Why Kenyan Startups Fail Despite Generous Funding - Insiders

  • Photo collage between aerial view of Nairobi and Kune employees
    Photo collage between the aerial view of Nairobi and Kune employees
  • The collapse of Kune Food, a Kenya-based cloud kitchen, less than 10 months since its launch, has raised questions on sustainability of startups in the country.

    The startup, which set its roots in Kenya in December 2020, promised to give solutions to the fast-food market by offering ready-to-eat affordable meals. It conducted trials before starting operations.

    The startup had raised Ksh100 million pre-seed funding and also borrowed millions to ramp up its production capacity.

    But despite receiving the generous funding, the startup failed to sustain itself with its founder and Chief Executive Officer, Robin Reecht, announcing its closure.

    An image of the staff of a Nairobi-based cloud Kitchen startup, Kune Food.
    An image of the staff of a Nairobi-based cloud Kitchen startup, Kune Food.

    "Since the beginning of the year, we sold more than 55,000 meals, acquired more than 6,000 individual customers and 100 corporate customers. But at USD3 (Ksh350) per meal, it just wasn’t enough to sustain our growth… Coupled with rising food costs deteriorating our margins, we just couldn’t keep going," the CEO wrote.

    But according to an insider who spoke to Kenyans.co.ke, the collapse of startups is tied to a number of factors that make Venture Capitalists rethink their decisions to invest in them.

    In Kenya, venture capital investors have been blamed for favouring an able founder over an attractive opportunity. Consequently, when asked to explain why a promising new venture eventually stumbled, most are inclined to cite the inadequacies of its founders, in particular, their lack of grit, industry acumen, or leadership ability as explained by Harvard Business Review.

    Other than promising startups that were felled by unexpected external forces such as the pandemic, Mwaura Wambiru, a Growth Marketing Consultant who spoke to Kenyans.co.ke, explained that most Kenyan ventures that initially showed promise but subsequently crashed to earth is because of errors that could have been averted.

    According to Mwaura, who has extensive experience in venture capitalism, startups that fail in Kenya hire third party companies to do for them research on how to penetrate the Kenyan market. They end up being misled and thus closing down after a few months or years of operation.

    He added that some founders fake numbers to hoodwink investors and in the long run fail to live up to the unrealistic expectations they set.

    "It's simple, and this is specifically in Kenya; unrealistic expectations, blinded research, lack of trust from local leadership and lastly, solid business models.

    "In addition, foreign top level managers are always in for a big payday and so they fake numbers to impress the investors for more money to flow," he told Kenyans.co.ke.

    According to Harvard Business Review, the collapse of startups in Kenya is attributed to founders failing to find a great fit and team to execute their plan to perfection. A broad set of stakeholders, including employees, strategic partners, and investors, all can play a role in a venture’s downfall. Failure to make all the team members play as a team compels some startups to go under.

    Another insider intimated to Kenyans.co.ke that despite most startups in Kenya receiving millions in funding, most entrepreneurs only adopt part of its proposal neglecting to research customer needs.

    A false start has also contributed to the demise of these enterprises. Most startups fail to shift with the change in the market and thus end up squandering time and money building and marketing a product that no one wants.

    "Be ready to change the business model if that means saving a million dollars investment. Investors should have a flexible mentality. It's never eyes on the goal alone but eyes on opportunities too! Timing is also very important, delaying a dream is better than killing a dream," Mwaura advised.

    Other startups with millions at their disposal crumble for failing to maintain balance in the market. This happens especially when resources are limited.

    "Because resources are limited, entrepreneurs must conserve them by being frugal and figuring out clever ways to make do with less. True enough, but if a start-up cannot consistently deliver on its value proposition because its team lacks crucial skills, its founders must decide whether to hire employees with those skills," Harvard Business Review states.

    The collapse can also be attributed to rapid growth which attracts investors and talent which boosts the team. In the long run, the morale tempts founders to curtail customer research and prematurely launch their product. 

    "Also, fast growth can put heavy demands on team members and partners. If a team has bad bedfellows, growth may exacerbate quality problems and depress profit margins," another startup expert explained.

    To overcome some of the challenges that make startups fail, Mwaura encouraged founders to invest in local talent who have the potential of spurring growth and sustaining the business model.

    "Get on the ground, go around the streets and get the information to solidify online research. Hire local industry experts and trust them as business advisors. Spend more time on this face before going live," Mwaura explained.

    The collapse of startups has forced venture capitalists to cut their investments to Kenyan youths. According to a report released by the American online platform, Substack, funding for young Kenyan firms fell to Ksh48 billion (USD411 million) in 2021 from Ksh64 billion (USD549 million) in 2020, a 25.1 per cent drop.

    Nairobi's Kune startup banner
    Nairobi's Kune startup banner