Kenya’s Tech Hub Gets a Makeover

‘Silicon Savannah’ is refocusing on profit and revenues, going beyond social activism

NAIROBI, Kenya — After a decade of buzz that brought bold headlines but few profits, Kenya’s “Silicon Savannah” technology hub is retooling to put income before activism.

A homegrown African tech community is rising in this city: bootstrapped but profitable businesses using technology and the internet to solve commercial problems connecting the biggest names in tech and finance.

International Business Machines Corp. is training hundreds of Kenyan coders in Nairobi each year; Visa and Mastercard are turning to Kenyan fintech companies to crack the local market.

Last month, Facebook Inc. and Alphabet Inc.’s Google started a strategic alliance with the iHub, an incubator and co-working space at the heart of Kenya’s tech scene, to reach and train app developers there. The Silicon Valley companies will tap local talent for coding and product development; they also will train Kenyans in artificial intelligence, cloud computing and machine learning — reinforcing the region’s role as the center for technology in Africa.

“It is true we had some companies that were more excited about headlines and about what new widget would solve the problems of the world,” said Patrick Njoroge, Kenya’s Central Bank Governor, in an interview last month. “What we’ve been pushing is for companies to focus on a particular problem. It’s more sustainable.”

Since the late 2000s, the startup community in this sprawling East African city welcomed top U.S. and European graduates, who were lured by adventurous opportunities and millions of dollars in no-strings-attached grants from Western donors. Newspapers queued up to profile startups using technology to spur African development in sectors as diverse as farming and transportation. Luminaries including former U.S. President Barack Obama and Facebook CEO Mark Zuckerberg visited the hub to trumpet its potential.

But beyond the buzz, few companies turned a profit and many died a quiet death, investors say. Funding has plummeted, with the total raised by Kenyan startups falling to $10.5 million last year from $47 million in 2015, according to data-collection platform Disrupt Africa.

Now, in the wake of the bubble, a less flashy but more successful model is emerging for startups in Silicon Savannah.

The iHub in Nairobi began as a social movement in 2010 and is now transforming itself into a for-profit company that collaborates with the likes of Facebook, Google and Microsoft. The U.S. companies will use the iHub as a center for their training and talent spotting. The recognition caps a long journey for the incubator founded by the group of activists behind Ushahidi, a platform created during riots in 2008 that collected testimonies, recorded incidents over their phones and geo-located them using Google Maps.

Both Ushahidi and the iHub were largely funded by grants from foundations such as the Omidyar Network. For the iHub, the model became increasingly unsustainable last year as it faced cash flow problems, said its former Chief Executive Kamal Bhattacharya, who took it over after a career at IBM and became chairman of iHub board this month.

The incubator last year received $2 million in funding from Invested Development, a U.S.-based fund, that allowed the company to reorient its business. Mr. Bhattacharya raised prices for services and added multi-month contracts to the firm’s revenue stream. The company has posted $1.5 million in annual revenue on average for the last three years.

Data collection remains patchy in Kenya, but the iHub reckons more than 100 startups have used its services over the past seven years, and more than 1,000 people have worked at startups during the same time. It now employs about 30 people full-time and has handled more than 50 projects in the last 12 months.

Kenya last year was the second-biggest tech hub in Africa in terms of the number of startups that secured funding, trailing only South Africa. But the average amount raised per startup last year declined by 85% compared with the year prior, Disrupt Africa data shows, from $2.6 million in 2015 to just $10,500 in 2016, relegating it to sixth place by this criterion behind Nigeria, Ghana, Egypt, Morocco and South Africa.

One fundamental change here is the type of investor attracted to Kenyan tech businesses. Angel investors — often themselves successful businesspeople or returned from the Kenyan diaspora — private equity and specialized technology funds are becoming more involved, just as Western donor agencies and charitable foundations are becoming less active, according to investors and technology entrepreneurs.

“The Peace Corps volunteers of the past came back to Kenya as impact-tech investors,” says Agosta Liko, founder of the profitable fintech company PesaPal, in describing Kenya’s tech scene during the initial years.

Mr. Liko, who avoided taking donor grants for his business that helps people pay for anything online using mobile money or credit cards, is hopeful that experienced entrepreneurs and homegrown startups will have more of a role.

“Many of us have been working hard and quietly for many years,” Mr. Liko said. “The most important thing is that a number of Kenyan technology businesspeople are now becoming mentors and angel investors for new startups here.”

Source: wsj