) where someone potentially without any formal qualifications and with very little capital could make that kind of money?

On a slightly larger scale, look at Finnish game developer SuperCell. Following $12mn of VC investment in 2011, they developed two games, one of which was Clash of Clans — an app that grossed nearly $900mn in 2013. I don’t know how many employees they had in 2011-12 when the game was developed, but I’ll bet it was a pretty small core development team.

To me, this is a kind of democratization – literally with nothing but a laptop and an idea, it’s possible for a talented coder anywhere in the world to come up with something pretty awesome and sell it globally. Of course, if they succeed they will make a ton of money and in doing so “mess up” the Gini coefficient; but honestly, who’d want to live in a world without that possibility?


This article first appeared on LinkedIn 11 November 2014