Affluent and wealthy individuals in the country have pushed to start investing their personal capital in digital start-ups to help them fix huge financing gaps mostly in idea development and testing viability of a product.
A new report developed by UKaid and iHub, digital entrepreneurship in Kenya 2014, say the country needs such investors to help scale apps citing a potential for significant number of active business angels in the market.
Business angels are high net-worth individuals putting their money to support growth of entrepreneurs expecting a return for equity, with return on investments of up to 40 times between a period of three to eight years.
They may opt to sit on the company’s board as advisory agents or just pump capital and own a share. According to the report, Nairobi currently has 5,000 US $ millionaires, the fifth highest number of any African city, making it favourable for angels to typically make smaller-sized investments at very early stages.
Most of these investors are speculating in real estate and traditional industries as well informal emerging investment groups and senior people from large technology conferences are considered crucial to uplifting the entrepreneurs.
“Funding in the range of Sh 870,000 to Sh2.6 million ($10,000 to $30,000), which is the range most desperately needed at present in Kenya, would be right in a business angel investor’s sweet spot,” said the report.
More than 60 percent of start ups said in the report they are interested in equity financing to support their sales and marketing roles but have not approached an investor.
Less than 50 percent of entrepreneurs feel that they have skills to run the companies said the report.
“The majority of startups we surveyed (70%) earn $2,900 or less which means they cannot work full time on their ventures nor hire proper marketing or user design resources,” said the report.
It emerged funding gaps are huge at Idea and prototype stages with foreign investors shying from such investments due to high risks and fierce competition in emerging markets for the little funds.
Over 60 percent of techpreneurs in the country are self-funded with less than 10 percent receiving funding from venture capital and Angels.
For instance 40 percent of mobile start ups receive less than $1,200 of funding while 93 percent received less than $120,000.
Funding needs as stated by startups at idea stage was just above this range ($27,000), but prototype stage startups were seeking significantly higher investments ($70,000).
“The spread of capital tends to be focused on seed and growth stage startups, with very little available at idea and prototype stage.