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Kenya’s Mobile Payments ‘Secret Sauce’ is Turning Nairobi into the Silicon Savannah

Dena Levitz Headshot

Dena Levitz

Challenge Cup Reporting Fellow, 1776

Mbwana Alliy has a single goal above all others: To open up the business section of any newspaper in east Africa one day and see it filled with only “real” business news—Not talk about the latest achievements by NGOs or tales of charitable causes trying to gain footing, but updates on high-growth, profitable ventures with global reach.

Until now, Africa—and especially Kenya—has been dominated by social entrepreneurs, nonprofit organizations and companies financed through grants and with far less emphasis on the bottom line than on humanitarian missions.

But Alliy is one of the leaders of a budding startup movement that seeks to change the nature of the business climate altogether. In particular, Alliy—who has lived outside of Africa for 16 years, launched startups himself and mentored other entrepreneurs as an investor—is trying to bring Silicon Valley to East Africa both literally and figuratively, starting with the region’s most advanced city, Nairobi.

“Job growth is what Africa needs, and if you create the Alibaba of Africa, you can create a ton of jobs,” he says. “I believe startups are the way to do this.”

The Savannah Fund, which Alliy founded in 2012 and now runs, is a first-of-its kind seed-capital fund focused on early-stage tech startups in sub-Saharan Africa. In addition to contributing capital to chosen companies, The Savannah Fund offers an accelerator program for business skills training and a mentorship aspect that puts entrepreneurs in touch with experts from Silicon Valley. Alliy has spent considerable time in the Valley and is hoping to create a bridge between Northern California and Africa.

“When I returned to Nairobi (from the Bay Area), I opened my computer and guess what? I had all of the same friends and contacts,” he says. “I thought, ‘I can borrow some elements and help to export the culture of Silicon Valley.’”

At that time, too, Alliy says he noticed several key factors taking shape in Eastern Africa: a growing middle class, an emergence of technology talent from the young populace and mobile devices low enough in price for citizens to have “computers in their pockets.”

Those same reasons could also explain why Nairobi, Kenya’s urban centerpiece, has gone from having nothing in the way of startups to becoming an emerging hub in just a few years. The city still has a long way to go before it rivals Tel Aviv, Silicon Valley and Boston. Yet, “Silicon Savannah,” as Nairobi has been nicknamed, is changing faster than most, fueled by major private-sector players, such as  The Savannah Fund, as well as the government, which is following a long-range plan to spur economic development and create jobs through technology.

Just four years ago, John Kieti says he saw no support in the ecosystem yet high potential, especially given the large number of computer science graduates. Rather than complain about an underdeveloped ecosystem, he decided to help build it. Among Kieti’s projects is m:lab, the region’s center for mobile entrepreneurship.

He says at this point the startup community is young.

“It’s growing but still hasn’t reached that maturity, considering that even the oldest companies aren’t even four years old; when you look at four-year-old startups there’s not too much to show for,” he says. “We have a couple of good-looking startup stories but not too many IPOs or exits yet.”

Sam Gichuru, founder of startup accelerator Nailab, says he has seen noticeable improvements in the quality of solutions being developed by startups and has high hopes for the city’s future.

“In the initial years, roughly six years ago, the struggle was to get young people with ideas to develop adoptable solutions locally,” Gichuru says. “Today, it is no longer a question of ideas and adoption; it is a question of scale and markets.”

Nairobi’s Startup Community

Any discussion of the startup scene in Nairobi begins with references to a few superstar companies that serve as examples for aspiring entrepreneurs and that have put Nairobi on the map internationally.

M-Pesa is a mobile money-transfer service created in 2007. Armed with a national ID card or passport, users can deposit, withdraw and transfer money with just a mobile device. The impact has been great, transforming Kenya from a cash-based society to a mobile payment one. And M-Pesa’s success has spread to countries in the Middle East and Europe.

Nairobi’s other runaway technology success is Ushahidi, which emerged around the same time as M-Pesa. In the aftermath of Kenya’s disputed 2007 elections, the software company created a digital platform called Crowdmap to collect eyewitness reports of election-related violence and display them on a map. The innovation is credited with introducing crowdsourcing for social activism and governmental accountability, and the project’s open source software is now being used around the world for similar projects.

Ushahidi’s leaders have spun off their success into new ventures. For instance, BRCK is a device several members of the team created to enable mobile connectivity in the developing world. Cofounder Juliana Rotich gave a popular TED talk about how the product is curing spotty Internet connections, enabling communities to stay online even when the power shuts off.

Rotich, along with renowned blogger and Ushahidi cofounder Erik Hersman, created iHub, Kenya’s first tech innovation hub. Since 2010 it has become a primary gathering spot for Nairobi’s developers and entrepreneurs. The multi-level space features a user experience lab, hosts events, is an office space for more established companies and houses m:lab.

“It’s a melting pot of all the right people and all the right things in technology in the country,” Hersman says in a video showcasing iHub to the public. “We’re engineering the serendipity to get people together to make things happen.”

This type of engineering is exactly what was needed, says Timothy Mwirabua, a Nairobi-based web developer who is working on CHIPPP, a startup focused on customer relationship management. Mwirabua, or TechyTimo, as he is known, volunteers at iHub in order to remain in the mix of the city’s startup action.

Because of iHub’s energy and physical location, the tech community has become close knit and is increasingly gaining resources and attention, he says.

“They now get a lot of mentorship, advice, opportunities for training,” Mwirabua says. “There’s also a lot of media attention toward this community. It happens to bring a positive impact on the startups because it develops the attention of the national and international public.”

Nailab, which runs three- to six-month programs to fast track startups’ progress, was formed in 2010 because Gichuru discovered there were far too few opportunities for startups to connect with investors or with potential customers.

“In five years we are proud to have seen, out of the over 30 companies incubated, two companies get acquired, one get assimilated in an accelerator in the Silicon Valley and over six companies grow to employ cumulatively 50 people and stabilize the solutions which are operating on profit margins,” he says.

Geographically, Nairobi’s startups are clustered on Ngong Road, the street that is home to iHub.

Gishuru says startups’ solutions are based on the needs that entrepreneurs see in their own backyards. This often falls into the realms of agriculture, education, money transferring and transport. E-commerce and banking, he predicts, will remain strong startup industries as well.

One Nairobi startup to watch going forward, according to Gishuru, is Cladlight, a wearable technology startup that aims to increase visibility levels of motorcyclists on the roads and reduce road accidents caused by the motorcyclists. Cladlight’s system is mounted on reflector jackets and syncs wirelessly to motorbikes to help indicate the intention of the rider to either brake, turn left or right.

Nairobi’s Challenges

On the list of needs for startups in Nairobi, a more robust investment network is almost universally at the top. Grants are considered easy to obtain, especially in areas like health, education and agriculture that NGOs hone in on. Securing seed and A-round capital is tricky given that Nairobi’s startup ecosystem is still building momentum. Venture capital firms outside of the area are not prone to take a risk and invest early on, and there’s simply a shortage of African-based VCs on whom entrepreneurs can rely.

Kieti, of m:lab, says Kenyan investors often lack the training and education to distinguish between promising and less-promising companies.

“There are still startups that aren’t good at fundraising. Between them and the investors they don’t speak the same language. They’re not quite on the same wavelength,” he says.

Kieti has witnessed cases in which a local angel is interested in backing a startup—but asks for 80 percent of the company, not quite grasping how equity works.

“There’s a lack of knowledge,” he says. “Even in the support part of the ecosystem, there aren’t that many lawyers and accountants who truly understand how to help startups.”

That’s why The Savannah Fund, Nailab, m:lab and iHub generate so much excitement. A number of these hubs also are trying to solve a shortage of high-profile entrepreneurs who give back to the ecosystem, either informally as mentors or more tangibly as investors.

“Angel investing is a key part of the Valley. As far back as Fairchild (Semiconductor, one of the earliest Silicon Valley successes), each generation has invested in the generation that’s come after it,” Alliy says.

In Africa, by contrast, wealthy individuals tend to pour their money into extravagances, like yachts. Culturally, there’s not a strong tradition of looking up to entrepreneurs as heroes; corrupt dictators are talked about more than tech self-starters.

“What’s missing is that circular loop of generations helping each other,” Alliy adds. “That’s what I’m trying to do with The Savannah Fund, enrich Africa with that thinking.”

In Gichuru’s opinion, the majority of small and medium-sized businesses in Kenya fail within months because of a few key factors. They lack funds to sustain their companies. As a result, many entrepreneurs fold in order to pursue careers that will pay for their basic well-being.

Low adoption by customers also is a considerable problem, he says. A shortage of reliable and inexpensive Internet is partially to blame. There’s also a perception problem among Kenyans.

“Most Kenyans view local solutions as substandard as compared to what the international market has to offer,” he says. “This (makes) it hard for the startups to gain a large enough market to stabilize.”

Kenyan entrepreneurs often possess computer science and engineering backgrounds and, hence, marketable IT skills. Their deficiencies often lie in understanding the industries that their startups are hoping to better, Mwirabua says.

To this, Alliy adds that his biggest task is getting them to think big enough. To grow and scale means expanding well beyond Kenya. Sometimes African startup founders don’t think in these terms. Similarly, The Savannah Fund tries not to limit the scope of its mentoring and investing activities. Beyond Kenya, it’s funding startups in a handful of other African nations.

“We invest across the continent because you need the scale,” he says. “My job is to make these entrepreneurs global entrepreneurs, to inject that global perspective.”

Nairobi’s Strengths

The country of Kenya itself holds several advantages that are helping to turn its capital into a startup hub. English is—along with Swahili—an official language, and the city’s location within the continent, combined with the frequency of air travel, means abundant transportation to and communication with Europe and the West.

Additionally, the country’s university system readily produces qualified tech employees. Salaries for developers are on the lower end of the spectrum, meaning that recruiting a team is achievable. According to Startup Angels, the average yearly pay for a developer is under $12,000.

From a technology standpoint, the largest strength for Nairobi is its high mobile-adoption rate to the tune of 60 percent of Kenyans using mobile devices. As a result, mobile is the common denominator among startups, according to Mwirabua.

“If you’re building any tech that leverages on mobile phones it actually has a much higher chance of doing well,” he says.

Not only do citizens own and use mobile devices, they also have embraced mobile payments with gusto. Of Kenya’s mobile subscribers, two-thirds use mobile money services. Thanks to M-Pesa, the public has fully transitioned from a cash-based society to a mobile one. Startups, across sectors, are leveraging mobile payments or mobile functions as key portions of their products.

For instance, Eneza Education facilitates tutoring via mobile phone. Students access learning materials as well as take and receive feedback on quizzes, all via their mobile devices. And M-KOPA, a Nairobi energy startup, sells solar power services using a mobile payments system, which has made it has helped it stand out and thrive.

“Kenya has this inherent secret sauce of mobile payments,” Alliy says. And while he encourages importing some of Silicon Valley’s startup culture, he also acknowledges that he can’t clone it. “What you can do is build a differential advantage,” he says, “and Kenya has that with mobile payments.”

Dena Levitz Headshot

Dena Levitz

Challenge Cup Reporting Fellow, 1776

Dena Levitz is traveling to almost all of the Challenge Cup cities to cover the competition and analyze startup ecosystems around the globe. Dena joins 1776 after finishing the first…