And those who were seen dancing were thought to be insane by those who could not hear the music — philosopher Friedrich Nietzsche
It is unlikely that many have heard the story of the Brush Electric company, which pioneered what became street lighting in the US. It story began as a pivot of a “telegraph repeater” a device invented to allow messages to travel further (I marvel at what George Hick, its inventor, would think of the iPhone). Hick, raised capital from wealthy folks in Cleveland with George Stockly as the main backer. Following the untimely demise of Hick, Stockly immersed himself in Cleveland’s “innovation” scene with the goal of finding the most skilled inventors to advance the work Hick started. This, however, did not materialize but culminated in a meeting of minds and talent of George Stockly and Charles Brush.
Brush, with enormous backing from Stockly invented the arc lighting device, which morphed into the street light. This invention, of course, made the investors and the inventors (who earned a loyalty) immensely wealth. It also led to galvanizing of the brightest of minds — inventors, hustlers to Cleveland with the goal of building the next Brush Electric Company. The company served as a quasi incubator, with inventions such as early electric car efforts pioneered at the firm. This, was alchemy in the sense of capital, innovation, talent descending in Cleveland, akin to Silicon Valley or Schezen or Nairobi/Lagos today.
I tell this story not to drag you into a history lesson but to correct and shed light on an ongoing discourse around startups, innovation and venture capital in Kenya. A few months back, one of the local papers carried a news report on the perceived failure of six local startups. The pièce de résistance for me, was a quote attributed to a CEO of a well established technology company, who blamed greed and get rich quick mentality of startup CEOs as the leading cause of startup demise. I read the article initially with hesitation and then with disbelief and then marvelled at the sheer schadenfreude. Currently, the mainstream and social media are awash with tales of local firms – Twiga, MarketForce, Sendy – who are the beacons of the local innovation movement but currently having to downsize their operations. The commentary has been really wanting – given that these firms collectively raised hundreds of millions of dollars, with most onlookers and mids wondering where is the money?
Nature of the startup
Startups in their nature are regular companies. They are not unique in their composition but seek to solve a problem in a rapid test-discard, test-scale blitz model. This allows founders to create MVPs ( minimal viable product), launch this in the market and iterate until they can find product market fit. This model, has particularly found home in technology companies, especially those whose underlying business model involves software. Software is essentially the most foundational tool of productivity in the modern age impacting business models and service delivery in industries from healthcare, financial services, manufacturing, logistics and education. Software, unlike in the physical word rides on bytes and not atoms.
Factoring the rapid pace of startups, an abundance of capital is critical. With outsized risk, is the prospect and promise of outsized rewards via an exit (IPO, acquisition etc). Investors, alive to these opportunities have poured copious amounts of funds into the world of startups. Not every one of the investments made into this world has a rosy story. We have seen companies succeed, fail to achieve hallmarks and monumental leaps proposed and in some cases pivot. Understanding this “move fast, break things, fail fast, growth by all means” avalanche is lost in translation with commentary such as “for how long is a company a startup? Why are they raising all this money?” aspects I deem inconsequential gauging how quickly these companies adapt, and grow in their quest to solve a challenge they have identified. For instance, a company such as Twiga has been in the space for the last decade or so (I wrote the first ever comprehensive coverage of the company at its early stages. Read it here). From my conversation with its co-founder, the vision has clearly thrived but also rapidly changed from working towards fixing market inefficiencies in the agricultural supply chain to production activities in their farm and B2B e-commerce targeting kiosks. It is no surprise that this endevours require alot of capital, for which investors global and local have provided.
A great deal of investing in startups is largely a process of screening and finding gems in innovators, identifying the imitators and staying away from the avarice of idiots. Investors tend to have a strict criteria to which the startup has to meet — how massive is the total addressable market, what is the approach in solving the problem, who constitutes the team? Investors from a portfolio of say 20 investments, 1 could lead to outsized returns, 2 do semi-well, 5 are non-starters and 12 go bad. Startup investing is a risky affair, which venture capital investors greatly understand and tend to limit themselves based on several parameters from a sector agnostic investor (energy, healthcare, SaaS); geographical focused (Africa, Emerging markets, LAtAm, Asia-Pacific), Corporate VC funds (Safaricom Spark, Intel Ventures, Google ventures), Syndicated funds and so many other permutations to fund sizes. The expectations for these venture funds is of course to return capital to their limited partners (LPs are the funds, high networth individuals and sometimes regular folks (syndicated funds) who commit capital to a venture fund). They too – have an option, which could be allocation of their capital to an index fund or government treasuries but opt for the high risk, high return pathway of startup investing.
Back to the 19th century tales, our ecosystem does need more of each — a Cleveland, George Stockly, Charles Brush. We have barely scratched the surface with capital commitments to local entrepreneurs. Suffice to say, we are seeing gains with more local investors backing local entrepreneurs with their capital (I do know of local investors who made 17X their money by investing in one of the local firms mentioned above in the seed round and cashing out in the Series A round). We do neeed more of these success stories.
Equally, our ecosystem does need more entrepreneurs! The derivative of the burgeoning startup movement is employees of the first wave of startups go on to build their own companies and solving complex problems with local nuance. They do need capital to pursue these ambitions. Importantly, we are seeing more innovators marshal the confidence and belief that they too, can build excellent companies just like the hustlers and inventors of Cleveland. This belief, contrasts with the shame currently associated with entrepreneurs who build startups that lack the wings to launch. This self defeating mentality and borderline inferiority complex has no place. In fact, we should laud the entrepreneurs that dare to dream and the investors that dare to allocate a part of their wealth towards supporting these dreams and their subsequent pivots.
Then again, what do I know? I am just a local hustler!
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