The startup ecosystem in Africa was shaken up late last year when 88mph, one of the active seed-funding companies in Nairobi, announced it would change its strategy to focus investments outside Kenya, in cities like Lagos and Cape Town.
The move, along with the departure of other businesses, has raised questions about whether Nairobi, and to a larger extent Kenya, provides a viable environment for tech startups.
88mph has pumped US$1.7 million into 20 startups, but officials have been reported as acknowledging that they have not succeeded in raising most of the companies they've invested in up to the next level.
Even some well-established companies, such as SleepOut, a holiday accommodation finder, moved from Nairobi to Mauritius last year, citing difficult business conditions in Kenya. In addition, South Africa-based e-commerce business Kalahari closed its Kenyan and Nigerian offices after they failed to be profitable back in 2011.
According to Manuel Koser, managing partner of Silvertree Capital, a South Africa-based investment firm, location alone does not determine the suitability of where to do business, but cannot be ignored.
Silvertree Capital has invested in startups in both Nigeria and South Africa. The companies they have invested in include e-commerce giants Jumia and Zando.
"If you have a longer-term growth plan then Nigeria is a good market, and for rapid profitability, South Africa is much easier," Koser said. He added that in South Africa, good infrastructure aids business while in Nigeria more capital is needed to turn a company profitable.
In Silvertree's experience, it is tough for a company to turn a profit within a year in Nigeria, but it's easier to do so in South Africa. The estimated time to profitability is a key issue Silvertree considers. So far, Silvertree has not invested in any Kenyan startups, though it is still studying the market.
Since the evolution of mobile money in the East African nation, Kenya has been tipped to be one of the most promising countries to invest in. With mobile penetration rates of over 80 percent and high technical knowledge among the population, it has been considered a good breeding ground for investments.
Some international tech companies, like IBM and Avaya, have not shied away from basing their businesses in Nairobi. IBM has one of its research labs in Nairobi's Catholic University while Avaya has its African headquarters in Nairobi. The mobile operator association GSMA also set up its first African office in Nairobi in 2013.
In 2014, though, the GSMA itself released statistics on business startup funding in Kenya, under the GSMA Digital Entrepreneurship study, and the numbers were low. Only 6.7 percent of startups had attracted venture funding, the study found. Other sources used for funding were family, friends and loans.
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