The Kenyan Startup Conundrum: Why Do Funded Startups Still Fail?

Until recently, the startup scene in Kenya has witnessed startling failures. Firstly, Kune Food collapsed barely a year into its operations, in 2022. Then, in 2023, Sendy Kenya was put under receivership. While everyone in the startup world wondered what had happened to these once-prominent companies, Twiga Foods faced headwinds, resulting in co-founder and CEO Peter Njonjo exiting the company. The cascade of failing firms is not unique to Kenya. Globally, we've seen companies like WeWork, Quibi, and Theranos, among many others, lose staggering sums of money.

So, what's happening? Like many, I have been trying to make sense of these recent mishaps. Several theories have been put forth, with one of the most peculiar being allegations of investor fraud. There might be some truth to this, especially when considering cases like Theranos, led by Elizabeth Holmes, who is currently serving an eleven-year prison sentence in the US for wire fraud. While fraud is certainly a growing concern within the Kenyan startup ecosystem, I believe there are even more fundamental issues that lead many founders astray. Why do funded startups still fail? In this article, I'd like to explore the three potential root causes that contribute to the downfall of Kenyan startups.

Untested Assumptions
At the top of the list is the usual suspect: lack of product-market fit. I understand that for marketing professionals, product-market fit may seem like an obvious, logical checkpoint before embarking on a business venture. Despite this apparent logic, many founders still grapple with the concept. When starting a business, one must meticulously study market needs and develop a suitable product to meet those needs. This requires conducting thorough research and analysis of the market to identify both latent and manifest consumer needs, as well as associated cultural nuances.

Consider the case of Kuna Foods, the former self-styled foodtech startup producing and selling three-pound ready-to-eat meals via app, web, and mobile. In an interview, the founder mentioned that during one of his numerous visits to Kenya, he noticed a scarcity of affordable yet high-quality ready-to-eat food, leaving a gap that, according to him, required attention. This assumption required thorough investigation to determine the value factors, which I doubt were ever conducted, given the company's swift demise barely one year in business.

In my opinion, Kuna Foods didn’t adequately consider cultural aspects. For many urban Kenyans, ordering food from restaurants is an occasional habit, mostly limited to the middle-income segment, which remains relatively small. In Kenya, dining out is often more about socializing and enjoyment rather than solely about food, not to mention incidental opportunities like business meetings.

Additionally, many working professionals, who were also Kune’s target demographic, prefer to bring food prepared at home due to its cost-effectiveness. Moreover, despite the seemingly low three-pound price tag, very few people could afford it on a regular basis, given that income levels for the majority are still low. Therefore, it wasn’t as inexpensive as the founders had presumed. With these key insights, Kune appeared to have missed the mark, failing to achieve the proverbial product-market fit, ultimately leading to its unfortunate demise.

Lavish Spending
Another reason I believe funded startups fail is due to excessive compensation for the founding team, combined with uncontrolled spending on non-essential expenses. When you hear about the mouthwatering perks received by some of the founding members, you will be astonished. If you have ever started a business on a bootstrap budget, I’m sure you know how difficult it is during the early days. I was shocked to learn that some startups were overcompensating themselves, even though they were still in a loss position, let alone breaking even. Many used salaries comparable to those in developed countries to compensate themselves in a third world country, with some matching perks offered by our local blue-chip companies. When questioned, they argue that the high salaries are intended to motivate the team to work harder and meet the often-difficult milestones set by venture capital firms. It's a fair point, but the startup ends up burning through cash reserves faster than necessary and without corresponding revenue.

In addition to overcompensation, we also encounter the issue of unchecked expenditure on non-essential items. Some startups embark on a spending spree immediately after securing funding from investors. During the startup phase, a business should focus on sorting out the basics and allocating funds to essential operations. However, many opt for luxuries, such as acquiring office space in affluent neighbourhoods at exorbitant costs, overstaffing, recruiting expensive talent, unnecessary software subscriptions, branded merchandise, and premature PR/advertising campaigns. I am aware of a struggling local startup that purchased high-spec computers for numerous employees, despite not really needing them. Ultimately, they had to dismiss the excess staff and sell the computers to recover operational funds.

Lack of Purpose & Drive
Finally, the greatest issue? Many members of founding teams are simply going through the motions, lacking real direction and drive. People embark on business ventures for various reasons; some aim to change the world with their ideas, others desire to be their own bosses, while some seek wealth. However, if there is one lesson I have learned in my entrepreneurial journey thus far, it is that passion and purpose lie at the core of a sustainable business. Upon reading Jim Collins’ book "Built to Last: Successful Habits of Visionary Companies," I couldn't agree more. Indeed, your business must transcend mere profit and strive for something deeper and more profound.

When examining some of the local startups that have failed, one will notice that the founding teams lacked genuine passion for the company's mission. Many failed startups can be attributed to founding teams who prioritised fundraising over the company's mission. Their attention shifted from creating and nurturing value for customers to securing funding, effectively transforming fundraising into the business model itself. Sooner or later, they lose touch with the core of the business and falter.

Final Thoughts
Startups play a crucial role in job creation in Kenya, and the frequent occurrence of significant failures should command our attention. It is imperative that this trend is not merely absorbed into the typical statistic of business failure. As previously discussed, I believe there are underlying issues that require addressing. Currently, many assume that local startups are primarily focused on exploiting investors by offering excessively generous compensation perks, only to abandon the company when funds are depleted. With each recurring incident, this assumption becomes increasingly plausible. Ultimately, the country stands to suffer greatly in terms of venture capital funding. Thus, it is vital for stakeholders to collaborate in addressing these underlying issues to foster a more sustainable and prosperous startup ecosystem in Kenya.

Stephen Osomba currently serves as the Lead Partner, Communication & Marketing at SMD Consulting Associates where he helps SME clients deliver value by adjusting the solutions to each company's mission, product, strategy, and industry.