Look investable to attract investors, Kenyan start-ups told amid 'funding winter'

Start-ups need to make information about their ventures clear and accessible to win potential investors, investment professionals told Kenyan start-up founders at an event on due diligence in the Kenyan start-up ecosystem in Nairobi on Thursday.

Due diligence is the detailed examination of a company and its financial records before becoming involved in a business arrangement in order to analyse and mitigate risk from a business or investment decision.

It involves examining a company's numbers and comparing them over time, and benchmarking them against competitors.

Zaina Otieno, an investment associate principal at CrossBoundary Energy which invests in renewable energy projects in Africa, told ventures to organise their materials and financial documents to give potential investors a seamless experience in the due diligence process.

“Look investable; having clear documents and a financial model makes sense for investors looking to invest in your company. It is also advisable to collect information as much as you can; save the material from your engagements with former potential investors so the others you engage with in future can rely on them as well,” she said.

Otieno was speaking in a panel discussion alongside Eric Muli, the founder and CEO of the Kenyan tech credit start-up Lipa Later, and Eugene Gikonyo, an investment associate at the Global Innovation Fund, which provides grants, loans and equity for social innovations targeted at improving the lives of poor people.

Muli, whose buy now pay later (BNPL) platform acquired the Danish e-commerce start-up Sky Garden at the close of last year, noted that proper organisation of a venture’s documents makes it easy for investors who have a wide range of companies to choose from and add to their investment portfolio.

“As much as some investors are thorough and the due diligence process can take months, think of them as people without too much time to spend when you organise materials. Don't make them look for information too much,” he said.

On his part, Gikonyo urged founders to understand their companies’ cost structure, saying ultimately, founders best understand their companies and as such, investors rely on how precise the information presented to them is.

“Especially with early-stage start-ups, we have had issues of costs not accounted for properly or do not match up with profit margins and it scares away investors,” he said.

But while due diligence can mostly be used to refer to something investors conduct on ventures, the professionals advised start-ups to also carry out due diligence on potential investors.

Otieno said this saves ventures time and makes them narrow down the list of investors who have a high chance of considering pouring money into their companies, as well as their impact.

“Do a background check on their investment portfolio, do they improve companies or slow them down? This will help you evaluate which investors are likely to say No or Yes, depending on their history,” she said.

“Ninety-five per cent of investors have said no to us so we have learned to be strong and cast your net as far as you can. If it is not working, it could be a sign there is something you are doing wrong,” Muli added.

Gikonyo further advised founders to have a long-term view when starting an engagement with a partner and evaluate the additionality to the company an investor is bringing, such as whether they are more focused on environmental, social, and governance (ESG) aspects or impact.

‘FUNDING WINTER’

Thursday’s discussion was co-hosted by Founders Factory Africa (FFA), an early-stage investor in tech start-ups on the continent across health, energy, financial technology (fintech) and education, and A&A Collective, a global community of mid-level professionals in the African tech and investment ecosystem to enable them to connect, collaborate and learn from each other.

FFA was among investors in Kenyan online ticket-booking start-up BuuPass’s Ksh.163 million ($1.3 million) pre-seed round early this year, as well as digital healthcare provider Zuri Health’s Ksh.131 million ($1.3 million) pre-seed round last year.

The discussion came at a time the Kenyan tech ecosystem, which flies high in Africa’s ‘Big Four’ club alongside Egypt, Nigeria and South Africa, is going through a so-called 'funding winter'.

Data from the start-up funding tracker Africa: The Big Deal shows that the Big Four jointly raised $4.6bn (Ksh.658 billion) between July 2021 and June 2022, with Nigeria leading at over $2bn (Ksh.286 billion) followed by Kenya at nearly $1bn (Ksh.142 billion), South Africa and Egypt.

But this year, funding shrank 77 per cent in Nigeria, making the giant lose its top spot to Egypt where the fall was the most moderate of the Big Four (25%).

In South Africa, funding dropped by 53 per cent while in Kenya, it dipped 69 per cent.