Most “investors” in Kenya have no incentive to make money. None.
To accelerate growth in Africa, we need capital—not deployed from a firehose—but strategically placed by skilled capital allocators incentivized to grow the African economy.
That’s not what we have.
I have been shocked to learn that most investors in Kenya and the continent have no incentive to make money. None.
But Kyle, how can you make such a claim? They are investors. Investors want to make money.
Problem: Incentives
Typically investors make a bonus when their investment does well. This is called a carry. This aligns the interests of all participants: the investors in the fund want to make money, the entrepreneur wants to make money and therefore the fund manager or VC only gets their bonus if the investment does well.
“Never, ever think about anything else before thinking about the power of incentives.” – Charlie Munger
But many investors in Kenya, and nearly all “impact” investors, do not follow this formula. There is no financial incentive for the managers of these funds to be financially successful—they get a monthly salary, but no carry.
Now, I get it. Some people are in the game for impact. But most impact investors don’t have a financial incentive tied to impact either. I get that accounting for impact is hard, but accounting for money is hard too. Impact accounting could measure acres of trees or lives saved. An independent audit firm could conduct an annual spot check, just like we do for finances. It’s not rocket surgery.
If you’re a startup founder, do yourself a favor. When someone approaches you with money, ask about their bonus structure. If there’s no link between their financial success and yours, tread carefully.
True investors should also take heed, especially if you get in bidding wars with “investors.” If an “investor” is willing to pay a crazy price remember they are using someone else’s money where the only incentive of “investors” is to get into a deal, not get an exit.
Some investors with a bonus structure can still lose all incentive. The carry bonus only kicks in after reaching a minimum threshold. If their fund is doing so poorly that they will never reach the minimum, the investors still have no incentive to make money.
If “investors” have no incentive to make money, they might as well give it away. Incidentally, this is exactly what has happened— note the recent bankruptcies that were financed by “investors.”
If an “investor” is not incentivized to make money, if they have never run so much as a fruit stand, then their advice should be taken with a grain of salt. Having them on your board is like having the pope as a marriage counselor. Recently, a VC ousted the CEO of a Kenyan company that had reached breakeven and within 12 months the VC ran the company into the ground.
“Show me the incentives and I’ll show you the results.” Charlie Munger.
Investing in Africa is not the same as Silicon Valley. But you wouldn’t know it from looking at these fund structures. Investors put money in a standard 10-year fund, never mind that Airbnb took 12 years to exit so why should it be faster in Africa? “Investors” have a bias for investing in Tech. Or, better said, any business wrapped in a thin “tech” veneer. Why did so many companies that have recently gone under bill themselves as “tech-enabled”? Because the marketing worked. Instead of “greenwashing” call it “tech washing.” See why Twiga is NOT a tech company.
Before Paul Graham shook up Silicon Valley by starting YCombinator, he wrote the infamous piece “The Unified Theory of VC Suckage.” It’s time for a shake-up in Kenya, too.
Solution
We need more investors, true investors, who use their hard-won money from their entrepreneur days. Investors should have incentives aligned with helping entrepreneurs win and helping the African economy win.
“Everyone underestimates the power of incentives.” Charlie Munger
When “investors” give “advice”, think about their incentives. If a “VC” is on a panel at a conference—or god forbid on your board of directors—If they aren’t trying to make money, what are they doing? Are they optimizing for prestige or looking good? Do you really want to get married to them for the next 10 years if their interests are not aligned with yours?
Am I wrong? Or is it time to change investment in Africa?
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Kyle Schutter is the co-founder of Kuzana.co, a pre-seed investor in Kenyan Agri-Businesses.
