The main reason why a majority of startups in Kenya fail according to founder and CEO of Nairobi-based Moringa school Audrey Cheng is because they seek investments or grants too early in order to fund operations.
Having previously worked at Savannah Fund an early-stage investor, Cheng’s view of the main problem facing Kenyan startups should be seriously considered by anyone looking to start their entrepreneurship journey.
“What I realized pretty early on, especially when I was working as an investor, was that a lot of companies seek funding too early. Essentially a lot of entrepreneurs were giving up huge chunks of their companies because they either weren’t showing enough traction, or they didn’t have as many customers… I was realizing that a lot of these early-stage investors weren’t giving good deals”, Cheng said in a podcast.
For Kenyan founders, this undoubtedly raises a number of interesting questions considering the influx of venture capital dealmakers in the country. For instance, in the second season of KCB’s Lions Den local entrepreneurs got Ksh. 138 million in financing with the highest getting Ksh. 40 million.
To illustrate Cheng’s point about how founders are willing to give up huge chunks of their companies, the first episode of Lions Den’s second season serves as a great example.
Wing It, a fast food company specializing in chicken wings was seeking Ksh. 7.5 million in exchange for 25 percent equity but Wandia Gichuru and Kris Senanu managed to negotiate their equity stake to 33 percent for that funding amount. Baraka Bora Products which offers car care and home care products including tyre shine, carpet shampoo and bleach was initially seeking Ksh. 1 million for a 20 percent stake but instead Darshan Chandaria managed to seal the deal for a 35 percent stake.
While raising capital isn’t in itself a bad move, this shouldn’t be the goal of a startup in its early stages as Cheng says this will not only lead to founders ceding a substantial portion of the company’s control but is also likely to lead to more distractions.
It is after leaving Savannah Fund that Cheng chose to bootstrap Moringa school, a training institution for software developers using her own money in the first couple of years. “I wanted to build a company… where people actually pay for our services, and only raise money when we are ready to start scaling. We haven’t raised money until this date, because we’ve been really iterating on our service over time, and making sure we are delivering the highest-quality service that we can”, Cheng explains.