Frontier and Growth Markets | September 30, 2012

Letter from Nairobi: Vanity Capital and Vanity Companies

The team at


NAIROBI – Here at ground zero for the new era of African innovation, investors are learning what an impact investing “bubble” looks like. Too much money, too few investment-ready companies. Lots of hype, uncertain impact.

The city’s start-up scene has been hyped by international media celebrations of catchy and simplistic narratives: women programmers helping farmers, SMS-based solutions for the unemployed and anything using mobile money.

Investors, entrepreneurs and opportunists have descended on “Silicon Savannah.” They fill the 16 (and counting) innovation hubs, tech centers, accelerators and incubators that dot Nairobi’s leafier neighborhoods.

Cynics call it “vanity capital.” It’s fueling an industry of fluffy metrics where prize money, downloads, press hits, and sexy videos pass for milestones.

“Vanity companies” with little more than an idea and a collection of buzzwords are receiving tiny amounts of seed cash from the round-robin of pitch competitions, grants, app challenges and hack-a-thons that animates the hub circuit. Entrepreneurs behind these companies are falling for too many carrots, chasing free money with half-baked ideas developed to satisfy overeager funders.

Everyone is clamoring to be the next M-Pesa. No one has even come close. Kenyans have made M-Pesa the world’s most successful mobile money service, transferring an average of $20 million each day. More than 70 percent of Kenya’s 40 million people have mobile phones.

Impact investors hope these numbers hold the key to solving grinding issues of poverty, youth unemployment, overflowing sewers, and fractured markets around the country. Foundations use the mobile stats to justify grants for just about M-Anything. Tech investors are betting Kenya is the testbed for new mobile platforms on which to build profitable companies and new industries.

There’s no disputing that there’s something to the Silicon Savannah buzz — Nairobi is brimming with talent and opportunity, creating a collective rush that is thrusting the city forward. But there is something strange going on.

All that prize money is meant to turn bubbling ideas into investable ventures. Yet it’s impossible for panel judges, grant givers, and small investors to determine the long-term viability of an African startup from a five-minute pitch. The cash sows seeds of hope for ambitious young entrepreneurs, without giving them resources to turn these ideas into sustainable businesses.

In recent weeks, investors have begun to complain that Nairobi is awash in too much of this wrong kind of money. Money that pays living expenses, rewards entrepreneurs repeatedly for the same ideas, or emphasizes “impact” without enough attention to “viability.”

“Nairobi is probably at the point where there is too much money for too few ventures,” explains Sean Smith of Invested Development, one of the crowd of impact investment firms that have set up shop in Nairobi. Others include Grassroots Business Fund, Acumen Fund, and Village Capital. At least a dozen more impact funds invest in east African ventures from offices elsewhere.

“There’s a flood of cheap money from grants, and a crowded field of investors, so investors have to demonstrate their value proposition as investors,” says Ross Baird of Village Capital.

That has led to some trash-talking between the impact crowd and funds looking for straight-up technology plays – who sometimes vie for the same deals. Most new social impact-related startups in Nairobi are tech-based, seeking to leverage M-Pesa or mobile phones. And even the tech-first investors acknowledge one of the realities of Nairobi’s startup ecosystem: There’s a lot more impact money flowing in than conventional investors.

“You either play in the vanity world of tech, or the real world of tech. I play in the real world,” said Mbwana Alliy, a former Silicon Valley entrepreneur who is now a Managing Partner in Nairobi’s Savannah Fund, a new seed fund for technology ventures.

“Impact investors come from a different world” Alliy said, “usually Wall Street, finance and aid. Very few come from tech. I’m scared of investing in a company (when) an impact investor will come in another round and mess things up. They have different priorities.”

So are impact investors, with their demands for social metrics and unfamiliarity with technology, performing a disservice to the very entrepreneurs they are trying to help? Are investors seeking to kickstart African innovation instead hampering it?
“This money from corporate CSR programs, NGO’s — it’s the wrong kind of money,” says Nikolai Barnwell, program manager of 88mph, a mobile-web seed fund and accelerator in Nairobi. “There is a problem with people who think it’s cute to invest in African tech, but don’t understand the market,” he says.

Barnwell says too many Kenyan startups he sees “don’t seem to have that long-term vision.”

88mph’s recent investments, totaling around $250,000 split among 8 companies, have been in industries such as gaming, betting and finance, which are “high value, easy to scale, and have potential for high ROI,” he says. “We want people who aren’t pitching for a salary, but want to build a company.”

Investors such as 88mph and Savannah Fund promise mentorship and a supportive ecosystem, but often at a steep price for entrepreneurs: An equity stake of as much as 10 to 15 percent for an investment of as little as $12,000 to $25,000.

Nairobi is still in the ascendant phase of its hype cycle, so failures have tended to be overlooked. The impact and tech crowds share an interest in promoting a romanticized narrative that technology can solve Africa’s woes.

Ben Lyon, co-founder of one mobile, tech and arguably impact venture, Kopo Kopo, says the convergence of factors that have made Nairobi hot are also setting it up for a fall. “Everything is being made available at once — affordable smart phones, high-speed internet, incubators, accelerators, early-stage investors, mentors,” he says.

Kopo Kopo is one of the few companies to emerge out of Nairobi’s iHub ecosystem that has managed to grow to more than 20 employees. Kopo Kopo already has raised nearly $1 million for its service, which enables merchants to accept, analyze and act on mobile payment data and trends.

Lyon predicts some parts of Nairobi’s ecosystem will get burned. “We haven’t had the luxury of learning from our mistakes.,” he says