venture capital and the finance gap in emerging markets

i

Venturecapitalandthefinancegapinemergingmarkets:AninstitutionalperspectiveonthecaseofKenya.

Master'sThesis2020

MScBusiness,Language&Culture

-Business&DevelopmentStudies-

MadsEmilVestergaardRobdrup,92173

CarlHenricEmanuelHansson,125510

Supervisor:MichaelW.Hansen

"Africaissexyforventurecapital,becauseit'sgottheyoungestpopulationofanycontinent;

themiddleclassisgrowingfasterthaninanyothercontinent,governmentand

infrastructureischangingfrequently.It'sarguablethattheAfricaneconomyisgrowing,at

anexponentialrate.Sogoodfundswillbeturnedontothisin,anycase."

(Interviewee2fromVC3,2020)

Hand-indate:10.05.2020

NumberofSTUs:251,253(110.5pages)

i

Abstract

This thesis takes departure in the premise of a finance gap in emerging markets,

hinderingSME growth and economic development, through an investigation of the

rapidly growing venture capital (VC) industry in Kenya, known as the “Silicon

Savannah”. Drawing on the institutional approach to business strategy in emerging

markets, this thesis set out to explore the barriers to venture capital found in the

institutional environment and the strategies used by VC firms to overcome these. By

combining deductive and inductive approaches, this paper presents a multiple-case

studyofVCfirmsandotherrelevantactorsintheindustry.Wefindthattheinstitutional

barriers toVC relate to regulatoryuncertaintiesmainlydue topolitical fluctuations, a

lack of underlying shareholder protection, and inadequate governance and reporting

regulation.Further,localfoundersfacechallengesrelatingtoliabilityofoutsidershipas

a result of foreign networks of capital. In effect, VC firmsmay suffer from liability of

foreignness as theirportfolio ventures struggle tonavigate the local business context.

Moreover, we find that the VC industry suffers from a lack of supportive industries,

particularly inadequate or lacking information providers, early stage technical and

financial intermediators, and exit opportunities. To overcome these institutional

barriers, we identify four coping strategies used by VC firms. Firstly, governance

strategiesrelate tosupporting theportfolioventures’governanceprocesses.Secondly,

firms may adopt local knowledge-capturing strategies to overcome liability of

foreignness.Thirdly,diversification strategies refer to risk-averse investments, spread

overindustriesandcountriesintheregion.Lastly, ininstitutionalavoidancestrategies

VCfirmspursueinvestmentsinforeignentrepreneurswhotheyperceiveaslessaffected

by the institutional barriers. Thus, our findings show that the VC industry is indeed

thrivingdespitefacingsomeinstitutionalchallenges,typicalforemergingmarkets.With

regards to the finance gap, our findings indicate that this specifically relates to local

foundersandtheirventures.Wesuggestthatfutureresearchandpolicyshouldconsider

theinstitutionswhichcansupportthispartoftheindustrytopreventthedevelopment

ofanenclaveeconomy.

ii

Acknowledgements:

Firstofall,wewanttoexpressouroutmostgratitudetotheinterviewees,whodedicated

theirtimeonparticipatingintheinterviews,althoughwehadtocancelourfieldtripto

Nairobiinthelastmoment,duetotheuncertaintiesabouttheCOVID-19virusatthe

time.TheirinsightstotheventurecapitalindustryinKenyaareofinestimable

importancetothecreationofthismaster'sthesis.Inaddition,wewouldliketothank

oursupervisor,MichaelW.Hansen,forsupportthroughouttheresearchprocessand

interestintheresearchtopic.Michael'sknowledgeandpassionaboutthefieldof

businessstrategyinemergingmarketshavebeenaninspirationtousduringour

master'sprogram.Furthermore,wearegratefulforthetechnologicaldevelopmentsand

onlinetoolsthathavemadeitpossibleforustomakethisresearchprojectwithout

meetingeachotherinpersonforalmosttwomonths,aswellascollectingvaluable

primarydatainEast-Africa.Lastly,weoweLouiseHantzscheandNageenHøjbjerga

deep'thankyou'fortheirsupportandunderstandingduringthecreationand

finalisationofthisthesis.

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Index

Tableofcontent:

Abstract................................................................................................................................................iAcknowledgements:..................................................................................................................................ii

Index....................................................................................................................................................iiTableofcontent:......................................................................................................................................iiiListofTables...............................................................................................................................................vListofFigures..............................................................................................................................................vListofAbbreviations..............................................................................................................................vi

1Introduction...................................................................................................................................11.1Introduction.........................................................................................................................................11.2ProblemFormulation........................................................................................................................31.3Purposestatement.............................................................................................................................41.3.1ResearchQuestion........................................................................................................................................4

2MethodsSection...........................................................................................................................52.1ResearchDesign..................................................................................................................................52.2Philosophicalassumption...............................................................................................................72.3Researchstrategy...............................................................................................................................92.3.1Selectionofcases........................................................................................................................................10

2.4Researchpurposeandapproach................................................................................................112.4.1Deductiveandinductiveapproaches.................................................................................................11

2.5Methodologyforempiricalresearch........................................................................................142.5.1TypesofData................................................................................................................................................152.5.2Methodsfordatacollection....................................................................................................................152.5.3Dataanalysis.................................................................................................................................................182.5.4Researchethics............................................................................................................................................18

2.6Credibility..........................................................................................................................................192.6.1Reliability.......................................................................................................................................................192.6.2Validity............................................................................................................................................................22

2.7Delimitations.....................................................................................................................................22Summaryofsection2:.......................................................................................................................................................23

3LiteratureReview.....................................................................................................................243.1Venturecapitalandfinancialliterature..................................................................................243.1.1Globalisationofprivatecapital.............................................................................................................243.1.2StartupsandSMEs:the‘ventures’.......................................................................................................253.1.3Venturecapitalforearly-stagefinancing.........................................................................................263.1.4BusinessAngelsandotherearlystagefinanciers........................................................................313.1.5Thecycleofventurecapitalfunds.......................................................................................................333.1.6EmergingMarkets......................................................................................................................................363.1.7VentureCapitalinEmergingMarkets...............................................................................................37Summaryofchapter3.1...................................................................................................................................................39

3.2Institutionaltheoryandfirmstrategyinemergingmarkets...........................................393.2.1Businessstrategyinemergingmarkets............................................................................................393.2.2InstitutionalTheory..................................................................................................................................423.2.3Theinstitutionalsettinginemergingmarkets..............................................................................43Summaryofchapter3.2...................................................................................................................................................45

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3.3TheoreticalFramework:institutionaltheoryandventurecapitalinemergingmarkets......................................................................................................................................................463.3.1Propositions..................................................................................................................................................49Summaryofchapter3.3...................................................................................................................................................53

4Introductiontothecasestudy..............................................................................................544.1PrivateEquityandVentureCapitalinEast-AfricaandKenya..........................................544.1.1Venturefundingfordigitallions..........................................................................................................544.1.2FirsttherewasM-Pesa.............................................................................................................................564.1.3InstitutionalStability................................................................................................................................584.1.4ActorsintheKenyanVentureCapitalLandscape........................................................................60Summaryofchapter4.1:..................................................................................................................................................62

4.2Presentationofcasecompanies.................................................................................................624.2.2VentureCapitalfirms................................................................................................................................634.2.3IndustryAssociation.................................................................................................................................684.2.4Accelerator....................................................................................................................................................694.2.5Startup.............................................................................................................................................................70Summaryofchapter4.2...................................................................................................................................................70

5Analysis........................................................................................................................................715.1Regulatoryuncertainties..............................................................................................................745.1.1Politicaluncertainties...............................................................................................................................745.1.2Regulationandtax.....................................................................................................................................755.1.3Corporategovernance..............................................................................................................................76Summaryofchapter5.1:..................................................................................................................................................77

5.2Liabilityofoutsidershipandliabilityofforeignness..........................................................785.2.1Liabilityofoutsidership...........................................................................................................................785.2.2.Liabilityofforeignness............................................................................................................................80Summaryofchapter5.2:..................................................................................................................................................83

5.3Underdevelopedsupportiveindustries...................................................................................845.3.1InformationAgencies................................................................................................................................855.3.2Intermediaryfinancingmechanisms.................................................................................................865.3.3Acceleratorprogramsforpipelinedevelopment.........................................................................905.3.4Exitopportunities.......................................................................................................................................92Summaryofchapter5.3:..................................................................................................................................................94

5.4Qualificationoffindings................................................................................................................955.5CopingStrategies.............................................................................................................................965.5.1Institutionalavoidancestrategies.......................................................................................................975.5.2Localknowledge-capturingstrategies...........................................................................................1005.5.3Diversificationstrategies.....................................................................................................................1015.5.4Governancestrategies...........................................................................................................................102Summaryofchapter5.5:...............................................................................................................................................103

6Discussion.................................................................................................................................1046.1EmpiricalGeneralisations.........................................................................................................1046.1.1Thelackofcapitalinemergingmarkets........................................................................................1046.1.2Institutionalbarriersandstrategicimplications.......................................................................1056.1.3Canwegeneralisefromtheempiricalfindings?........................................................................106

6.2TheoreticalContributions.........................................................................................................107Theinstitutionalapproachtoventurecapitalinemergingmarkets...........................................107

6.3Implicationsforpractice............................................................................................................1086.3.1ImplicationsforVCfirms.....................................................................................................................1086.3.2Policyconsideration...............................................................................................................................1096.4Evaluationofresearchstrategyandmethods................................................................................110

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6.5Suggestionsforfutureresearch...............................................................................................1127Conclusion.................................................................................................................................113

Bibliography.................................................................................................................................116Appendices...................................................................................................................................126APPENDIXA. SummaryofCases...................................................................................................127APPENDIXB. InterviewGuide.......................................................................................................129APPENDIXC. InterviewwithintervieweefromVC1...............................................................131APPENDIXD. InterviewwithintervieweefromVC2...............................................................143APPENDIXE. Interviewwithinterviewee1and2fromVC3.................................................152APPENDIXF. InterviewwithintervieweefromVC4...............................................................167APPENDIXG. InterviewwithintervieweefromVC5...............................................................180APPENDIXH. Interviewwithintervieweefromtheindustryassociation...........................192APPENDIXI. Interviewwithintervieweefromtheaccelerator.............................................205APPENDIXJ. Interviewwithintervieweefromthestartup....................................................216

ListofTables

1. Researchdesign………………………………………………………………………………………….……………6

2. DifferencebetweenBA,VCandPE………………………………………………………………………….30

3. Listofinstitutionalbarriersfromourfindingsasdividedintothecaseentities………..72

ListofFigures

1. Researchapproachandprocess…………………………………………………………………..…………12

2. Perry'scomparisonofcasestudyresearch………………………………………………....................14

3. Startupinvestmentrounds…………………………………………………………………………………….28

4. TheVCfundcycle………………………………………………………………………………….……………… 33

5. Illustrationofthetheoreticalframework………………………………………………………………..46

6. Deductiveprocessfrompropositiongenerationtoempiricalfindings……………………...53

7. VCinvestmentsintoSSA2013-2015…………………………………………………………...………….55

8. TheriseofatechnologicalecosysteminNairobi……………………………………………………..57

9. Theinstitutionalbarriersperceivedbytheinterviewees…………………………………………94

10. Inductiveapproachfrombarrierstostrategies……………………………………………………..103

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ListofAbbreviations

ABAN AfricanBusinessAngelsNetworkADB AsianDevelopmentBankAFDB AfricanDevelopmentBankBA BusinessAngelBoP BottomofthePyramidCB CrunchbaseCDC CommonwealthDevelopmentCorporationCFI CorporateFinanceInstituteDFI DevelopmentfinanceinstitutionEAVCA East-AfricanprivateequityandventurecapitalassociationEIB EuropeanInvestmentBankEU EuropeanUnionFDI ForeigndirectinvestmentGP GeneralpartnerIB InternationalBusinessICDC Industrial&CommercialDevelopmentCorporationIFAD InternationalFundforAgriculturalDevelopmentIFC InternationalFinanceCorporationIFU DanishInvestmentFundforDevelopingCountriesIMF InternationalMonetaryFundIPO InitialpublicofferingISDB IslamicDevelopmentBankI3N IntellecapImpactInvestmentNetworkLP LimitedpartnerMSME Micro-,small-andmedium-sizedenterprisesNSSF NationalSocialSecurityFundOECD OrganisationforEconomicCo-operationandDevelopmentPE PrivateequityPOCD People,opportunity,contextanddealSME Small-andmedium-sizedenterprisesSSA Sub-SaharanAfricaUN UnitedNationsVC VenturecapitalVCs VenturecapitalistsVC4A Venturecapital4Africa

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1Introduction

1.1Introduction

Inthe2000’s,entrepreneurshipandprivatesectordevelopmenthasseenanincreasing

appraisalfromthedevelopmentcommunityforitsroleinensuringeconomicprosperity

ofdevelopingcountries (Gambettaetal.,2019). Inparticular, thesuccessofsmalland

medium sized companies (SMEs) has been considered crucial for economic

development. In emerging markets, formal SMEs contribute up to 60% of total

employment and up to 40% of national income and it is estimated that these figures

wouldincrease,takinginformalSMEsinaccount(Ndiayeetal.,2018).Forsuchentities,

thelackoffinanceisconsideredoneofthelargestchallenges,hinderingsmallfirmsto

scale,internationalizeandbecomesubstantialcontributorstoeconomicdevelopmentof

thecountry.TheWorldBankestimatesanunmetdemandfor$1.2tnfromformalSMEs

indevelopingcountries,andanother$1tnforinformalenterprises.Inparticular,SMEs

requiring between $100,000 and $2m in capital are facing the issue, falling into the

“missingmiddle”(Sultan,2019).

Named the “thehopelesscontinent” inanarticle fromTheEconomist (2000),partsof

Africa were for a long time perceived as incapable of lifting itself out of poverty. A

decade later, that perception changed to “Africa rising: a hopeful continent” (The

Economist,2013).Whilealmostnon-existent in theearlyyearsofprivatecapital, low-

incomecountriesinSub-SaharanAfrica(SSA)nowadaysaccountforagrowingamount

of international private equity (PE) and venture capital (VC) investments (Hain &

Jurowetzki, 2018). Particularly through improvements in IT infrastructure, IT-

competenceandthedevelopmentofinnovativetech-solutions,countriessuchasKenya

andNigeriahavebeencalledthe“newemergingmarkets”(Hain&Jurowetzki,2018).In

the lastdecade,Kenyahasbeenrisingas the toppillar for start-upgrowth inEastern

Africa. With success stories of ventures such as M-Pesa, M-Kopa, BRCK, and Twiga

Foods, the country has built a global reputation as a rich start-up hub known as the

SiliconSavannah(Pilling,2019).

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TheVC financingmodelhasbeensuggestedasaviablemechanismtospur innovative

SMEgrowth. The efficient flowof risk finance,whichVC firmsbring, is considered to

contribute significantly to entrepreneurial prosperity and business development,

supportingthewidereconomy,particularlyasinnovativebusinessesaremajorjoband

incomegenerators(Lerner,2010).Besides,innovativebusinesseswithouttradingtrack

records tend to face information asymmetries for which effective due diligence is

prohibitively expensive for larger financiers such as banks and other PE models to

undertakeandinvest.Thisappliesparticularlyinemergingmarketcontextswherethe

requirementofformalreportingandcorporategovernancehasshowntobeinsufficient

(Carpenter&Peterson2002).

The independentmarket analyst organisation, BriterBridges (2020) presents in their

latestreportthatprivatecapital investmentsinAfricaaccumulatesto$1.5bn.Leading

Africannewsmediaonentrepreneurship,Weetracker(2020),showsintheirreportthat

Kenyanstartupsraised$428.91millionin2019.ThisplacesKenyasecondintheamount

receivedduringtheyearinAfrica,followingNigeria,atanearly300%riseininvestment

volumefrom2018.Theirreportsshowedadditionallythatthegrossescalationislargely

attributedtobig-ticketdealsofmorethan$40million,wherecompaniesinFintech,E-

commerce and Agritech tops the charters (WeeTracker, 2020; Briter Bridges, 2020).

Kenya has been praised for its regulatory stability, sophistication of its business

environment andprivate-sector ledeconomy (Divakaranetal., 2018). In addition, the

countryhostsastrongentrepreneurialclassandbenefitsfromagoodsupplyofhuman

capital, both local and international. As such Kenya has captured a disproportionate

share of the activity, both in terms of deal flow and funds compared to other East-

African countries, and the country’s current standing in the alternative investment

industry in Africa is notable (ibid). While most business and economic development

literatureoninternationalfinanceflowstowardSSAmainlyfocusesonthedriversand

impactof foreigndirect investments(FDI),VCinSSAisyetanunstudiedphenomenon

albeititspotentialimplicationsforeconomicdevelopment(Hain&Jurowetzki,2018).As

such, Kenya is an interesting case for looking at VC in emerging markets and the

possibilitiesforeconomicdevelopment.

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1.2ProblemFormulation

Despite itsrapidgrowthand largesuccess, theKenyanVCecosystemisstillyoung.As

suchitcarriesanumberofimplicationsanddifferencestodevelopedeconomieswitha

longerhistoryofearlystagefinancing(Hain&Jurowetzki,2018).InmatureVCsystems,

investorshavebeenheavilyreliantoninstitutionalstability,suchasruleoflaw,minimal

corruption, corporate control and capital,whicharguably isoften lacking in emerging

markets (Ahlstrom & Bruton, 2006). Generally, East-Africa has shown a high cost of

operating a VC fund in the region, much due to the length of time it takes to find,

evaluate,andmakeinvestments(Gugu&Mworia,2016).Thestruggleofdeal-sourcing

has been attributed to underdeveloped deal intermediaries such as incubator- and

acceleratorprogramswhilstthelackofexitopportunitiesisduetopoorprivateliquidity

optionsandunderdevelopedfinancialmarkets,makinginitialpublicofferings(IPOs),a

rareoccurrence(Gugu&Mworia,2016).InanextensivereportbytheWorldBank,the

lack of information available to investors was further highlighted as a major factor,

hinderinginvestmentsinSMEs.Thelackofknowledgeonformalreportingmechanisms,

corporategovernanceandfinancialcapacitytonavigatetheinformationrequiredbyVC

firms make due diligence processes lengthy and costly. As such, navigating the local

institutionalcontextiscrucialformakinggoodVCinvestments(Divakaranetal.,2018).

Peng (2002) describes these issues relating to regulatory uncertainties as typical for

emerging markets, while Khanna and Palepu (2010), in addition, coin the term

“institutional voids”, referring to the lack of formal institutions such as intermediary

agenciesandcreditratingsystems,arguingthat incountrieswhereformal institutions

areweak,informalinstitutionsandnetworksfilltheirplace.Assuchculturaldifferences

andtheliabilityofforeignnesshavebeenemphasizedasimperativeforfirmsoperating

in emergingmarkets (Marquis&Reynard, 2018).Thisposes somebarriers related to

the institutional context and creates implications for the VC firm’s strategy, which

arguablyneedtobechangedinaccordancetotheinstitutionalframework.Wefindthat

institutionaltheoryhasnotyetbeenappliedtoVCindustriesinemergingmarkets,and

thereforethereisaneedforresearchwithinthisfield.

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1.3Purposestatement

Thispapertakesadepartureinthenotionofafinancegapwithinemergingmarketsand

developing countries as commonly proclaimed by The World Bank and other major

globaldevelopment institutions.Highlighting the functionsof institutions inunlocking

finance in emergingmarkets, particularly through the flow of VC, we further seek to

investigate whether there is a finance gap and how the institutional context creates

implicationsforVCintermsofreachingtheentrepreneurs.Assuchweaimtoapplythe

institutional perspective to approach business strategy on VC in the Kenyan context.

Kenya ischosenas thecountryofanalysisdueto itsgrowingreputationas theSilicon

Savannah, attracting investments into a growing startup ecosystem. By exploring the

implications of the institutional environment specific to Kenyawe aim to understand

howthisaffectstheVCindustry.Throughourassessmentoftheliteratureonbusiness

strategiesinemergingmarkets,wefindsomegeneralemergingmarketcharacteristics,

whatwecallinstitutionalbarriers.Alargefocusofthispaperistotrulyinvestigatethe

validityandreplicabilityoftheseinstitutionalbarriersinthecontextofVCinKenya,asa

caseforVCinemergingmarkets.Additionally,weseektoexplorethestrategiesadopted

by VCs for successfully navigating the context. Although literature on institutional

challenges for VC exists (Ahlstrom& Bruton, 2006; Ekanem et al., 2019), we seek to

furtherenrichthenotionofinstitutionsintheemergingmarketcontext,particularlyfor

theVC industry, through thecasestudyof theKenyancontext.Hence,wehavea two-

foldresearchpurposeintermsofexploringtheinstitutionalbarriersforVCinemerging

marketsandexploringthestrategicimplicationsforVCfirms.

1.3.1ResearchQuestion

Based on current literature on business strategies in emergingmarkets, this research

projectaimstoevaluateandexploretwospectrumsrelatingtoearly-stageinvestments

inKenya.First,weseektoevaluatetheapplicabilityofthebarriersimpliedbythe‘weak’

institutional framework and market failures, specifically in relation to the venture

capital industry in Kenya. Considering one of the most commonly noted differences

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betweendeveloped-andemergingmarketsamongstmajorbusinessscholarsrelatesto

theformalinstitutionalenvironments,ourpaperwilltakedepartureintheinstitutional

theory.Secondly,weaimtoexplorethestrategiesthatVCfirmsareadoptinginorderto

navigatetheinstitutionalchallengesinKenya.Assuch,ourresearchquestionfollows:

Whataretheinstitutionalbarrierstoventurecapitalinemergingmarkets,present

inthecaseofKenya,andwhatstrategiesdoventurecapitalfirmsusetoovercome

these?

2MethodsSection

2.1ResearchDesign

Thissectiondescribestheresearchdesign,includingtheapproachesandstrategieswe

have taken and what methodological decisions we have made to best answer our

research question. These approaches and decisions are based in our ontological and

epistemological beliefs, which can be categorised as the philosophical assumption of

pragmatism.Ourresearchdesign isageneralplanofhowwearegoing toanswer the

research question. Our two-fold research question embodies a two-fold research

purpose.First,weaimtounderstandtheinstitutionalbarriersforventurecapital(VC)

firms that operate in Kenya in adescriptive and confirmatoryway. Second,we aim to

understand the strategic implications that such barriers have on the VC firms in an

exploratory way. As exploratory research is particularly useful to clarify the

understanding of a problem, when the precise nature of the problem is uncertain

(Saundersetal.,2009),theoverallpurposeofourresearchisexploratory.Aspresented

indepthbelow,weseektomovefromoneresearchpurposetotheother.

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Asthesectionshedslightontheresearchapproaches,themethodologicaldecisionsand

the pragmatic reasons behind our choices. The headlines include: philosophical

assumption,researchstrategy,researchapproach,methodologyanddatacollection,and

credibility. While presented in the same order as listed, a summary of the research

designcanbefoundinthetablebelow.

PhilosophicalAssumption: Pragmatism

ResearchDesign: Exploratory,multiple-casestudy

ResearchApproach: Firstpartdeductive,secondpartinductive

MethodologyforDataCollection:

Qualitative,semi-structuredinterviews

Credibility:Validitythroughtriangulation,caseselection,

&Multiplecodingofdata

Table1:Researchdesign:summaryofmethodologicalapproachesanddecisions.

The researchproject’s timehorizon is an important aspect to considerwhen creating

the research design. The time horizon is defined by the research question and the

research purpose, but also influenced by the amount of time and other resources

available to theresearchers(Sandersetal.,2009).As thephenomenonofVC isrecent

and and the perceived institutional barriers for VC firms are contemporary, the time

horizon of this research resembles what Saunders et al. (2009) term cross-sectional,

which isasnapshot,rather than longitudinal,andshowcaseschangeanddevelopment

over time.As this researchprojecthasanenddate, culminatingwithahand-inof the

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project for our final exam, the time for this study has been limited to 3 months.

Consequently,thetimehorizonimpactstheresearchstrategyandthechoiceofmethods

usedfordatacollection.

2.2Philosophicalassumption

Research philosophies consider the underlying assumptions to what constitutes

knowledgeandhownewknowledgecanbedeveloped(Saundersetal.,2009).Thefour

main research philosophies are: positivism, interpretivism, realism, and pragmatism.

Positivism reflects the philosophical stance of an objective worldview focusing on

observable data. On the other side of the spectrum, interpretivism considers the

importance of the subjective understanding of the researcher and provides a larger

acceptance for different interpretations among social actors. Similar to positivism,

Realismadoptsanapproach,whichreliesheavilyonobservabledatabutacknowledges

thecontextualimpactandtheperceptionsofsocialactors.Finally,Pragmatismsuggests

that there are several different ways to view knowledge. The pragmatic approach

considers thatmultiple perspectiveswillmost probably enrich the study. As a result,

pragmatistscanintegrateseveralresearchapproachesandstrategiesinthesamestudy,

forexamplebymixingqualitativeandquantitativedata(Wahyuni,2012;Saundersetal.,

2009). This study acknowledges different research approaches as well as research

objects with varying perceptions, as such a pragmatic research philosophy is

appropriate.Takingapragmaticapproachtotheresearch,wefindourselvesdeveloping

theresearchdesign, choosingmethodologiesandchoosing the theoretical foundations

basedonourresearchquestion.Theadoptedpragmaticresearchphilosophyisaresult

ofourdifferentontological,epistemologicalandaxiologicalviews.Inthesectionsbelow,

we describe the main philosophical dimensions, ontology and epistemology, and the

viewsappliedinthisresearchproject.

Ontologyrefersto“howoneperceivesknowledge”(Wahyuni,2012:69).Thetwoaspects

of ontology, objectivism and subjectivism, both common in business andmanagement

research. Froma pragmatic standpoint, it is assumed that reality is external,multiple

8

and complex, and the view that best enables the researcher to answer the research

question should be adopted (Saunders et al., 2009). It is our ontological belief that

knowledge is not only acceptable if the phenomena observed can provide hard data,

detailsorfacts,butthatsubjectivemeaningsaboutsocialphenomenacertainlygenerate

acceptableknowledge.

The other philosophical dimension, epistemology, refers to the “beliefs on the way to

generate,understandandusetheknowledgethataredeemedtobeacceptableandvalid”

(Wahyuni, 2012: 69). From a pragmatic view, both observable phenomenon and

subjectivemeaningsareconsideredacceptableknowledgeifitcontributestoanswering

the research question. Hence, we accept that there is a reality behind the details, as

subjectivemeaningsmotivateactionsandimpactstrategicdecisions,andinthecaseof

developingfindingsinthisresearchproject,weusesubjectivemeaningsasvaliddatafor

ourownreasoningtodevelopacceptableknowledge.

Furthermore, in terms of our axiological belief, which is “concerned with ethics,

encompassingtherolesofvaluesintheresearchandtheresearcher’sstanceinrelationto

the subject studied”(Wuhyani, 2012: 69-70),we see ourselves as etic to the observed

context.Aswearefull-timemaster’sstudentsanddonotworkwithVCorliveinKenya,

ourresearchonthetopicisoutside-in.Inaddition,weacknowledgethatwehavevalue-

ladeninterpretationoftheresults,aswecannotarguetobecompletelyindependentof

thedata,butmost likelyadoptobjectiveaswellassubjectivepointsofviewalongthe

way.

As the nature of our master's thesis relates to some particular context-dependent

challenges fororganisationsoperating in theKenyan industry forVC,weperceive the

reality as objective and that it exists independently of human thoughts and beliefs or

knowledge of its existence. Nevertheless, it is our understanding that despite reality

being objective, it is interpreted through social conditioning and therefore presents

itselfdifferentlyineachindividual'sperception.Asourontologicalandepistemological

fundamental beliefs do not fall into either one paradigm or the other, we reasonably

categoriseourresearchparadigmaspragmatism.

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2.3Researchstrategy

The choice of a research strategy should be guided by the research question and the

researchpurpose(Saundersetal.,2009).Asfortheresearchquestionandtheresearch

purpose,we found itmost suitable tomake the exploration of VC in Kenya as a case

study.Wahyuni(2012)advocatesforthecasestudy,asit“facilitatesadeepinvestigation

ofareal-lifecontemporaryphenomenon in itsnaturalcontext” (p. 72). Furthermore, as

highlightedbyYin (1994), theboundarybetween thephenomenonbeing studied and

the context within which it is being studied is not clearly evident, meaning that an

uncontrolledcontextisnotproblematicandthatthestudyisnotlimitedbythenumber

ofvariablesforwhichdatacanbecollected.

A case study can either be a single-case study or a multiple-case study. Single case

studiescanbeholisticorembedded,dependingontheunit(s)ofanalysis.Inamultiple-

case study, the researcher examines several cases to understand the similarities and

differencesbetweenthecases(Baxter&Jack,2008).Asweseektoestablishwhetherthe

findingsoccuracrossthecasesinordertoproducegeneralisationsacrosstheVCfirms

underthescopewedecidedtoincludeanumberofdifferentcases.Thusenablingusto

getarepresentativeandmoregeneralunderstandingoftheinstitutionalbarrierstoVC

and the coping strategiesusedbyVC firms.As suchweadopt themultiple-case study

approach,inspiredbyYin(1994),whereweperceiveourmultiple-casestudyasarich,

empiricaldescriptionofparticularinstancesofaphenomenonthatisbasedonavariety

ofdatasources.

Inhis reviewof the case studymethodology,Rolf Johansson (2007:2)presents three

pointsaboutthe"case"incasestudies,whichmostresearchersseemtoagreeupon.The

"case"should:beacomplexfunctioningunit,beinvestigatedinitsnaturalcontextwitha

multitude of methods, and be contemporary. While Stake (1998), emphasizes that

crucialtocasestudyresearchistheinterestinindividualcases,Yin(1994)placesmore

emphasis on themethods and the techniques that constitute a case study (Johansson,

2007). In addition we find that as the number of cases in the multiple case study

increases, the less relevant a detailed and in-debt description of each individual case

becomes (Eisenhardt & Graebner, 2007). Although acknowledging Stake's (2013)

10

argumentoftreatingeverysinglecaseinthemultiple-casestudyasanentityandacase

studyofitsown,weadheretoEisenhardt&Graebner’s(2007)argumentofreducingthe

efforts topresent each casewithan 'unbroken'description.Thuswe seek to combine

Stake’s(1998)individualcaseperspectiveandYin's(1994)emphasisontechniquesand

method.

2.3.1Selectionofcases

The phenomenon and main focus of our multiple-case study is investment of VC in

emergingmarkets.As explained in the introduction,we lookat thephenomenonas it

occursinKenya,duetoitsdevelopmentoftheVCscene,whichinrecenttimeisgaining

a lot of interest from foreign investors. As we decide to look at various actors and

organisationsintheVClandscape,itmakessensetochoosethecasesasentities(Stake,

2013).Thecaseshavenotbeenrandomlyselected,butselectedcarefully toprovidea

comprehensive,wide-rangingcoverageofthechallengesintheKenyanVCindustryand

copingstrategies thatVC firmsuse toovercome thesechallenges.Thiscorresponds to

Flyvbjerg(2006:230)informationorientedselection,whereweaimtoincludemaximum

variationcasesto“obtaininformationaboutthesignificanceofvariouscircumstancesfor

caseprocessandoutcome”.Togetarepresentativeunderstanding,wehaveincludedfive

VCfirmsasentitiestobeinvestigatedascases.Thesefivecasesvaryintheirorigin,time

in themarket, composition of staff, and investment focus such as industry and stage,

however, they all have that in common that they have offices and staff inKenya. The

cases have been selected out of a great population of foreign aswell as domestic VC

firmsthatoperateinKenya.Thesefivecaseswillcountastheprimarycasesofanalysis

in our quest to answer the second part of the research question,while the following

casescontributeinunderstandingthegreaterpictureofinstitutionalbarriers.

Additionally,asasixthcasewehave includedan industryorganisation forPEandVC,

dueto its importance inthe industry.Weadditionally includeanacceleratorprogram,

whichisacapacitybuildingorganisationforequityseekingcompanies,toshedlighton

thefinancingofstart-upsandSMEsfromanotherperspective.Theacceleratorprogram

11

has been selected based on our perception of it as a critical case, with important

differencesfromotheraccelerators.Lastly,weincludeanentrepreneurwhorepresents

theoppositesideofthetable,seekinginvestmentsforhisventure.Thepresentationof

caseswilltakeplaceinthesecondpartofpresentationofthecasestudyandwillnotbe

presentedfurtherinthissection.

2.4Researchpurposeandapproach

2.4.1Deductiveandinductiveapproaches

Therearegenerally threeresearchpurposes in social science:descriptive,explanatory,

and exploratory (Saunders et al., 2009). The purpose of the research defines the

approachesthattheresearchersneedtotakeinordertoanswertheresearchquestion.

Descriptiveresearchaimstoportrayanaccurateprofileofpersons,eventsorsituations

andcanoftenbea forerunner forexploratoryresearchorcombinedwithexplanatory

research. Explanatory research includes studies that establish causal relationships

between variables. Exploratory research is particularly useful to clarify the

understanding of a problem, when the precise nature of the problem is uncertain

(Saundersetal.,2009).InrelationtotheframeworksuggestedbySaundersetal(2009),

our overall research purpose is exploratory. In addition, Reiter (2017) separates

exploratoryresearchintoconfirmatoryandexploratory.Assuchconfirmatoryresearch

“allows for a clear formulation of a theory to be tested in its application, commonly

formulatedashypotheses” (p. 131). As outlined above,we approach our research in a

way that we perceive best fit to answer the research question. The essence of this

researchproject is an explorationofwhether certain emergingmarket characteristics

arepresentintheVCindustryinKenyaandifso,whatcopingstrategiesVCfirmsuseto

overcomethese.Astheresearchquestionistwofoldandtherearetwopurposesforthe

researchproject,thereisaccordinglyaneedfortwouniqueresearchapproaches.

Thefirstpartseekstoinvestigatewhethersomegeneralcharacteristicsaboutmarkets

andindustriesinemergingeconomies,whicharetaken-for-grantedinnumerousstudies

in the international businessmanagement academia, are prevalent and recognised as

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real challenges in the Kenyan VC market. In doing so, we go through the financial

literatureonVCandtheliteratureoninstitutionaltheory,asimpliedinemergingmarket

contexts. From the literature, we create a theoretical framework combining the two

strands of literature, fromwhichwe develop 3main propositions about institutional

barriers for VC in emerging markets. As this section takes a deductive approach, it

conforms to what Reiter (2017) calls confirmatory research. Our understanding of

realityandunderstandingofknowledgeofreality,makesitpurposefulforustoanalyse

thedata in relation to thesepropositions.Hence,wemakequalitative analysesof our

primary data and explore what institutional barriers our interviewees from all eight

case entities experience. The figure below shows how we go from the premise of a

finance gap for startups and SMEs in emerging markets to a literature review and

theoretical framework to the creation of the propositions, and how we explore the

institutional barriers to VC deductively in our case study and the coping strategies

inductively.

Figure1:Researchapproachandprocessfromtheorytogeneralisations.

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Thesecondparttakesaninductiveapproachandseekstoexplorethecopingstrategies,

whichVC firmsuse inorder toworkaround the challenges,whichhaveproven tobe

present. The purpose here is to understand how the challenges affect the strategic

decisionsof theVC firms and toprovide students, academics, professionals andother

stakeholderstotheKenyanprivateequitymarketwithanexplorationoftheconductsin

theindustry.InthesecondwethereforeadheretousingonlythedatafromtheVCfirm

caseentities, aswell aswe limitouruseof theory.AsStebbins (2001:6) argues, "the

maingoalofexploratoryresearchistheproductionofinductivelyderivedgeneralizations

aboutthegroup,activity,process,orsituationunderstudy".

The figurebelowshowsPerry's (1998)conceptionof theorybuilding fromcasestudy

research,wherethenumberofcasesandthetheoryusedinanalysiscorrespondtothe

exploratory or confirmatory nature of the research. Where the left-hand side is

inductive and the right-hand side is deductive, the dotted line in the centre of the

horizontal axismarkswhat Perry denotes as the preferred position of induction and

deduction. As argued, we pursue the first part of the research to be deductive and

confirmatory,whereasthesecondpart is inductiveandexploratorybybuildingonthe

first part through investigating the strategies adopted by the VC firms. Therefore,we

movefromthegreencircletotherightofthedottedlinetowardsthegreencircletothe

leftofthedottedline.

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Figure2:comparisonoftwocasestudyresearchpositions:inductive(lefthandside)anddeductive(right

handside).Thecentermarks thepreferredposition(ablendof lefthandandrighthandsides.Adopted

fromPerry(1998:789).

2.5Methodologyforempiricalresearch

A researchmethodology refers to “amodel to conduct researchwithin the context of a

particularparadigm.Itcomprisestheunderlyingsetsofbeliefsthatguidetheresearcher

tochooseonesetofresearchmethodsoveranother”(Wahyuni,2012:72).Thedecisionto

chooseonemethodologyisoftenhighlybasedonthephilosophicalparadigmappliedin

theresearch.Assuch,positivismoftenleadstoquantitativemethodsandinterpretivism

often leads to qualitative methods (Saunders et al., 2009). As our philosophical

paradigm is that of pragmatism, neither onemethodology or another is given as the

fundamental beliefs of knowledge. As we perceive knowledge to be interpreted

differently through social conditioning in each individual’sperception, as given inour

ontologicalandepistemologicalbeliefs,themostappropriatemethodsarefoundinthe

qualitativemethodology.

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2.5.1TypesofData

This case study makes use of both primary and secondary data. Secondary data can

workastheonlysourceofdataofastudyoritcanbeusedasacomplementtoprimary

data. (Saunders et al., 2009). Different types of secondary data include raw data or

compiled data, such as industry statistics and reports, surveys and government

publications,anditcanbequantitativeaswellasqualitative(ibid.).Inourpresentation

ofthedevelopmentsandtrendsintheprivateequityandVCmarketsacrossEastAfrica

andinKenyaespecially,weusesecondarydatasources.Theseincludepublicationsfrom

industry analysts such as WeeTracker (2020) and Briter Bridges (2020), a policy

researchworkingpaperfromtheWorldBank(Divakaranetal.,2018),andvariousnews

articles.Thesesourcescontainbothquantitativeandqualitativedata.

Primarydata,onthecontrary,isdataproducedbytheresearchersforthepurposeofthe

research project. For this multiple-case study, we apprehend primary data from

professionalsandemployeesworkingattheVCfirms,whichareourentitiesofanalysis.

AsReiter(2017)argues,“therenolongerisalegitimatejustificationfor‘playingtheGod

trick’andpretendingthatonecandoresearchfromnowhere,withoutaspecific interest,

whileseeingeverything”(p. 130), andwe arguably cannot rely on secondarydata and

Google searches alone. This complies with Wahyuni’s (2012) recommendation, that

“qualitativeresearchersshouldgetinvolvedinacommunicationwiththepractitionersin

theorganisationalcoal-faceinordertobetterunderstandthecurrentstateofreal-world

practices”(p.73).Wehavebeendirectlyengagedwiththecompanieswhichwestudy,

and been able to collect comprehensive qualitative data from primary sources. A

discussionofthevalidityandcredibilityfollowsinthesubsequentsection.

2.5.2Methodsfordatacollection

Aswehaveadoptedaqualitativemethodologyfordatacollectiontogettheresultsthat

best relate to our research question, we dive into the toolbox of this methodological

foundation. The qualitative data collection methods most commonly used for case

studies are interview and observations (Saunders et al., 2009). An interview is a

purposeful conversation where the interviewer asks the interviewee some questions

16

about the research topic. As the data, we perceive is valid, is generated in the

individual’sperception,askingquestionsandgettinganswersaremoremeaningfultous

thanlookingat‘hard’dataalone.

Interviewscanvaryfromhighlystandardisedtohighlyinformaltalks.Manyguidelines

on conducting interviews concern maximizing the flow of valid, reliable information

whileminimizingdistortionsofwhat the intervieweralreadyknows.According toYin

(1994)oneofthejobsoftheintervieweristoaskactualconversationalquestionsinan

unbiased manner. Silverman (2004) adds, that as the interviewer is supposed to be

neutral,amainchallenge lies inextracting informationasdirectlyaspossible,without

contaminating it. He furthermore argues that the interview is framed as “a potential

sourceofbias,error,misunderstanding,ormisdirection;itisapersistentsetofproblemsto

beminimized.Thecorrectiveissimple: iftheinterviewerasksquestionsproperlyandthe

interview situation is propitious, the respondent will automatically convey the desired

information. In this conventional view, the interview conversation is a pipeline for

transportingknowledge”(Silverman,2004:141).Assuch,itisimportanttorealizehow

toaskquestions,thekindofquestionsnottoask,andtheorderinwhichtheyshouldbe

asked. ‘Why’ questions could often create defensiveness on the informant’s part, in

contrasttoposinga‘how’question(Yin,1994.).

Initially, in our process of tuning in on the research topic and getting to knowmore

about the nature of the VC landscape in Kenya, we conducted two unstructured

interviewswith industryexpertsandprofessionals.The first interviewwasconducted

with an executive director and partner of a leading accelerator program in Kenya,

GrowthAfrica.ThesecondinterviewwasconductedwithananalystatHeliosCapital,a

private equity firm that does not fall into our category VC investors, due to the high

ticket sizes.Both interviewshelpedusunderstand thedynamicsof theVC industry in

Kenya and how itworks. This highly affected our research purpose and our research

question. Besides the initial interviews,we used the interviewmethod to gather data

fromourcasestoanswertheresearchquestion.Wehadintendedtospendthreeweeks

inKenya tocollectourdataasweperceivedthis to improveourchancesofgetting to

interviewthecompaniesandthepeople,weweremostinterestedin.However,asofthe

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outbreak of COVID-19, the pandemic coronavirus that made implications for global

mobility,wehadtocancelthistrip.Afterinformingtheintervieweesofthis,8outof9

understood our decision and remained willing to contribute our research with their

insights.Hence,duetothegeographicaldistancebetweentheparticipatingfirmsandus,

interviews are conducted online in a virtual conference room. The interviews were

recordedandnotetakingwascarriedouttoo.

These interviews were semi-structured, and we used an interview guide to lead us

throughtheinterviews.AswesetouttogetinformationabouttheVCfirms’perception

of institutionalbarriersandtheircorrespondingcopingstrategies, the interviewguide

has logically been structured around the three propositions. In that way, the

interviewees have givenus insights to howhe/sheperceives the various institutional

barrierstoVCinKenya,whichwehavepredeterminedfromthetheoreticalframework

aspropositions.Withregardstothesecondpartofourresearchquestion,anidentified

solution for asking about the interviewees’ and the case companies’ strategies for

operating in the environment is through the technique of probing. For our interview

strategyweusedtheprobingtechniqueinapredeterminedaswellasinaspontaneous

way.Probingquestionscanbeusedtoexploreresponsesthatareofsignificancetothe

research topic (Saunders et al., 2009). This means that prior to conducting the

interviewsweidentifiedvariousways,inwhichwecouldprobe,whilethesequestions

were supplemented with more intuitive questions by the interviewer. Regarding the

roles during the interviews, we decided that the one, who had established the

connectiontotheintervieweesandcasecompanies,shouldbeginwithanintroduction,

whereastheotheroneshouldcarryouttheinterviewastheinterviewer.

WhileYin(1994)highlightsthatthechoiceofmethodsandtechniques is important in

casestudies,Wahyuni (2012)states thatcasestudiesshouldoftenusemore thanone

method.Withregardstothecollectionofprimarydata,wehad intendedtomeetwith

professionals and if possible take part in some interaction between entrepreneurs,

accelerator programs, business angels and VC firms. However, with the outbreak of

COVID-19, we had to cancel our three-weeks field trip to Nairobi, and conducting

observations became impossible. Instead, wemust rely on the interview as our only

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methodforprimarydatacollection.Nevertheless,whenitcomestosecondarydata,we

usedtheInternettogetvariousdatasources,mentionedintheprevioussection.

2.5.3Dataanalysis

As the interviews were recorded, we were able to make wordly and accurate

transcriptions.Toeasethework,weusedanonlinetranscriptionservicecalledOtter.ai,

whichmadean initial transcription. It is thenpossible to read throughwhile listening

and correcting anymistakes.Before the analysis of ourprimarydata,weused coding

methods. To ease this process, we used a software for treatment of qualitative data,

calledNVivo.Herewe created amasterfilewith all the transcriptions andwe created

fourcodes,threeofwhichrefertothethreepropositionsandonegenericcodereferring

to strategies adopted by VC firms to circumvent these barriers. Then we distributed

copiesbetweenusandbothcodedtheentiredataset.Uponmergingthetwocopiesinto

a new masterfile, we could compare the results of our coding process, and where

differentcodeshadbeenassigned,afruitfuldiscussionaboutthemeaningofthegiven

quotewould follow.As such, ananalysisofourdata continuedandwaselaborated in

thisprocess.Havingcoded the interviews,webegingathering thecodes intosections,

while comparing how each VC firm experiences the prevalence of the institutional

barriersandtheirimpactonstrategy.

2.5.4Researchethics

Atthebeginningoftheinterviews,thepurposeofthestudyisonceagainpresentedand

abriefoutlineoftheinterviewisintroduced.Intervieweesareaskedforpermissionto

record the interviewsand if theywouldpreferbeingquoteddirectlyoranonymously.

All interviewees agreed to being quoted, although some said that their views were

personal and not reflecting the company theyworked for. Despite some interviewees

proclaiming that their views are personal, we consider their professionalism and

expertise on the research topic as the most important factor concerning the data

validity. We are aware of the fact that the research should not put any of our

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participants in a bad stand in any way, and it is our responsibility to protect the

participantsfromanyharassmentrelatedtotheirviews,aspresentedhere.Towardsthe

endoftheinterview,weaskedtheintervieweesiftheyfeltwemissedsomeimportant

points or topics in our questions or had anything to add about the challenges and

constraintstoVCinKenya.Furthermore,weaskediftheintervieweeshadanyquestions

for us. Common to allwas the interest in getting the findings of our study,whichwe

agreed to give them. In that regard, we are very interested in seeing whether the

participantscanbenefitfromourfindingsandtheirimplicationsforpracticeorwhether

our findings are more beneficial to new entrants to the Kenyan VC market, such as

internationalPEandVCfirmsorentrepreneursinKenyainsearchofcapital.

2.6Credibility

Thissectionseekstovalidatetheprocessofgoingfromtheorytopropositionsandfrom

interviews to generalisations as well as arguing for the reliability of our scientific

method and data sample. Hence, we seek to work on the concepts of reliability and

validity. In this regard, Reiter (2017) argues that therewill always be some sort of a

paradox: “Themorereliable scientificmethods, the lessvalid their findings” (p. 135). In

termsofworkingoncredibility,Silverman(2001)arguesthat““weshouldnotbeallthat

impressedifaresearchermakesverymuchoftheir ‘intensivepersonal involvement’with

their subjects” (p. 221), indicating that perhaps there exist somemotivation for us in

terms ofmaking the research project appearmore valid and reliable than it really is.

Throughoutthissection,weaimtoconsiderthisbiasinparticular.

2.6.1Reliability

Inthisdiscussiononreliabilityofourresearch,weadheretotheframeworkproposed

bySaundersetal. (2009:156-159).Reliability refers to “theextenttowhichyourdata

collectiontechniquesoranalysisprocedureswillyieldconsistentfindings”(Saundersetal.,

2009:156).Thusweneedtoconsidertheresearchstrategy,theselectionofcases,and

theresearchmethodforthefirstpart,andouranalysisofthedataforthesecondpart.

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Theframeworkconsistsoffourthreatstoreliability:participanterror,participantbias,

researchererror,andresearcherbias.

Thefirstthreattoreliabilityisconcernedwithparticipanterror.Tobeginwith,weneed

toevaluatethecasecompaniesthathavebeenchosenasentitiesforourmultiple-case

study,andtherepresentativesfromthecompanies,withwhomconductedtheinterview.

Regarding the selection of cases, we have chosen them based on the perspective of

maximumdeviation,asdescribedearlier.Themainreasonforthatisreliability.Itisour

belief that the more variation we find in the VC firms, the more will the views and

opinionsbe representative for thegeneralpopulation.Nevertheless, our evaluationof

and selectionofVC firms is not necessarily perfect, and future research following the

same criteria may select different case companies, threatening the reliability of our

study. Participant errormay also exist,when it comes to the specific individuals that

participatedinourinterviews.Inthreeoutfiveprimarycases,wehadtheopportunity

tospeakwiththepersonswhichweinitiallyconsideredwerefittingforthestudybest,

whileintheothertwocases,employeeswereassignedbytheirsuperiorstoparticipate.

Itisourbeliefthatthebossesassignedindividuals,whotheybelievedcouldbenefitour

studythemost,howevertheymightnothavebeenfullyawareofourresearchpurpose

before taking that decision. Nevertheless, the variety of the participants’ profession

gives us insights to the various strategic and operational decisions taken on different

levelsof theVC firm.Thestrengthof interviewingKenyanprofessionals lies indeed in

theirparticularknowledgeabouttheindustryandtheinstitutionalenvironmentofthe

country.

The second threat to reliability is participant bias. In terms of the participant bias,

intervieweesmay have said something they thoughtwe or their bosses (in case they

wouldseetheresearchproject)wantedtohear,ortheywouldrestrainthemselvesfrom

saying something because they were afraid of the consequences if the wrong people

heard their views. In this regard, one topic that seemed to be sensitive for some

intervieweeswastheinfluenceoftheKenyangovernmentonfacilitatinginvestmentsin

theVCindustry.Inoneinterview,theintervieweesdirectlysaidthattheywouldprefer

nottoanswerthatquestion.

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A third threat to reliability is researcher/observer error. In relation to conducting the

interviews,thetwoofus,researchersconductingthisstudywouldobviouslyhavetwo

differentwaysofconductingtheinterviews.Therefore,asdescribedearlier,weagreed

onspecificquestionstobeincludedinourwell-structuredinterviewguideandagreed

toaskthequestionsaspreciselyastheywerewrittenwhileallowingforsomeflexibility

in termsof theorder inwhich thequestionswereasked.Tokeep consistency inhow

questionswere asked,we used the same interviewer for all the interviews. In future

replicative studies, where researchers base their research on similar theoretical

foundations, itmight aswell be that propositions are createddifferently and that the

interview guide and questions consequently are different too. Hence, we try to be

transparent about our research methods, our approaches and describe the reasons

behindthechoiceswemake.

The last threat to reliability concerns researcher/observer bias. This largely refers to

how the observers understand the answers and how the researchers analyse the

responses. We must acknowledge that some uncertainty exists in the way questions

havebeenunderstoodby the interviewers.Oneparticularchallenge lies inconducting

theinterviewsonline,butthegeneralconceptionofmisunderstandingsbasedonsocio-

culturaldifferencesisconsidered.Tolimitthisbias,weallowedthesecondresearcher,

theonewhodidnotcarryouttheinterview,toaskprobingquestionsattheendofeach

interview.Thisseemedparticularlyhelpfulatseveraloccasions,wheretheresearchers

hadunderstoodsomethingdifferentlyorwhenthesecondresearcherwasinterestedin

probingintosomethingtheintervieweehadsaid.Withregardstothereliabilityofthe

researchmethods,we find it tobeastrength thatbothofus tookpart in theprocess.

Thisisalsothecaseforthedataanalysis,whereweusedmultiplecodinganddiscussed

theinterviewsinrelationtothecodingprocess. Inthatway,wewereabletoquestion

eachother’sunderstanding.

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2.6.2Validity

AccordingtoSilverman(2001:232),validityis“truth:interpretedastheextenttowhich

an account accurately represents the social phenomena towhich it refers”. In terms of

validating the research, we emphasize the triangulation of data by using both our

primary data from the interviews and the secondary data about the VC industry in

Kenya.Asstatedearlier,theuseofanadditionalmethodfordatacollectionwouldhave

benefittedthevalidityofourresearch,aswewouldhavebeenabletocomparetwosets

ofprimarydata.However,wesee itasastrength, thatrelevantsecondarydataexists,

whichwecanuseinstead.Validityandreliabilitystronglyaffecttheabilitytogeneralise

from the findings, and hence the arguments presented in this section should aim to

justifythatthegeneralisationsandconclusionsoftheanalysisrespondstotheresearch

purposeinasatisfactoryway.

2.7Delimitations

Asafinalparagraphinthissection,wewillpresentsomeofthedelimitationswehave

made as a result of narrowing down the focus of our thesis. Most importantly, we

decidedtolimitourfocusofprivatecapitalinvestmentstoearly-stageinvestmentsinto

startups and SMEs. Hence, we do not include private equity such as those directed

towardsinfrastructuredevelopmentprojects.Thisalsomeansthat,althoughwefoundit

interesting along the way, investment projects and the entire investment agenda for

economicdevelopment related todevelopment finance institutions (DFIs), suchas the

Danish IFU, were left out of our scope. With regards to the number of cases, we

acknowledge that interviewing twice as many VC firms would have increased the

reliability of our findings, but due to the selection of cases, we evaluate the data as

sufficient.AsthisstudyassumesVCfirmsasthemainprovidersofearlystageventure

financing,itdoesnotinvestigatethespecificinstitutionsaffectingalternativesourcesof

early stage investments such as business angels, peer to peer lending and

crowdfunding.

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Furthermoreasourtheoreticalfocuslieswithinthescopeofinstitutionalperspective,it

isnotwithinthescopeofthisresearchtoconsiderthenatureoftheinvestmentsmade

byVCs.Assuch, thisstudywillnotconsiderthe internalprocessessuchasknowledge

transferfoundwithinVCfirmsandtheventurestheyinvest in.Althoughwerecognise

that some business strategies related to institutional barriers in emerging markets

alreadyexist,itisnotourintentiontotesttheapplicabilityofthese.Duetoourinductive

approach we instead seek to find patterns in the empirical data to form generic

strategies forVC firms.Furthermore,althoughthe focusof thispaperrevolvesaround

the common notion of a finance gap preventing socio-economic development in

emerging markets and socioeconomic long-term development, we do not seek to

provide specific assessments around the political economy or any in depth policy

analysis.Lastly,thispaperdoesnotseektoprovidespecificstrategiesforVCfirms,but

ratherareasofconsiderationwhicharehighlightedinthefindingsofourresearch.

Summaryofsection2:

In the method section we have defined and described the research design, research

strategy, research purposes and research approaches of this thesis. As such,we have

highlighted that the research question calls for an exploratory purpose, which we

further divide into a confirmatorypurpose and an exploratorypurpose. Furthermore,

eachof thesepurposes is related to adeductive approachandan inductive approach,

respectively. For the deductive part, we use a theoretical framework, whichwe have

constructed by combining the relevant financial literature on venture capital and the

literatureon the institutionalperspectiveonbusiness strategies in emergingmarkets.

This theoretical framework has produced three propositions,which guide us through

thefirstpartsoftheanalysis.Throughamultiple-casestudy,semi-structuredinterviews

havebeenconductedwithprofessionals intheVCindustry inKenya,whichhavebeen

selectedthroughthemaximumdeviationselectioncriteria.

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3LiteratureReview

Inthefollowingsection,literatureconstitutingthefoundationforthestudyisoutlined.

Thefirstpartintroducesthekeyconceptsrelatingtotheventurecapital(VC)landscape

andentrepreneurial financetoshowsomeof thechallengesandstrategic implications

facing the VC firm. Subsequently, we present the institutional theory and its

contributions to business strategy in emerging markets. The third section presents

earliercontributionstoinstitutionaltheoryasappliedtoVCfirmsinemergingmarkets.

Based on this literature, the last section includes the theoretical framework and 3

propositions,whichwillbeemployed for theanalysis inorder toanswer theresearch

question.

3.1Venturecapitalandfinancialliterature

InthischapterweaimtopresenttherelevantfinancialliteratureonVCasavehiclefor

early stage investments for startups and SMEs. As such, we aim to explore the key

conceptsandmainactors,whichimpacttheoperationsoftheVCfirm,andtheactivities

inrelationtotheVCfundcycle.

3.1.1Globalisationofprivatecapital

Sincethe1980’sprivatecapitalmarketshavebeenontherise.Jensen(1999)described

the phenomenon as the “privatization of public equity” referring to the influx of

investmentsthrough private equity (PE) funds, venture capital (VC) funds, buy-out

funds,familyoffices, infrastructurefunds,realestatefunds,businessangels(BAs).The

privatemarketsdiffertopublicmarketsmainlyinthatwhilethepublicmarketsofasset

classessuchasstocksandbondsincludetransactionsinvolvingthegeneralpopulation,

theprivatecapitalmarketsinvolvetransactionsofequityanddebtbetweenprofessional

investors(Jensen,1999).WeadoptGompers&Lerner'sdefinitionofVCas“independent,

professionallymanaged, dedicated pools of capital that focus on equity or equity-linked

25

investments inprivatelyheld,highgrowthcompanies” (2001: 146). The last decades of

technologicaladvancementsanddigitalbusinessemergence,hubssuchasSiliconValley,

havebroughtanincreasingamountofcapitaltowardsVCfirms(Fazekas&Becsky-Nagy,

2015). Thus, the VC market provides a unique link between finance and innovation,

providingearlystagefirmswithcapitalmarketaccess,thatistailoredtothespecialtask

of financing these high-risk, high-return activities (Gilson, 2003). As the presence is

increasinglyglobal,thenumberofVC-backedstartupsandsmallbusinesseshasseena

sharp increase throughout emergingmarkets (McKinsey & Company, 2019). Through

thesuccessfuldevelopmentoftheVCindustryinChina,IndiaandBrazil,combinedwith

the increasing perception of VC as a key determinant for economic development,

investors are increasingly turning their eyes towards other emergingmarkets around

theworld(Breuer&Pinkwart,2018).

3.1.2StartupsandSMEs:the‘ventures’

It is imperative to take into account the groups of organisations and individualswho

receiveVC: the investeecompanies.Hence, in thissectionweseektodefineSMEsand

startups, which are the actors referred to interchangeably throughout this paper as

ventures. Micro-, small- and medium-sized enterprises (MSMEs) are acknowledged

worldwideasimportantdriversofsocio-economicdevelopmentduetotheirimportant

roleinGDPgrowth,newjobcreationandentrepreneurship(Karadag,2016).Theirrole

has been considered particularly crucial in developing economies with a comparably

lower number of large corporations (Narteh, 2013). TheOECD’s definition of SMEs is

wide in termsofage, size,businessmodelandaspirationofentrepreneurs,varying in

theircharacteristicsandperformance(OECD,2019).Inaddition,theWorldBank(2020)

stressestheimportanceofformalSMEsastheycontributeupto40%ofgrossdomestic

product(GDP)inemergingeconomies,emphasizingthatthesenumbersaresignificantly

higher when informal SMEs are included. Although acknowledging that all countries

maydefineSMEsdifferently,theWorldBank(2008)hascategorizedallcompanieswith

amaximumof300employees,andayearlyrevenueofupto$15million,tobelongtothe

category.Within thecategoryofSMEs,micro-sizedenterprisesholdamaximumof10

26

employees and sales of $100.000; small-sized enterprises hold between 10-50

employees with total sales between $100.000 to $3 million; while medium-sized

enterprisesemploybetween50-300employeeswithrevenuesbetween$3-$15million

(TheWorldBank,2008).Startupsservepartinthiscategorizationastheyaregenerally

known as newly formed ventures, preparing some minimum viable product, having

higher entrepreneurial risk in establishing itself on a market, and is striving for fast

growth. For such firms, the provision of sufficient funds to foster growth is the key

factorofsuccessfulbusinessdevelopmentBednár&Tarišková(2017).

Hudson&Khazragui(2013)coinedthephrase“startup’svalleyofdeath”referringtothe

earlystageofdevelopmentwherestartupsencounterthefinancialgapwhichlimitsthe

companies’ abilities to innovate and to commercialise its products. Limited human

capital,highuncertaintyintermsofproductandmarket,volatiledevelopmentprocess

andweakpartnershiptiesareconsideredtraditionalbarriers,whichimpedessuccessful

startup growth, causing a high number of startups to fail within their first years of

operation (Fielden et al., 2000). These firms are thus often considered too risky for

commercialloansandtoounderdevelopedforpublicmarkets(Herciu,2017).Astherisk

offailureisveryhigh,theVCfirmsareconsideredoneofthemostrelevantsourcesof

fundingfornewventures(LiandZahra2012).

3.1.3Venturecapitalforearly-stagefinancing

The main function of VC firms is to invest in a company’s balance sheet and

infrastructurethroughequityordebtuntilitreachesasufficientsizeandcredibilityfor

an exit (Hall & Lerner, 2010). General difficulties related to investing in startups and

early stage companies include lack of internal cash flows and collaterals, asymmetric

informationandagencyproblems,bringinghighrisks,pressuringtheVCtomakehigh

returns on successful investments (ibid.). In essence, the VC firms buy a stake in an

entrepreneur’sidea,nurtureitforashortperiodoftime,andexitatahighreturnifthe

businessissuccessful(Gompersetal.,2015).ThemostcommonstructureforaVCfund

is a limited partnership arrangement. Under the limited partnership arrangement,

27

individual private investors (LPs) purchase a limited interest in a VC fund, which is

managed by a group of venture capitalists (VCs). Those VCs are the general partners

(GPs)intheVCfund,aswellastheprincipals,associatesandinvestmentanalysts,and

theychargeamanagementfeeplusashareofthecapitalgainstorunthefund(Baker&

Filbeck,2013).

Kaplan & Lerner (2010) highlight that despite the fact that the numbers of ventures

actuallyreceivingVCfundingintheUSismuchlessthan1%,itisconsideredwellsuited

tostimulatethedevelopmentofinnovativefastgrowingbusinesses.Breuer&Pinkwart

(2018) further emphasize the importance of VC to the wider economy, adding the

importance of PE in their review of current financial literature in emergingmarkets.

They argue that although PE funds and VC funds are both seen as important

contributors to the economy, their differences become crystal clear once one takes a

closerlookonthetwodifferenttypesoffunds(Breuer&Pinkwart,2018).

WhileVChasproventobeoneofthemostrelevantsourcesoffundingfornewventures,

PE fundsrepresentanatural financingsource for firmspursuingcapital-intensiveand

risky investmentstrategies,usually inmaturing industries.WhileVCenables founders

toestablishyoung,oftentech-relatedventuresinimmaturemarkets,PEfundstypically

buy firms seeking additional capital in maturing markets, e.g. through a leveraged

buyout.Furthermore,Breuer&Pinkwart(2018)discussthatwhileVChasbeenseenas

asupportivefactortoentrepreneurshipandSMEgrowth,PEfirmshavebeencriticized

for loading companies up with debt, exploiting regulatory loopholes as their

investmentsresultinhighlyleveredfirms.Othersclaimhoweverthatfirmsfinancedby

PEfundsincreasedtheirperformanceduetoanenhancedfinancialscope.Thefactofthe

matter is that PE firms tend to enter at later investment stages, and usually buy a

majoritystakeintheventurestheyinvestin(Breuer&Pinkwart,2018).

Moreover,byactivelysupportingtheventure’smanagement,corporategovernance,and

reporting, VC firms have been considered particularly suiting to contribute to the

professionalizationof startups (Hellmann&Puri, 2002), enabling innovativeproducts

or services to be rapidly brought tomarket (Black& Gilson, 1998). As Sorenson and

Stuart(2001)pointout,theselectioncriteriaandindustryfocusfortheVCfirmcanvary

28

highly depending on the industry criteria and the environment. If the GPs have

experience fromaspecific industry, the fundcanbe industryspecific, inothercases it

can be industry agnostic, meaning the firm will seek investments across industries.

Similarly,Mayer etal. (2005) argue that someVC firms enter at earlier stageswhere

investment rounds are smaller and others focus on later stages where investment

roundsarelarger.Accordingtotheonlinestartuptrackerandinformationtoolformany

VC,Crunchbase(CB)(2020),themostcommonfundingroundsarecategorizedaspre-

seed,seed,SeriesA,SeriesB,SeriesC,andSeriesD.Belowfollowsanillustrationofthe

startup financing rounds. The amount of the rounds are not fixed, nor is the order

chronological, as venturesmayneed additional financing that does not correspond to

the subsequent round provided by the model below. However this model is used to

provide an overview of the investment amounts and the financing actors that

correspondtothese.

Figure3:Startupinvestmentrounds.Ownconstruction.Source:Crunchbase(2020)

29

Pre-seedisthestartupphaseoftheventure,wherefoundersrelyoninformalcapitalto

test the viability of their business idea. At this stage, the venture has no institutional

investors and the capital invested is often a very low amount, often below $150k

(Crunchbase, 2020). In this earliest phase, the entrepreneur is mostly relying on

financialsupportfromfamilyandfriendsaswellasgrantfunding.Atthesecondstage,

theseedfunding,theventuregetscapitaltofundcostsofproductlaunch,earlytraction,

bring in their first revenue, initiate important hiring and furthermarket research for

product-market fit (Riding,2008).At this stage,BusinessAngels (BAs)serve themost

importantpartoffinancingtheventuresalthoughsomeVCsenteralreadyatthisstage.

Investment sizes range between $10k–$2M at the seed stage according to CB (2020),

whoreportsthatlargerseedroundshavebecomemorecommoninrecentyears.

Traditionally, SeriesA is the first round of VC financing and at this stage the venture

shouldhavedevelopedaproductandacustomerbasewithconsistentrevenueflow,as

the investments at the Series A round focus heavily on scaling up and reaching

significant recurringrevenue increases.According toCB (2020)Venturesat this stage

may raise up to $15million at this funding stage. The SeriesB funding stage focuses

heavily on the ventures ability to meet the various demands of their customers and

compete in tight markets in terms of competition. Here, ventures can raise

approximately $30 million during the Series B funding round (ibid.). The Series B

fundingstagemayappearsimilartotheformerfundingstageintermsofprocessesand

keyplayers,however,themajordifferenceisusuallytheadditionofanewwaveofVCs

thatspecializeininvestinginwell-establishedstartupssothattheycanfurtherexceed

expectations.

Generally, ventures thatmake it to theSeriesC funding look for funding tobuildnew

products,reachnewmarkets,andevenacquireotherunder-performingstartupsofthe

similarindustry.Astheventure’soperationshavebecomelessriskyatthisstage,other

institutional investors thanVCs are coming into play. Apart fromPE firms,which are

veryactiveatthisstage,hedgefundsandinvestmentbanksinvestinventuresduringthe

SeriesCstage.Ventureswithgoodbusinessgrowth,valuingupto$100million,maybe

able to raise approximately $50 million during the Series C funding stage (ibid.).

30

Subsequent to the Series C stage, some ventures additionally go through a Series D

funding stage, which allows entrepreneurs to raise funds for a special situation, for

instanceamerger.AventuremayconsiderseriesDfunding,orbridge-financing,ifithas

notgonepublicorbeenacquiredyet,but is contemplatingamerger, andneeds some

runway to reach their targets. In addition to PE firms, investment banks and hedge

funds,some latestage-VCsarestillactive investorsat thisstage.Startups in thisstage

mayraiseuptowards$100million(ibid.).

BusinessAngels VentureCapital PrivateEquity

TicketSize* $10.000-$500.000 $0.5-$20million,althoughincreasing

Widerange:from$millionstobillions

Investmentstage(ofbusiness)*

Founding,startup,pre-revenue;Pre-seedstage,seedstage,A-round

Earlystage,pre-profitability;MainlyA-round,B-roundandCround,sometimesalsoD-roundandbridgefinancing

Maturecashflow,oftendeterioratingduetoinefficiencies;Bround,CroundandD-round

Typeofinvestment

Equity Equity,convertibledebt Equitywithleverage

Levelofriskandreturn*

Extremeriskandreturn(100xreturntarget)

Highriskandhighreturn(10xreturntarget)

Moderateriskandmoderatereturn(15%IRR)

Investmentscreening

Founders,marketsharepotential,virality,#ofusers

Founders,marketsharepotential,revenue,margins,growthrate

EBITDA,cashflow,IRR,financialengineering

Ownership Smallequity,owncapitalinvested.

Below50%,investonbehalfofLPs

Above50%,onbehalfofLPs

Purpose Highinvolvementinmanagement,professionalization,gotomarketstrategy.

Mentoring,professionalization,growth.Sellstakeforprofitthroughexit.

Createeconomicefficiencyandgrowth.Leveragedbuyout(LBO).

Investmentfocus

Investinsmallnumberofventures

Hockeystickventures,oftenwithinstateofarttechnologyornovelproduct-marketfit

Traditionalindustriesorfirmswithwelltestedbusinessmodelsandgoodtraction

31

Table 2: Difference between BA, VC and PE: characteristics in spectrum of risk/return and stage of

investment. Own construction based on: Aylward (1998); Gompers et al., (2015); Monika, & Sharma

(2015);Baum&Silverman(2004);Hall&Lerner(2010);CFI(n/d);CB(2020);Hellmann&Puri(2002);

Black&Gilson (1998); Sagari&Guidotti (1992);Ramadani (2009);Teker&Teker (2016). *Thefigures

providedshouldbeconsideredasgeneralpointsofreferencetodistinguishbetweenthetypesofinvestor.The

investortypes,asexplainedintheparagraphsbelow,areconstantlyevolvingandthereisnodefinitionthat

canaccountforallthevariations.

3.1.4BusinessAngelsandotherearlystagefinanciers

BusinessAngels(BA),whichusuallyconstitutewealthyindividualswithlargebusiness

experience, and family and friends of the entrepreneurs (‘love money’) make up the

informal capitalmarket for early stage ventures. Togetherwith theVC firms they are

consideredanimportantsourceofcapitalforSMEsandavitalcornerstoneintheearly

financingstages(Riding,2008).Assuchtheyserveacrucialfinancialroletobridgethe

gap between the founders and larger institutional investors. Apart from their

contributionsthroughthefinancialinvestments,BAstendtohaveahighinvolvementin

supporting the management of the ventures they invest in. As BAs usually have an

entrepreneurialbackgroundeitherbysucceedingwiththeirownventureorbyhaving

done very well in the industry, they have the financial means and experience to

contribute with (Ramadani, 2009). The last couple of years have seen an increasing

trendofBAscomingtogetherunderAngelnetworks.Insuchsyndicates,asagroupBAs

can provide higher amounts of financing than individual BA investors (Croce et al.,

2016).

Other models of early stage venture financing includes crowdfunding, which is an

umbrellatermusedtodescribediverseformsoffundraising,typicallyviaplatformsover

theinternet,wherebygroupsofpeoplepoolmoneytosupportaparticulargoal(Ahlers

etal.,2015).Furthermore,familyofficesthatserveasintermediariestomanagewealth

is yet another model. Instead of owning the firm directly, the family bundles its

ownershipshares intoa familyofficeandonlyhasan indirectownershipshare in the

firm (Zellweger & Kammerlander, 2015). Such family offices increasingly invest in

32

growth ventures and have evolved into an important player in the market. These

emerging models add heterogeneity to the rapidly changing landscape of

entrepreneurialfinance(Blocketal.,2018).

Perhaps themost notable addition to the early stage financing landscape is the rapid

evolution of accelerators and incubators appearing all over the globe. These are

organisationsthatsupporttheventuresbymitigatingriskandincreasetheprobability

forsuccessbyimplementingtargetedoperationalimprovementsatinvesteecompanies.

Such efforts include financial literacy training, business plan development,marketing

support,strategic planning, legal support, operational and process improvement,

facilitating access to international supply chains, and information technology support.

Additionally, accelerators and incubators seek to support start-ups in their growth

throughnetworkaccessandinadditiontoco-workingspace(Divakaranetal.,2018).

While scholars and practitioners commonly use the terms incubator and accelerator

interchangeably, incubatorshavebeenaround foramuch longer timeand theirscope

has been considered much wider, including all support relating to projects, tools,

facilities,buildings,enterprises,organizationswhichmayfacilitatethebusinessstartup

process.Accelerators,ontheotherhand,areusuallyfixed-term,cohort-basedprograms

providing education,monitoring, andmentoring to the entrepreneurs, and connecting

them with VC firms and BAs amongst others (Hausberg & Korreck, 2020). Although

some accelerators are increasingly providing financial support through loans,

convertiblenotesandequityatpre-seedstage,theirroleinthelargerschemeofearly-

stage funding tends to lay around preparing the ventures and connecting themwith

investors,andhencetheycanbeseenasanintermediaryactor(Hallenetal.,2016).In

comparisontothealternativemodelsoffinancing,VCshavebeenconsideredasabetter

fitting investment vehicle to foster the interest of larger institutions such as pensions

funds, and lately even development banks in their surge for unlocking capital in

emergingmarketsthroughinvestmentsinearlystageventures(UNCTAD,2017;Barger

etal.,1996),

33

3.1.5Thecycleofventurecapitalfunds

The cycle of VC funds, as shown in the figure below, includes funding, screening,

investing,monitoringandexiting(Rajan,2010).ThefundswhichtheVCfirmisrunning

are usually closed-ended and reach maturity, normally at 10-12 years, after which

investments should have been exited and returns distributed (Cremades, 2018). The

firststep,funding,includesfindingtheinvestorswhowillfundtheVCitself.TheGPsof

theVC firmareusuallyexperienced investorswhowill seekexternal funding to runa

fundforaspecificperiodoftime.ExperiencedGPsmayrunmultiplefundswithdifferent

investors and portfolios simultaneously. These investors, the LPs, include amongst

others endowments, corporate pension funds, sovereign wealth funds, wealthy

individualsandfamilies,andfundsoffunds(Rajan,2010;Patricof&Sunderland,2005).

Figure4:TheVCfundcycle.OwnconstructionbasedonRajan(2010).

34

ThesecondstageintheVCfirmsfundisscreening.TheanalystsoftheVCfirmusually

collectmarketresearchandinformationonpotentialinvestmentobjects.Togetherwith

moresenioremployees,associates,theanalystsserveakeyroleinthefirm'sscreening

anddeal-sourcing(Rajan,2010).Scrapingvariousmarketintelligencesitesforpopular

dealsandkeepingacloserelation to the intermediaryactorssuchasacceleratorsand

other network parties who may provide deals is a vital part of the analysts and

associatescontributionstotheVCfirm.Althoughthefinal investmentdecisionisoften

taken by the GPs, the analysts and associates provide a crucial role in providing

necessaryinformationfordevelopingtherightcriteria,KPIsandultimatelyinvestment

decision(Landström,2007).Multiplephasesofscreeningandevaluation isneeded to

understandthe industry-andfirmspecificconditionspriorto investing intheventure

(Fried&Hisrich,1994).Althoughtheinvestmentcriteriamaydifferlargelyfromfirmto

firm, the people, opportunity, context and deal (POCD) framework developed by

scholars at Harvard Business School usually presents some overarching categories

whichVCstendtoincludewhenformingtheirowncriteria.Peoplerefertothecapacity

andtrackrecordofthefounders,managementandemployees.Opportunityreferstothe

economicsof thebusinessandusually includes cash flowestimatesorotherpotential

market opportunities thatmay arise.Context refers to the external factors potentially

affectingthebusinesssuchasshiftsinthepolitical landscape.Lastly,dealreferstothe

relationships between the involved parties, including contracts, compensation, and

incentives(Amis&Stevenson,2001).

When the firm has found ventureswhich fit their criteria theywill proceedwith the

thirdstage, investing. Inatypicalstart-updealtheinvestmentsaremadeinpreferred-

equityownershipposition,whichimpliesdownsideprotection.Forinstance,theVCfirm

receivesaliquidationpreferencewhichensurestheirinvestmentisrepaidbeforeother

shareholders.Inotherwords,shouldtheventurefail,theyaregiventhefirstclaimtoall

thecompany’sassetsandtechnology.Inaddition,thedealoftenincludesblockingrights

ordisproportionalvotingrightsoverkeydecisions,includingthesaleofthecompanyor

thetimingofaninitialpublicoffering(IPO),referringtoofferingcorporatesharestothe

general public (Rajan, 2010; Zider, 1998). In most cases, VCs invest in the company

throughmultiplefundingrounds,sincestagingofcapitalinfusionsallowsVCstogather

35

information,monitor the progress of firms, and gives the option of abandoning those

projects that are not doing well (Gompers, 1995). As described above, the funding

roundsareoftencategorisedaspre-seed,seed,seriesA,seriesB,seriesCandsometimes

evenseriesDbeforeaventureisviableforanexit.

The fourth step in the investment cycle is themonitoring process along the venture’s

growthjourney.ManystudiesshowthatVC-backedventuresaremorelikelytosucceed

thanventureswhoarenotbackedbyVCfirms(Cumming,etal.2005).Thisissupported

by the fact that GPs tend to have a highly active role in the ventures they invest in,

holdingboardseatsandactingasstrategicpartnersinmanyhighleveldecision-making

processes.VCsusetheirspecificindustrialknowledge,expertise,andcontactstoassist

their portfolio firms in various areas such as strategic and operational planning

(MacMillanetal.,1989;Sagari&Guidotti,1992).

The last step of an investment is the exit. Since VC funds are generally structured as

closeendedfunds,theVCshavetoliquidatetheirinvestmentsafteracertainperiodto

distribute the profits to the limited partners. The common routes of exit are through

IPO, acquisition by another company, repurchase of VC firm’s shares by the investee

company,orsecondarypurchaseofVCfirm’ssharesbyathirdparty(Sagari&Guidotti,

1992; Rajan, 2010). Studies suggest that longer investment periods are correlated to

lowerreturnsoninvestments, indicatingthatearlyexitroutesarepreferred(Aylward,

1998).Additionally,Schwienbacher(2008)highlights theagency issuesresulting from

the conflict of interest between the investors and the founders of the venture, when

deciding routes for the exit. Seeing an IPO often allows the entrepreneurs to keep

controlaftertheVCfirmsexit,thismayconflicttheinterestoftheinvestorswhoatthis

stagewill look for themost lucrativeoffer for theirshare in thecompany.Asaresult,

moststartupdealsincludeprovisions,whichallowtheinvestorstohavevetorightson

the exit route decisions (Schwienbacher, 2008). This could in effect answer why the

majorityofexitsaremadethroughacquisitions(Gompers,1995).

36

3.1.6EmergingMarkets

Multilateral organizations each employ their own classification of countries, varying

with the purpose of the organization. The World Bank classifies countries in four

categoriesbasedon theper capita incomeas lowincome, lower-middle income,upper-

middle-income, andhigh-income. Countrieswith an income exceeding $ 1,025= lower

middle income; over $4,035 = upper middle income; over $12,475 = high-income

economies. Kenya thus classifies as a lower middle-income country (Fantom &

Serajuddin,2016).TheInternationalMonetaryFund(IMF)usesasimilarclassification,

but adjusts for example for members of the Eurozone, which are considered as

advanced.TheUnitedNations(UN)categorizescountriesinthreecategories,developed,

developing and transition. Apart from countries that joined the EU which are

automatically classified as developed, the UN´s classification has not been updated to

reflecttheeconomicevolutionofthepast25years(Meyer&Grosse,2018).

Management scholars have taken a more pragmatic approach to the classification of

countries. Emerging markets have been defined as “those economies that have high

growthorgrowthpotential, butdonothave the same sophisticationof the institutional

frameworkasWesternEuropeorNorthAmerica”(Meyer&Tran,2004:6).Management

studies additionally emphasize differences between emerging markets. One of the

biggestdifferencesmadebymanagementscholarsisbetweendevelopingcountriesand

transitioneconomies.AlthoughneithertheOrganisationforEconomicCo-operationand

Development(OECD),theWorldTradeOrganisation(WTO)northeWorldBankoperate

with definitions for developing countries, development studies and, increasingly,

business studies are dealing with the term. Mutual research themes on developing

countrieshavebeenidentifiedsuchasmarketfailure,institutions,entrepreneurshipand

firm internationalisation (Hansen & Schaumburg-Müller, 2010). While the term

developingcountriesisusuallyusedforcountriesinAsia,LatinAmerica,Africa,andthe

Middle East, transition economies is used for countries in the former Soviet Union,

EasternEuropeandEastAsia.Transitioneconomiesarefacingachangefromacentrally

plannedeconomytoamarketeconomythroughincreasedprivatization,achangingrole

of government, and legal and institutional reforms. Apart from these differences,

emergingmarketsdiffer in their level of industrialdevelopment, the extentofmarket

37

liberalization, the degree of integration into the global economy, and the rate of

economic development and growth (Marquis and Raynard, 2015). Despite these

differences, emerging markets share a number of characteristics that not only

differentiatethemfromtraditionallystudieddevelopedmarkets,butalsocreateasetof

generalchallengesfornavigatingtheirbusinessenvironments(Khanna&Palepu,2010).

Kenyahas in the lastdecadebeen the subjectof several studies, focusingonbusiness

strategies in emerging market contexts. As such, Sudhir et al. (2015) study the

application of emerging market literature relating to consumer preferences and

marketingusingtheKenyancontextasthesubjectoftheresearch.Similarly,Drouillard

(2017)usesKenyaasthecountryofanalysisforhisstudyonhowdigitalplatformscan

help overcome salient market inefficiencies stemming from institutional voids in

emergingmarkets. Investigating the VC industry in Kenya, Hain & Jurowetzki (2018)

additionally comment that the recent flow of investments into Sub-Saharan Africa

signals"thereexistyoungcompanieswithinnovativeproducts,services,orbusinessmodels

which are potentially fit for international or even globalmarkets. This picture fits well

with the arising speculations about countries such as Kenya and Nigeria becoming the

‘newemerging’marketswhomayfollowthedevelopmentpathoftheBRICScountries"(p.

451).AssuchweperceiveKenya,asthecountryofanalysis,tobearepresentativecase

fortheVCindustryinemergingmarkets.

3.1.7VentureCapitalinEmergingMarkets

Throughoutthepastdecades,cross-borderVCinvestmentshaveincreasedsubstantially

in terms of number of deals, amount of capital invested, and geographical reach

(Aizenman&Kendall,2012).In1992,theWorldBankissuedadiscussionpaperonthe

possibilitiesforVCinvestmentsasasolutiontoprovidefinancialsupporttodevelopthe

productive sectors in developing countries (Sagari & Guidotti, 1992). Although

recognising that traditionally conceived VC firms might face challenges related to

business environment, such as the size and the purchasing power of the domestic

markets,thesupplyofskills,entrepreneurs'attitudestowardssharingcontrol,andexit

mechanisms,thepapersuggeststhatlessonslearnedfromthedevelopedworldcanbe

38

usedinemergingmarkets(Sagari&Guidotti,1992).ThepatternofVCglobalisationhas

been explained mainly by market attractiveness. This is an exogenous country-level

factor to which VC investments gravitate, and empirical studies show that VC

investments tend to flow to countrieswith some key economic features such as high

economicgrowth(SchertlerandTykvová,2009;2010).Explainingthecross-borderVC

flows,GulerandGuillén(2010)emphasizetheroleofinstitutionalfactorsandconclude

thatVC firmsprefer to invest in countrieswith technological -, legal -, financial -, and

political institutions that create innovativeopportunities,which they considerdefined

bythelevelofscientificknowledgeandtechnology.AhlstromandBruton(2006)argue

thatoverthelastdecades,someemergingeconomiessuchasBrazil,Taiwan,India,and

ChinahavehoweversucceededtoattractsubstantialamountsofforeignVCinvestments.

Thenumberof cross-borderVC investments intoemergingeconomies increased from

8.7percentofthetotalVCinvestmentsin1991to56percentin2008(Chemmanuretal.,

2016). Financial dataprovider, Preqin (2018), showed in their report from2018 that

funds from emergingmarkets have collectively posted the strongest returns for both

2010-2012 and 2013-2015 vintage funds compared to North America- and Europe

basedVCfunds.ThereportadditionallyshowedthatthemajorityoftheVCinvestments

inemergingmarketsaremadeinAsia,whereSingaporeisthehub,however,theregions

with the largest proportion of newly registered VC firms is Latin America (30%),

followedbyfirmsbasedinSub-SaharanAfrica(26%)(Preqin,2018).

Although, there is an emergence of dynamic startup ecosystems and rapidly growing

domestic markets in these countries they are also characterized by a high degree of

politicalandmarketinstability,underdevelopedinvestorandpropertyprotection(Peng,

2001), corruption (Johan and Najar, 2010), weak security and basic infrastructure as

well as vastly diverging businessmodels, ethics, and practices (Ahlstrom andBruton,

2006). As a consequence of the high levels of uncertainty, investments into these

countriesrepresentachallengeforVCinvestors,requiringthemtoadjusttheirroutines

regardingdealselection,structure,monitoring,andprovidingmanagerialsupport(Dai

etal.,2012;Khavul&Deeds,2016).

39

Summaryofchapter3.1

Inthispartoftheliteraturereview,wehaveexploredtheconceptandphenomenonof

VC.Wehave furtheremphasized theglobalizationofVCand its recentexpansion into

emerging markets. The chapter has additionally presented VC as a suitable financial

vehiclefordevelopmentofstartupsandSMEs(theventures)andthatVCintegratesinto

a process of financial mechanisms together with BAs and PE funds, which appear at

differentstagesoftheventuresdevelopment.Lastly,wehaveexploredthestagesofaVC

fund’s cycle, at which different activities take place. These stages include funding,

screening,investing,monitoringandexiting.

3.2Institutionaltheoryandfirmstrategyinemergingmarkets

In this chapter we aim at exploring the literature that has evolved around business

strategies in emergingmarkets by highlighting the arrival of institutional theory, as a

perspectivethattakesintoaccounttheexternalfactorstothefirm.Thus,exploringthe

originsofinstitutionaltheory,theliteraturereviewfurthermorepresentsthequalityof

theinstitutionalsettingascommonlycharacterisedinemergingmarkets.

3.2.1Businessstrategyinemergingmarkets

Untilthe2000’s,businessstrategyliteraturelargelyfocusedonPorter’s(1980)industry

perspective, Barney’s (1991) resource-based viewand to some extent, the knowledge

basedperspectivepresentedbyTeece (1997).Porter (1980)suggested that the firm's

competitiveadvantageisamatterofcostleadershipordifferentiation,relatingthefirm

strategy to its position against other industry actors. Barney (1991) considered the

firm'ssuccessasamatterofinternalresourcesandcapabilitieswithaparticularfocus

ontheiradvantage-value,rareness,imitability,andsubstitutability.Followinghisideas,

the knowledge-based perspective (Teece, 1997) emphasized the firm's internal

40

resources in terms of knowledge, transfer of knowledge and the protection of such

resources.AlthoughscholarssuchasOliver(1997)suggestedthatfirmsneedtoadjust

forwiderinfluencesfromthestateandsociety,theabovementionedtheoreticalstrands

have been criticized for lacking applicability outside developed countries, where the

societal influences on the firm is subject to rapid change, affecting the firm's strategy

(Garridoetal.,2014).

Inthelightofthis,ithasfurtherbeenarguedthatthethreemostappropriatetheoriesto

explain the relationships between the firm and its surroundings are resource

dependencytheory,populationecology,andinstitutionaltheory(Hatch,1997;Pfeffer&

Salancik, 2003). Further, Hoskisson et al. (2000) argue that particularly institutional

theory suitsorganizations operating in emergingmarkets due to its ability to capture

thenatureoftheregulatorybodiesandtheirimpactonorganisationalbehaviour,aswell

as the significance of culture. As government- and societal influences are stronger in

emergingmarkets than in developed economies, Hoskisson etal. (2000) consider the

institutionaltheoryaspreeminentinexplaininghowthiswillaffectthefirm'sstrategy,

arguingforacombinationofinstitutionaltheory,resourcebasedtheoryandtransaction

cost economics for strategy formulation in emergingmarkets.Hoskisson etal.(2000)

declare the role of institutions in an economy to reduce transaction- and information

costs by limiting uncertainty and establishing a stable structure that facilitates

interactions between societal actors. Hoskisson et al, (2000) further meant that

transaction cost is related to institutional enforcement such as the rule of law.When

institutions fail to support such interaction, the settingwill give rise to opportunistic

behaviour,implyinghighertransactioncostsforthefirms(Hoskissonetal,2000).Peng

(2002)emphasizesthatalthoughtheresourcebasedviewandtheindustryperspective

paidattentiontothe“externalenvironment”,theirconsiderationshavebeenlimitedto

primarilyeconomic factorssuchas technologyanddemand.Headditionallyhighlights

that the institutional underpinnings, which form the context of competition and the

firms,havebeenignoredasaneffectonresearchonfirms,competitionandstrategyin

the US. Hence, taking into account the wider societal influences should no longer be

ignored. These influences are broadly considered as institutional frameworks (North,

1990;Scott,1995).

41

In business strategy research, this perspective has been called the institution-based

view (Peng, 2002). Thus, Mike Peng (2008) proposes the “strategy tripod”, which

considers strategic choices as driven by industry conditions, firm capabilities, and an

importantreflectionoftheconstraintsofaparticularinstitutionalframework.Treating

institutionsasindependentvariables,theinstitution-basedviewofstrategythusfocuses

on the dynamic interaction between institutions and organizations, and considers

strategic choices as the outcome of such an interaction (Peng, 2008). Furthermore,

institutionaltheoryconsiderstheimplicationofnetworksandcultureonfirmstrategy

as Marquis and Raynard (2015: 2) add to this approach by defining institutional

strategies as “the comprehensive set of plans and actions directed at strategically

leveraging the socio-political and cultural institutionswithin an organization’s external

environment”. Some firms further utilize social networks as a strategicmechanism to

overcomedisadvantagesrelatedtotheinstitutionalenvironment(Peng2008,Hoskisson

etal.,2010).IntheirrevisitedversionoftheUppsalamodel,Johanson&Vahlne(2009)

highlight that networks and mutual commitment play a large role in the

internationalisationofacompany,whereasthenatureofinformalrelationshipscreates

aneffectofliabilityofforeignness.

The term liability of foreignness was first coined by Zaheer (1995) to explain the

additionalcoststhatfirmsoperatinginternationallyexperienceinrelationtolocalfirms.

KhannaandPaleppu(2010)haveusedtheconcepttoexplainnumerousimplicationsfor

business strategy relating to emergingmarkets such as local product adaptation and

marketing strategies. Moreover Johanson & Vahlne (2009) argue that a firm’s

internationalsuccessrequiresthatitbeestablishedinoneormorenetworks,inwhich

the firm becomes an insider. If the firm does not possess such a position in the local

network,itisconsideredanoutsiderandsuffersfromtheliabilityofoutsidership(ibid.).

Ifthefirmattemptstoenteranewmarketwithouthavingestablishedrelationshipsand

networks, it will suffer from both liability of foreignness, i.e. the socio-cultural

understandingoflocalmarketenvironment(Marquis&Raynard,2015),andliabilityof

outsidership, which makes it impossible to develop a business (Johanson & Vahlne,

2009).Hence, as the business environment is viewed as awebof relationships,more

thanthepsychicdistance,outsidershipisarootofuncertainty(ibid.).

42

3.2.2InstitutionalTheory

Kostova&Marano(2019)distinguishbetweentwostrandsof institutional theory: the

institutional economics and the organisational institutionalism (Kostova & Marano,

2019).Firstly, the institutionaleconomicsstrandof institutionalperspective,as in the

workofNorth(1990),emphasizestheinstitutionalqualityinanindustryorcountryand

thesalienceandroleoftheinstitutions(asappliedine.g.Khanna&Palepu,1997,2010;

Meyer & Peng, 2005, 2016; Xu & Meyer, 2013). Secondly, the organisational

institutionaliststrand,whichwasfirstdevelopedbyDiMaggio&Powell(1983)andlater

elaboratedbyScott (1995), focusesonhoworganisationalarrangements impactother

organisations (as applied ine.g.Ahlstrom&Bruton,2003;2006;2010).Together, the

institutionaleconomicstrandcombinedwiththeorganizationalinstitutionalismstrand

servecrucialcornerstonesintheunderstandingofinstitutionsassocialstructuresand

theirimpactonthefirm.

In institutional economics, institutions are perceived as "those humanly devised

constraintsthathelpreduceuncertaintyamongtransactingeconomicactors"(Kostova&

Marano,2019:101).Hence,firms'actionsareexplainedthroughthelogicsofeconomic

efficiencyandrationalitywithintheconstraintsoftheinstitutionalenvironment.North's

framework (1990) embodies a conception of the different dimensions of institutions,

definingthemasthe"rulesofthegame".Theformaldimensionincludeslawsandformal

rules,whileculturalnormsand tacit codesofbehaviourareembodied in the informal

dimension (Ahlstrom&Bruton,2006;Grillietal., 2019).Hofstede (2007)additionally

emphasizes the importance of culture as the foundational layer of institutional

arrangements.Institutionaleconomicsfurthersuggeststhat,insituationswhereformal

institutional constraints fail, the informal constraints will come into play to reduce

uncertaintyandprovideconsistencytoorganisations(North,1990;Peng,2002).

Organisational institutionalism is concerned with how and what social constructs

influence the arrangements of organisations (Kostova & Marano, 2019). These

institutional forces that make organisations look quite similar are identified as

institutional isomorphic change (Alsharif, 2015).DiMaggio&Powell (1983) identified

three mechanisms for this isomorphism: the coercive isomorphism that stems from

43

political influence and the problem of legitimacy, the mimetic isomorphism which

resultsfromstandardresponsestouncertainty,andthenormativeisomorphismthatis

associatedwithprofessionalization.Inaddition,Scott(1995)buildsonNorth’sconcepts

of formal and informal institutions and incorporates the categorisationofDiMaggio&

Powell’s three mechanisms (Ahlstrom & Bruton, 2006). Scott (1995) categorises the

institutional mechanisms as regulatory, normative and cognitive. The regulatory

institutions are themost formal and represent the rules, laws, regulations, and other

sanctions. The normative forces include the norms and values in a society, often

manifested through accepted authority systems such as accounting. These can be

codified, and other times they are the tacitly understood practices of a profession or

workfunction.Finally,thecognitiveforcesarethemostinformalandreflectthecultural

dimensionofa society.Theyguide thebehaviour through taken-for-grantedrulesand

beliefs, which are established among individuals through social interactions. The

cognitiveandlessformalnormativeinstitutionsinfluenceasocietythroughtheculture

ofacommunity(Ahlstrom&Bruton,2006;Scott,1995).

3.2.3Theinstitutionalsettinginemergingmarkets

Theinstitution-basedviewonstrategyhasproducedarichexplanationofthecontextual

environmentofemergingmarkets.ScholarssuchasMeyer&Peng(2005;2016),Xu&

Meyer (2013) and Khanna and Palepu (1997, 2010) emphasize certain constraints

relatingtotheinstitutionalsettingofemergingmarketcontext.Atdifferentlevelsofthe

spectre:theinstitutionalarrangementscanbe"strong"iftheysupporteffectivemarket

mechanisms,andtheycanbe"weak"iftheyfailtoensureaneffectivemarket.Khanna

andPalepu (1997) coin the term ‘institutional voids’ referring to the imperfections in

the institutional frameworkwhich commonly colour emergingmarkets, such as if the

national environment lacks formal institutions that support effective functioning

markets, such aspreventionof corruption, protectionofproperty rights, ensuring the

ruleof law,andprovisionofpublic investmentsand infrastructure (Khanna&Palepu,

2010;Kostova&Marano,2019).Hence,thesescholarsemphasizetheroleandlevelof

qualityof the formal institutions,particularly thegovernment-relatedentities, andthe

44

importance of the informal institutions such as social norms and cultures as the

counterbalance.

In addition, Meyer & Tran (2004) builds on this notion, highlighting that emerging

markets are highly volatile because of frequent changes in institutions, industrial

structures and the macro-economy. Despite this, the economic context of emerging

markets tends to be coloured by a rapid GDP growth, an increasing consumer

purchasingpower,agrowingmiddleclass,ahighproportionofmanufacturing,labour-

intensiveindustries,andlarge-scaleheavyindustrialsectors(Sit&Liu,2000).Therapid

and widespread adoption of market-based policies is common amongst emerging

economy governments and, additionally, raises important issues for the strategies

adoptedbyprivateenterprisesinemergingmarkets(Hoskissonetal.,2000).

When comparing institutional frameworks between nations, there are often certain

institutionsthatareperceivedaseachothers’equivalent.Nevertheless,theinstitutions

common to an industry in one country will not be similar to the corresponding

institutionscommontoanindustryinanothercountry.Thisisbecauseorganisationsin

generalareembeddednotonlyintheinstitutionalarrangementsintheirindustry,butin

thecountry-specificinstitutionalsettingaswell,includingthehistoricdevelopmentofa

nation’s rules and laws, business norms, and commercial traditions (North, 1990;

Busenitz etal., 2000; Kostova, 1997). Xu& Shenkar (2002) have used the concept of

institutional distance, to explain this phenomenon. For foreign firms operating in

emerging markets, the institutional theory concepts such as institutional quality,

institutional voids, and institutional distance are particularly relevant (Kostova &

Marano,2019).Thisisespeciallyinsightfulconcerningemergingmarkets,asitallowsus

tounderstandthedistinctivenessof themarketandtheuniquenessofmanagerialand

strategicchallenges for the firms(Kostova&Marano,2019).Asemergingmarketsare

bydefinitionundergoingsocietalandeconomicaldevelopment, theyprovidea rapidly

changing environment for organizations to evolvewithin (Hoskisson et al., 2000). As

such it becomes pertinent to understand the influence of institutions on the firm's

strategy, which as it faces strong environmental pressures for change (Peng, 2003).

Specifically, scholars have highlighted issues relating to increased transaction costs,

45

market vulnerabilities and macroeconomic- and political instabilities as well as

underdeveloped and missing infrastructures (Mair & Marti, 2009), and rampant

opportunisticbehaviour,bribery,andcorruption(Hoskissonetal.,2000).Onapractical

level,theinstitutionalperspectivethusoffersanapproachtostrategicdecision-making,

which will help organizations navigate the complex challenges specific to emerging

marketcontexts.

Summaryofchapter3.2

In chapter 3.2 we have introduced the institutional approach to business strategy in

emergingmarkets.Hoskissonetal. (2000),Peng(2001),andKhanna&Palepu(2010)

amongst others have highlighted the applicability of the institutional theory within

businessstrategy inemergingmarkets.Exploringtherootsof institutional theory, this

chapterpresentsNorth’s(1990)workoninstitutionaleconomicsandtheorganisational

institutionalism, as developed by DiMaggio & Powell (1983) and later elaborated by

Scott (1995), defining the rules of the game. Investigating the institutional setting in

emerging markets, we find that a common characteristic of emerging markets is

inadequateorlackingformalinstitutions,describedasaweakinstitutionalenvironment

and institutional voids, informal institutions tend to take crucial functions otherwise

providedbyformalinstitutions.Assuch,informalinstitutions,suchasnetworksandthe

cultures theyare embedded in, are critical components for firms tonavigate the local

context.

46

3.3TheoreticalFramework:institutionaltheoryandventurecapitalin

emergingmarkets

Relating the previous chapters of the literature review, we combine the financial

literatureonventurecapitalandtheliteratureoninstitutionalperspectiveonbusiness

strategyinemergingmarketsintoauniquetheoreticalframework.

Figure5:IllustrationofthetheoreticalframeworkasacombinationofthefinancialliteratureonVCand

theliteratureoninstitutionaltheoryinemergingmarkets.

Thispaper is aimedat assessing characteristics of the institutional settingwhichmay

proposebarriers toVC firms face inKenya andwhat coping strategies firms adopt to

circumventthesebarriers.Assuchthetheoreticalframework,whichwillbeappliedto

answerthefirstpartofourresearchquestion,drawsheavilyonthecontributionsfrom

Peng, (2002; 2008) and Hoskisson et al. (2000) under the institutional approach,

considering the firm’s strategyasanoutcomeof thedynamic interactionbetween the

firm and the external environment. This encompasses the emerging market

characteristics, the market failures, and the institutional surroundings (Marquis &

Raynard,2015).AsPeng(2008)suggestsunder the institutionalapproachtostrategy,

wewillassumetheinstitutionalenvironmentasanindependentvariable.Hoskissonet

al. (2000) further emphasize the institutional environment as a key influencer in

opportunisticbehaviour,agency,andultimatelytransactioncost,suggestingthatthisis

particularly the case for emergingmarketswhere formal institutionsmaybeweakor

47

absent.Weaimtotakedepartureinthisnotioninourstudy,usingNorth’s(1990)and

Scott’s (1995) categorizations of institutions to create an understanding of how the

institutional setting in Kenya is affecting the VC firm’s business strategy. The lack of

formal institutions in emergingmarkets is considered to have significant implications

for firms (Peng, 2008; Hoskisson et al., 2000; Khanna & Palepu 2010; Ahlstrom and

Bruton,2006).Morespecifically,governmentinterventionandregulatoryuncertainties

(Marquis & Raaynard, 2015), liability of foreignness, socio-cultural differences, and

liability of outsidership (Khanna & Palepu, 2010; Johanson & Vahlne, 2009), and

underdeveloped supportive industries, technological challenges, and weak

infrastructure(Arregle&Borza,2000;Khanna&Palepu,2010)havebeenemphasized

asparticularchallengesrelatingtotheinstitutionalbarriersthatfirmsfaceinemerging

markets.WeparticularlyconsiderVCfirmsasimportantprovidersoffinanceforyoung

innovativefirms,assuggestedbyHall&Lerner(2010),amongothers,wherethemain

strategicconsiderationsliewithinfunding,screening,monitoring,andfinallyexitingthe

venturestheyinvestin(Rajan,2010).

Institutional theory has been applied in emerging market contexts to explain the VC

firms’ strategic decisions and ways to operate (e.g. Ahlstrom & Bruton, 2006;

Lingelbach, 2015; Li & Zahra, 2012). However, the effect of changing institutional

environmentsofemergingmarketsontheVCdevelopmentprocesshasonlyjustbegun

tobeaddressed(Ekanemetal.,2019).AsproposedintheVCinvestmentdecisionmodel

(Fried&Hisrich,1994),therewouldoftenbecertaininstitutionsthatarecommontothe

industry that will lead to uniformity among the VC firms’ behaviour. However, firms

shouldacknowledgethattheseinstitutionsdonotshapetheindustriesinsimilarways

once compared across countries (Busenitz etal., 2000; Kostova, 1997; Xu& Shenkar,

2002). If the institutional differences in emerging markets make VC firms’ decision

processdifferent,thetraditionalVCmechanismsmayhavetobemodified(Ahlstrom&

Bruton,2003;2006).AccordingtoAhlstrom&Bruton(2006),thepastunderstandingof

the VC industry has primarily built on agency theory and stewardship theory, and

highlight that these approaches seem only to have been fit for developed country

contexts. The geographical-, cultural- and institutional distancebetween theVC firm’s

home country and the host country has been considered to negatively affect cross-

48

borderinvestments(Li&Zahra,2012).Inaddition,theconceptofinstitutionaltrustis

important as it reflects the need for foreign firms to build up relational trust. This is

mostlyreflectedinthebusinesses’orpopulation’strustintheinstitutions,andifthisis

low there is a need for more proximity and engagement with local partners (ibid.).

Hence,highlevelsofinstitutionaltrusthaveapositiveimpactoncross-borderVCflows

fromdevelopedtoemergingeconomies(Hainetal.,2016).

Li&Zahra(2012)showapositivecorrelationbetweenVCinvestmentsacrosscountries

and thedevelopmentof formal institutions.Hence, theyargue that stimulating theVC

activitybydevelopingtheregulatoryframeworksofformalinstitutionsisbeneficialasa

meansforpromotingentrepreneurship.However,theirresultssuggestthatbothformal

and informal institutions are important determinants of the cross-border VC activity.

Theeffectsofformalinstitutionsdependoninformalbutpowerfulculturalconstraints,

asuncertaintyavoidanceandcollectivismreduceVCfirms’sensitivitytotheincentives

providedbyformal institutions(Li&Zahra,2012).Thesefindingssupporttheviewof

North (1990) and Xu & Shenkar (2002). Also Ahlstrom & Bruton (2003) have called

attention to informal institutions such as culture and norms that can substitute for

potentialVCunfriendlyformalinstitutions.Localbiasisconsideredinherentinfinancial

intermediaryactivity,asthereisastrongneedforspatialproximityandheavyreliance

on local expertise tomitigateagencyproblems, especially as investment in innovative

activities involves considerable uncertainty and is characterized by asymmetric

informationattheoutsetandagencyproblemsduringtheinvestmentprocess(Hainet

al.,2016).

For international VC firms to consider investments in developing countries and

emerging markets, the institutional conditions as well as the characteristics of the

marketingeneralarevitalconsiderations.DuetothechronicallypoorITinfrastructure,

particularly related to many Sub-Sahara African (SSA) countries, investments in

technology-related applications and ventures, where most investments go, calls for

attentionwith regards to theapplicabilityof these innovations in society, e.g. through

integrating local perspective and bottom of the pyramid (BoP) approach (Hain &

Jurowetzki, 2018). Nevertheless, new establishments in internet and mobile

49

infrastructures are improving tech-competence and potential for domestically

developedtechnology-intensivesolutions(Hain&Jurowetzki,2018).

Generally,East-Africahasshownahighcostofoperatingafundintheregion,muchdue

tothelengthoftimeittakestofind,evaluate,andmakeinvestments(Gugu&Mworia,

2016). Additionally, lack of experience and knowledge around rapid scale-up, which

tend tocharacterizeventuresunder the loopofVCs,are forcing fundmanagers in the

region to take on roles that are not typical of conventional fund management.

Furthermore,challengesrelatedtoscreeningandexithavealsobeenhighlightedasan

inherentpartof thecurrentVCecosystem.Thestruggleof screening,ordeal-sourcing

has been attributed to underdeveloped deal intermediaries such as incubator- and

accelerator programs,whilst the lack of exit opportunities relates to the poor private

liquidityoptionsandunderdevelopedfinancialmarkets,makingIPOsarareoccurrence

(Gugu&Mworia,2016).InanextensivereportbyTheWorldBankonPEinKenyafrom

2018,the lackof informationavailableto investorswasfurtherhighlightedasamajor

factor, hindering investments in SMEs. The lack of knowledge on formal reporting

mechanisms, corporate governance and financial capacity to navigate the information

required by VC firms, make due diligence processes lengthy and costly. As such,

navigatingthelocalcontextiscrucialformakinggoodVCinvestments(Divakaranetal.,

2018).

3.3.1Propositions

By combining the institutional approach to business strategies in emerging markets

with financial literaturewehavedeveloped threepropositionswhichwillbeanalysed

through our findings. The propositions concern institutional barriers which the

literatureingeneralperceivesaschallengingforfirmsinemergingmarkets.Hence,the

institutional barriers hinder the VC firms from pursuing investments in emerging

markets.Through thesepropositions,weseek toanswer the firstpartof the research

question: “What are the institutional barriers to venture capital in emergingmarkets”.

Thesectionbelowprovidesanoutlinetothesepropositionsandthelogicbehindthem.

50

1. Regulatoryuncertaintiesareinstitutionalbarrierstoventurecapitalinemerging

markets.

Emergingmarketcountrieshavebeenconsideredto includelessdevelopedregulatory

infrastructures, which has been categorised as regulatory uncertainties, including

inadequate or missing market regulation, corporate governance, transparency,

accounting standards, and intellectual property protection (Khanna & Palepu, 2010).

Corruptionandopportunisticbehaviourhasparticularlybeenconsideredaschallenges

for the firms, causing high monitoring costs and making legal contracts difficult to

enforce (Peng, 2001; Khanna & Palepu, 2010; Marquis & Qian, 2014). Especially the

effectiveness of regulations and the legal system regarding investor protection,

reportingandaccountingstandardshavebeenhighlightedasimportantforVCactivity

(Grilli et al., 2019). Imprecise descriptions of regulation of reporting standards, and

inadequate enforcementof such, create challenges forVC firmsupon the collectionof

valid financial informationonthe investeecompanies.GuguandMworia(2016)argue

that corporate governance and reporting have particularly challenged the VC firms

operating in such a context. Ahlstrom and Bruton (2006) further highlight that such

institutionalsettingsaretypicalforemergingmarketsandresultinunattractivemarkets

forVC investors,who typicallyareheavily relianton theruleof law.Furthermore the

politicalenvironmentisconsideredasparticularlychallengingtonavigate,asemerging

marketgovernmentshavebeennotedasmoresusceptible toexternalconflicts,coups,

internaltensionsandpoliticalinstability(Hiatt&Sine,2014;Hain&Jurowetzki,2018).

Lingelbach (2015) additionally emphasizes the impact of rapidly changing formal

institutions, such as laws and regulations, related to the government's effort tomake

substantialreformsontheVCdevelopmentprocess.

2. Liabilityofoutsidershipand liabilityof foreignnessare institutionalbarriers to

venturecapitalinemergingmarkets.

Thelackofinstitutionalmarketknowledge,suchasknowledgeaboutthelanguage,laws

and ruleshasbeenhighlighted as a liabilityof foreignness(Johanson&Vahlne, 2009).

51

Thetermreferstotheadditionalcoststhatfirmsoperatinginternationallyexperiencein

relationtolocalfirms(Zaheer,1995).KhannaandPaleppu(2010)haveusedliabilityof

foreignnesstoexplainnumerousimplicationsforbusinessstrategyrelatingtoemerging

markets such as local product adaptation and marketing strategies. In addition,

Johanson&Vahlne(2009)arguethatifthefirmisnotestablishedinanetworkofother

businessesandinstitutionsintheindustry,thefirmisconsideredanoutsiderandsuffers

fromtheliabilityofoutsidership.Thiscanberelatedtothetermoflocalbias,whichisof

particularconcernintermsofagencyproblemsandinformationasymmetryinemerging

markets (Hain et al., 2016). In relation to that, as emerging markets are often

characterisedbylowerinstitutionaltrust,thereisaneedforVCfirmstogetestablished

andgetgeographicalproximitytotheinvesteefirms(ibid.).AhlstromandBruton(2006)

further suggest that networks and the knowledge possessed in networks on the local

markets are necessary in bringing value to the ventures, in which the VC firm holds

investments. They argue that such relations are cultural-cognitive dependent,

highlightingtheneedforVCfirmstopossesslocalculturalunderstanding.Inparticular,

the cultural distance between emerging markets and developed economies creates

differences on the business ethics inherent to the local setting (Ahlstrom & Bruton,

2006). Furthermore, as the socio-cultural environments in emerging economies are

especially characterized by a younger population, an expandingworkforce, and rapid

urbanizationtheytendtodifferlargelyfromadvancedeconomies,(Marquis&Raynard,

2015).

3. Underdeveloped supportive industries are institutional barriers to venture

capitalinemergingmarkets.

Underdeveloped supportive industries seen as market failures in emerging markets

havebeen resulting inweakprovisionof assisting technological infrastructure for the

VCindustry.Keyfinancialintermediariessuchasaccountingfirms,creditratingsystems

and financial analysts are typically either absent or onlymarginally present, creating

information asymmetries within themarkets (Peng & Heath, 1996; Lerner, 2010). In

relation to these institutions, Mason and Owen (2017) recognize that in developed

52

marketssuccessfulnurturingofVCmarketsrequiresaholisticapproach,whichincludes

the entrepreneurial finance escalator, including pipeline development of new

businesses. Supportive market institutions, as such, are often underdeveloped in

emerging markets (Khanna & Palepu, 2010). In this notion, assisting intermediary

institutions include the accelerators and incubators, but also complementary financial

providers such as BAs, which serve to provide the VC market with a pipeline of

investableventures(Ekanemetal.,2019).Withregardstothefinancialmarkets,Griliet

al. (2019) further emphasize the correlation betweenhigher intensity and returns on

exitsonVCfundingwithahighstockmarketcapitalization/GDPratio,highlightingthe

importanceofadevelopedstockmarketforVCdevelopment.ApartfromanactiveIPO

marketforthedevelopmentofVCactivity,anactivemarketforMergers&Acquisitions

(M&As)hasbeenstressedasanexpecteddeterminant thatmaystimulateVCmarkets

and optimise portfolio company exit value and recycling of returns into new

investments (ibid.). Such supportive industries are oftenunderdeveloped in emerging

markets,affectingpotentialexitopportunitiesforVCfirms(Ahlstrom&Bruton,2006).

Other market failures have been further noted by Khanna and Palepu (2010) as the

resultofalackofhardinfrastructure,i.e.roadsandports,andsoftinfrastructure,i.e.the

market institutions. Institutional voids, as the lack of developed infrastructures and

formal market institutions that enable efficient business operations and effective

functioningmarkets,formingbarriersforfirmsoperatinginemergingmarkets(Khanna

&Palepu,1997;2010).Additionally,emergingmarketstypicallyhavelessdevelopedor

inadequate technological and physical infrastructures as compared to developed

economies causing specific issues for VC firms. Inadequate information and

communications technology (ICT), commercial and transportation infrastructures,

power generation capabilities, distribution channels, and low levels of education has

specificallybeenhighlightedasconstraintstothefirm'sinvestmentambitionsinthese

contexts(Arregle&Borza,2000;Hain&Jurowetzki,2018;Marquis&Raynard,2015).

53

Summaryofchapter3.3

This chapter presents a literature review on financial theory of VC and institutional

theoryinemergingmarkets,andcreatedatheoreticalframework,inwhichwecombine

thesestrandsofliterature.Additionally,thetheoreticalframeworkiscomposedofthree

overarching propositions about emerging market characteristics and challenges that

havebeenhighlightedintheliterature.Inourtheoreticalframework,thisisreferredto

asinstitutionalbarrierstoVCinemergingmarkets.Thethreepropositions,showinthe

figurebelow,willbeusedtoassessthefindingsofthisresearch,relatetotheconceptsof

regulatory uncertainties, liability of outsidership and liability foreignness as well as

underdeveloped supportive industries. For the first part, the deductive part, of our

researchquestion,weaimat exploring thesepropositions in relation to the empirical

data to understand the impact of the institutional environment on VC and assess

whethertheliteratureofinstitutionaltheoryreallyisapplicableontheVCindustry.

Figure6:Illustrationofthedeductiveprocessfrompropositiongenerationtoempiricalfindings.

54

4Introductiontothecasestudy

ThefollowingsectionpresentsanoverviewoftheventurecapitalindustryinKenyaandthe

lastdecade'sdevelopment.Assuch,wepresenttheemergenceofventurecapitalinKenya,

followedbyanoutlineoftheactorsandrecentchangesintheventurecapitalecosystem.

Subsequentlywepresentthecaseentitiesthatconstituteourmultiple-casestudy.

4.1PrivateEquityandVentureCapitalinEast-AfricaandKenya

4.1.1Venturefundingfordigitallions

InthelastdecadeSub-SaharanAfricahasseenarapidupsurgeinVCinvestments(Gugu

&Mworia,2016).From2008to2010,nearly60percentofinvestmentinSub-Saharan

AfricawasdestinedforSouthAfrica.RegionalhubsinNigeriaandKenyaweretrailing

farbehindintermsofmarketshare.Intheaftermathofthe2008globalfinancialcrisis,

the region’s growth storyattractedan influxofprivateequity investors toAfrica.The

influx of foreign VC in emerging markets with limited indigenous VC firms drove an

upsurgeofgrowth-oriented,technologyfirmsintheseregions(Meulemanetal.,2017).

WithinthecontextofEastAfrica,Kenyabecamean increasingly importantdestination

forprivateequity investors.Newentrants intotheAfricanprivateequityscenelooked

beyond the increasingly crowdedSouthAfricanmarket, to exploreother countries on

the continent. Between 2013-2015,PE funds investedmore than $750million across

nearly 50 deals based in Kenya. Thus, gaining some 15.5% of total Sub-Saharan PE

investments, justbehindNigeriaat19.5%andSouthAfricaat28.2%(Divakaranetal,

2018).

55

Figure7:VCinvestmentsintoSSA2013-2015.AdoptedfromDivakaranetal.(2018)

BriterBridges (2020), an independentbody that collectsdataonAfrican investments,

shows in their latest report that private capital investments in Africa in 2019

accumulatesto$1.5billion.MorespecificallyonKenya,leadingAfricannewsmediaon

entrepreneurship, Weetracker (2020) shows in their report from 2020 that Kenyan

startups raised $428.91 million in 2019, placing Kenya as second to Nigeria in the

amountreceivedduringtheyearinAfrica,atanearly300%riseininvestmentvolume

from2018.Whilealmostnonexistent in theearlyyearsofprivatecapital, low-income

countries in Sub-Saharan Africa (SSA) nowadays account for a growing amount of

international venture capital (VC) investments (Hain & Jurowetzki, 2018). The

opportunities for African digital development has been popularized through epithets

suchas‘Lionsgodigital’,suggestingthatthehugegenerationofyoung,technology-savvy

Africans could grow Africa’s economy (McKinsey Global Institute, 2013., FT, 2018).

Additionally countries such as Kenya and Nigeria have been proclaimed as the ‘new

emergingmarkets’,particularly through the recent improvements in IT-infrastructure,

IT-competence and thedevelopment of innovative tech-solutions, (Hain& Jurowetzki,

2018). The gross escalation is largely attributed to big-ticket deals ofmore than $40

million, where companies in Fintech, E-commerce, and Agritech top the charters

(WeeTracker,2020).Overall,theincreasedinvestmentsinAfricahasbeenastheresult

ofanincreasinglypositiveoutlookforAfricanbusinessenvironment(Roxburgh,2010).

56

4.1.2FirsttherewasM-Pesa

Over the last decade, Kenya has been rising as the top pillar for start-up growth in

Eastern Africa. Platforms such as M-PESA, the mobile phone-based money transfer

platformfrom2007,havebeendescribedasstimulatingabutterflyeffect,actingasthe

“thetriggeranddriverofanewecosystemofmobiletechnologicalinnovations” (Manske,

2015:14).ThroughothersuccessstoriesofventuressuchM-KopaandTwigaFoods,the

countryhasbuiltaglobalreputationasarichstart-uphub,whichhascometobeknown

as the Silicon Savannah (Financial Times, 2019). As one of our interviewees puts it:

“We'veseenahugegrowthinsoftwareandtechbusinessesandthenhere inEastAfrica,

Kenyahasbeenthehubandisprimarilybeendrivenbystronginfrastructureandmobile

money,right?SomobilemoneytoKenyasoyoucansee it in the trendsright.FinTech is

something that's done really, really well in Africa. And that's because more and more

peoplehaveaccesstomobilemoney”(interviewee2fromVC3,2020).

Since 2010, several hubs for information sharing between innovative tech-

entrepreneurs have been founded in Nairobi, Kenya, which later developed into

numerous accelerators and incubator programs and gave rise to the technological

ecosystemclaimedtobethecentreofAfricantechnologicalinnovations(Manske,2015).

Followingthesedevelopments,someof the largest tech-MultinationalssuchasGoogle,

Microsoft, Nokia and IBM have opened branches and research centres in the capital

(ibid).The illustrationbelowhasbeenadoptedfromaVodafonereportmadein2015,

and although changes have occured since, it firmly illustrates the strong existence of

accelerators and tech-hubs in the entrepreneurial ecosystem inNairobi. And asmany

foreign VC firms set up regional offices in Nairobi, one interviewee expresses his

impressionof thedevelopmentof theVC landscape: “Theecosystemisquiterichandis

quiteinterconnected,soyoucanmeetpeopleeasily”(intervieweefromVC2,2020).

57

Figure8:TheriseofatechnologicalecosysteminNairobi.AdoptedfromManske(2015:13).

Although 42 percent of the Kenyan population is officially unemployed, informal

enterpriseswithinnovativesolutionsformanagingeverydayproblemsaregerminating

everywhere (Manske, 2015). The combination of this constructive attitude, known as

JuaKali(“underthehotsun”),combinedwiththecompetencesoftheincreasingnumber

of local and foreign developers and technology experts that come out of Kenyan

universities,createsapotentialforcreativebusinessideas,asmobiletechnologiesopen

upnewwaysofsolvingnumerouschallenges(Manske,2015).Hence,thereputationof

Kenya as a global ICT-hub, holding a strong entrepreneurial class and good supply of

humancapitalwithinthespherehashelpedcontributetothehypeoftheKenyantech-

scene (Ndemo & Weiss, 2017). As one of the interviewees stated: “Foreign VCs are

getting more and more turned on to the space [...] Africa is sexy for venture capital,

because it's got the youngest population of any continent, the middle class is growing

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fasterthaninanyothercontinent,governmentsandinfrastructureischangingfrequently.

It'sarguable that theAfricaneconomy isgrowing,atanexponentialrate.Sogood funds

willbeturnedontothis[...]especiallybecausealotofhighnetworthindividualsalsowant

tostartmakingapositiveimpact”(interviewee2fromVC3,2020).

4.1.3InstitutionalStability

Kenya has shown stability over the past couple of years. Recently, a much-hyped

handshakebetweenthePresidentUhuruKenyattaandtheleaderoftheoppositionRaila

Odinga in March 2018 has given an additional boost to the hope about the political

stability of the country (Wilson, 2019). The growing economic development in the

countryreachesaGDPpercapitaofUSD2,127.42in2019,respondingtoaGDPgrowth

of6.62%(KNBS,2020).Accordingly,thishasincreasedtheinterestforforeigninvestors

to enter the country (Chambers, 2019). Kenya’s newly formed policies around

protectionofminorityinvestors,onlinetax-systemandstrengthenedaccesstocreditby

introducing online registration, modification and cancellation of security interests

rankedKenya56thontheWorldBank'sEaseofdoingbusinessrankingsin2020(The

WorldBank,2020).Beyondoffering relative regulatory stability,Kenyahas longbeen

known for its private sector-led economy, which has gained strong political support,

bothinanabsolutesense,butparticularlyrelativetotheothereconomiesofEastAfrica

(Tyce,2020).Additionally,TheWorldBank(n.d.)reportsstrongefficiencygainsdueto

theonlinesystemsfortaxfilingandpayments.Further,Kenyascoreshighinprotecting

minorityinvestorsinthe‘extentofdirectorliabilityindex’byrequiringshareholdersto

approvetheelectionanddismissalofanexternalauditor(WorldBank,2020).

TopromoteinvestmentinKenya,theGovernmentmadesubstantialchangestoKenya’s

licensingregimein2006,andreducedthenumberof licencesrequiredtodobusiness,

whilemaking licensing regimes simpler andmore transparent. Furthermore, in 2008,

theGovernmentreducedthenumberoflicencesrequiredtosetupabusinessfrom300

to 11 (Africa Legal Network, 2015). Following Kenya’s Constitution Article 40(5), the

state isrequiredtosupport,promoteandprotect intellectualpropertyrights,whereas

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enactedlegislationsthatprotecttheintellectualpropertyrightsincludetheTrademarks

Act (Chapter 506), the Copyright Act (Chapter 130), and the Industrial Property Act

(2001),whichrelates topatents, industrialdesignsandutilitymodels. Internationally,

Kenya is amemberof theAfricanRegional IntellectualPropertyOrganisationand the

WorldIntellectualPropertyOrganisation(ibid.).Additionally,theCompetitionAuthority

ofKenya (CAK) ismandated to promote andprotect effective competition inmarkets

andtopreventmisleadingmarketconduct throughoutKenya(Chambers,2019).Thus,

showingthattheKenyangovernmentbodiesarefocusingtheireffortsbyputtingseveral

actsinplacetoprotectforeigninvestors.

Other institutions that govern and support the investment scene include the Kenya

InvestmentAuthority(KenInvest),whichisacorporatebodyestablishedbythestateto

implementthelegislationsfromtheInvestmentPromotionAct,2004.Assuch,itdecides

whetheraforeigninvestorcanbecomecertifiedforinvestmentsinKenya,andin2015,

this encompassed an investment size of at least $100,000 and an evaluation of “the

extent towhich the investmentwill contribute to theKenyaneconomyby increasing the

number and quality of jobs in Kenya, training Kenyans in new skills or technology,

encouraging economic development, allowing the transfer of technology, adding to tax

revenueoraffecting foreignexchange”(Africa LegalNetwork, 2015: 9). In that regard,

oneoftheintervieweesfurthernotesthatrecentchangesmadebytheCAKencompass

anexemptiontotheVCtransactionsfromcompetitionpilots,sotheydon'thavetoget

regulatoryapprovaltodoinvestmentsthatarelessthan$100,000,andhenceareableto

deploy without spending more money for regulatory filings (interviewee from the

industryorganisation,2020).

Kenya’s vibrant investment environment is centred around the Nairobi Securities

Exchange(NSE).AsofMay2020,theNSEhad67companieslistedinthestockmarket,

showing littlegrowth in termsof companies listingon the stockmarket through IPOs

(NSE,n.d.a).HoweverinJanuary2013,theNSElauncheditsGrowthEnterpriseMarket

Segment(GEMS),anewmarketwhichSMEstoraiseon-goingcapital.TheNSEincluded

incentivesforSMEstolistsuchasreducedrequirementsforlisting,reducedlistingfees,

andreducedcorporatetaxesforlistedcompanies(NSE,n.d.b)Asof2018,therearefive

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companieslistedontheGEMS,whichareAtlas,HomeAfrika,NairobiBusinessVentures,

FlameTree,andKurwitu,showingarelativepositivegrowthintermsoflistings(Mbogo,

2018).

Inrelationtothegovernment’seffortstoattractmoreforeigninvestorstothecountry,a

varietyoflegalandinstitutionalchangeshavebeenmade.Overthepastyears,someof

themostnotableregulatorychangestotheVCindustryincludearegulationfrom2015

thatallows localpension fundsto invest inprivateequityandventurecapital,assuch

the first investment from pension plans in private equity took place in 2018 in an

infrastructureproject(Jacobius,2018).Assuchitcanbeseenthatthegovernmenthas

focused its attention in the lastdecadeonpromoting the regulatoryenvironmentand

easeofdoingbusiness,particularlyforprivatecapitalinvestors.

4.1.4ActorsintheKenyanVentureCapitalLandscape

The funds that constitute the private capital industries can be divided into distinct

groups.First, thereareprivateequity funds.Privateequity funds invest inbusinesses

rangingfromSMEsandfamily-ownedbusinessesto largepan-regionalbusinessesthat

operateinKenya,inEastAfrica,oracrossthecontinent.Suchinvestmentsmayinclude

globallygovernedfundswithdedicatedregionalteamsforAfricaandKenya(Divakaran

etal.,2018).Otherfundsareregionallyinvested,focusingonfirmswithinEastAfrica.At

present, therearenoPE funds thatoperatesolely inKenya.Second,beyondthesetof

traditionalprivateequityfunds,DevelopmentFinanceInstitutions(DFIs)aresomewhat

also competing for the samedealflowas thePE funds.Anumberof these institutions

include largeplayerssuchas theCommonwealthDevelopmentCorporation(CDC), the

International Finance Corporation (IFC), the Danish Investment Fund for Developing

Countries (IFU), the AfricanDevelopment Bank (AFDB), the AsianDevelopment Bank

(ADB),theEuropeanInvestmentBank(EIB),theIslamicDevelopmentBank(ISDB).The

strongparticipationbyDFIsinthemarketisnotsurprising;DFIshaveoftenbeenamong

theearliest investors inprivateequity inemergingmarketsworldwideandhavebeen

crucial to providing a demonstration effect for the industry. They also provide

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governance,environmentalandsocialbestpracticesandserveasatraininggroundfor

the human capital that is required to start and manage successful investment firms

(Divakaranetal.,2018).

As foreignVC firmsare increasingly finding the industry attractive, thenumberofVC

firmsthatinvestinKenyaisgrowing.Ourprimaryandsecondaryresearchshowsthat

therearemorethan40VCfirmsinvestinginKenya.SomeofthemostactiveVCfirmsin

Kenya include: Acumen, DOB Equity, AE Ventures, AHL Ventures, Novastar Ventures,

andTBLMirrorFund.ThefewdomesticVCfirmsthatexistare:GreyElephantVentures

andSavannahFund.

Moreover, someof themostprolific acceleratorand incubatorprograms include iHub

co-working space, NaiLab accelerator, GrowthAfrica accelerator, Safaricom Spark

Venture accelerator, Pangea accelerator, Antler global accelerator among others. In

addition,AfriLabisapan-Africanorganisationthathelpstheacceleratorprogramsand

innovation hubs through knowledge sharing and capacity building (Afrilab, n.d.).

Furthermore, aiming tobuildupAfrica’s startup community,VC4Awasestablished in

2007 to create a platform for gathering the knowledge, capital and network that

startupsneedtosucceed(VC4A,n.d.).Ontheirplatform,entrepreneurscangainaccess

totheVC4AStartupAcademy,mentorshipopportunitiesandtheabilitytoraisecapital.

Furthermore,theBaobabNetworkishighlightedbymanyintervieweesasapromising

newplatformforgainingknowledgeaboutwhatisgoingonintheVClandscape,asthe

platformpublishesinformationonventures,sectorsandmarketstoitsmembers,while

alsobeingandacceleratorwhichprovidescapitaltothestartupsinitscohorts(Baobab

Network, n.d.). About the increasing amount of accelerator programs, interviewee 2

fromVC3emphasizesthattheenvironmentisgrowingveryrapidly.Infact,thegrowth

mightevencontemplatetheproximityandrelatednessofthedifferentactorsintheVC

landscape:“therearesomanyaccelerationsthatIjusthearabout,andIdon'tknowabout

them.Intheory,theyshouldknowaboutus,andweshouldknowaboutthem.”

In addition, there is a growing number of BAs in Kenya. The African Business Angel

Network(ABAN)isapan-Africannon-profitorganisationthatsupportsthedeployment

ofearlystagecapitalinstartupsacrossAfrica.Sincethelaunchin2015,thenumberof

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BAnetworkshasgrowntoover80acrossAfrica.BAnetworksseatedinKenyainclude

Viktoria Business Angel Network, Intellecap Impact Investment Network (I3N), and

1000Alternatives(ABAN,n.d.).

Summaryofchapter4.1:

In this chapter4.1,wehave shown thatVC inflowshave increased inEastAfrica, and

thattheVCindustryinKenyahasseensomerapidchangesoverthepasttwodecades.

Assuch, thesuccessstoriesof technologystartupshavespurred thedevelopmentand

gained international attention.Wehave showcased themaingoverning institutions to

the Kenyan VC industry and highlighted the institutional stability that is increasingly

beingassociatedwithit.AssuchthenumberofsupportingactorswithintheVCindustry

has been flourishing in the last decade, including VC firms, accelerator programs and

BAs.

4.2Presentationofcasecompanies

To get a representative understanding of the institutional barriers in the Kenyan

venturecapital industryandtogetanawarenessofhowstrategiescanbeusedbythe

VC firms to overcome these challenges, different companies and organisations in the

KenyanVClandscapehavebeenselectedascaseentitiesforourmultiple-casestudy.As

argued in the methodology section, we aim to get a representative sample of the

population of VC firms through a selection strategy ofmaximumdeviation. A total of

eightcaseshavebeenincludedofwhichfivecasesareVCfirms.Oftheremainingthree

cases,onecaseisanaccelerator,onecaseisaVCindustryassociation,andonecaseisan

entrepreneurwithastartupinKenya.Followingtheargumentationinthemethodology

section,thehighnumberofcasesimplicatesathoroughanddescriptivepresentationof

eachcase.Inthissectionweaimtogiveanoverviewofeachcase,theirrelationtothe

Kenyan VC industry, and an argumentation for including each particular case. See

AppendixAforasummaryofthecaseentities.

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4.2.2VentureCapitalfirms

EnzaCapital,VC1

Enza Capital is a Kenyan-based private investor in early-stage African technology

companies. As a VC fund, Enza Capital is backed by private capital which specifically

targetstech-enabledbusinessesthatare“tryingtosolvelargeandmeaningfulproblems

onthecontinent”(intervieweefromVC1,2020),astheylook“forsolutionsthatcanlead

to positive social or environmental outcomes for Africa and our growing populations”

(EnzaCapital,n.d.).ThelimitedpartnersofEnzaCapitalareallforeigntoKenya,based

inEuropeandtheUS.Whilethecapitalthatisinvestedisforeign,theteamofinvestors

arealllocalKenyansandconsistsofachairman,aCEO,andananalyst.Weinterviewed

AnthonyKimani, the investment analyst,whomainly handles deal pipeline, screening

andanalysis,dealstructuring,andintheeventofinvestment,portfoliomanagementand

reporting.AlthoughAnthonyhasagreed tobequoted,wewill so forthrefer tohimas

“intervieweefromVC1”.

SetupinMay2019, it isthemostrecentlyregisteredVCfundoutofourinterviewees.

Today, theportfolioalready includesfive investmentsofwhichfourareKenyan-based

venturesandoneisinNigeria.Theirticketsizesrangefrom$50,000to1milliondollar

ranging from pre-seed to Series A. Their investments include Flair, an emergency

responsebusinessfocusingonlogisticswithinhealthcaresupply,thestartupLink,which

provides a platform that connects informal sectorworkers to people in need of their

services,Sendy,whichisaquitepopularlogisticscompanyinAfrica,Tuteria,anettech

business based in Lagos,Nigeria,which connects tutors to students in needof tutors,

and lastly Safi Analytics, which is a business that provides industry 4.0 solutions to

manufacturingcompaniestohelpthemimprovetheirefficiencyandefficientenergyuse.

So while technology is a main investment focus, Enza Capital has investments in

Logistics,Ed-tech,Healthcare-tech,andsmartfactorytechnology(intervieweefromVC1,

2020).

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SaviuVentures,VC2

Saviu Ventures is registered as a holding company that raises capital funding from

external investors suchaswealthy individuals, familyofficesandprivateequity firms.

Withinthisstructureallthecapitalisgatheredunderone‘umbrella’,unliketraditional

VC firms,whichhaveclosed-end fundsandaresupportedby institutional investorsas

LPs.InSaviuVenturestherearenogeneralpartnersbutemployeeswhorunthevarious

functions from deal sourcing to portfolio management. According to the interviewee

fromSaviuVentures,whowillsoforthbereferredtoas“intervieweefromVC2”,their

structuregivesthemmoreflexibilityandtheabilitytoproceedwithinvestmentsfaster

than an average fund, due to the lesser bureaucracy related to the investments.

Additionally,theumbrellastructureallowsSaviuVenturestoexittheinvestmentwhen

it suits best, as the VC firm is not restricted by the certain number of years of a

traditionalfundcycle.Althoughtheirstructuregivesmoreflexibility,theVCfirmhasto

raisecapitalfromtheirinvestorsalmostonayearlybasis(intervieweefromVC2).The

staff isfromEuropeanddoesnothaveabackgroundwithinthefinancialworld.While

Saviu Ventures initially had their focus on Francophone Africa, the VC firm recently

moved its focus toEastAfrica as theywere ”tiredofbeingtheonlyonesdoingventure

capitalover there”andwanted to “find some followon investors thatwill joinus in the

adventure”(interviewee fromVC2). Today theyhave offices in France,Mauritius and

theirmainofficeinKenya.

SaviuVentures focuses on tech-startups but has through investments in Francophone

Africaadoptedanapproach,whichtheydescribeas‘offline’.Insteadofpurelyinvesting

in tech startups, theVC firmperceives ‘tech’ as a long-termprocessor a ‘mindset’, as

theylookforstartupsthatalsoareabletodothingsoffline.Accordingtotheirwebsite,

Saviu Ventures do not look for ‘unicorns’ but for ‘gorillas’, which they define as

“ambitious entrepreneurs who are building category-defining companies with solid

foundations”, including local roots but regional ambitions, B2B businessmodels, post

revenue companies, and strong unit economics (Saviu Ventures, n.d.). Over the years,

SaviuVentureshasmadeeight investmentsand isnowclosingtheirninth investment,

whichwillbethefourth investment inKenya.Theyinvestatpre-seedandseedstages

andhencefocusonveryearlystagestartups.Previously,theyinvestedpre-revenue,but

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astheinflowofinvestableventureshavegrowntheyinvestinventureswithat leasta

fewthousandUSDofrevenuepermonth.Theticketsizesofthefirstinvestmentsrange

from$50.000to$800.000butincreaseforthefollow-up/bridginginvestments.Saviu’s

investments inKenya includeSwyft,which is a logisticsplatform that enablesAfrican

brandstoreachtheirend-consumers,andLapaireGlasses,whichisaneyewearprovider

fortheAfricanurbanmiddle-class.

ChandariaCapital,VC3

ChandariaCapitalisaVCfirm,whichispartoftheChandariaGroupownedbythehigh

networthfamilywiththesamename.Assuch,theVCfirmcanbecategorisedas‘family

investmentoffice’.ChandariaGrouphasbeenoperational inKenyaandEasternAfrica

for 60 yearsmainly through their primary business, Chandaria Industrieswhich sells

hygieneandtissueproducts.Today,theyareoneofthebiggestproducersoftissueand

hygieneproducts in termsofmarketsharewithin theSub-Saharanregion.Apart from

Chandaria Capital, the group includes a separate entity formoremature investments,

Chandaria Ventures, as well as an entity for property investments. Chandaria Capital

stands out as the only VC firm amongst the interviewees with local LPs through the

Chandaria family office. The VC firm has been operating in Kenya since 2018 and is

composedofateamofnineventurecapitalists,ofwhichthreearefromtheChandaria

family. The interviewees for this research was Bruce Nsereko-Lule, the investment

principal,whowillsoforthbereferredtoas“interviewee1fromVC3”,andHamzaButt,

anassociate,whowillsoforthbereferredtoas“interviewee2fromVC3”.

TheVCfirm'sticketsizerangefrom$150,000to$500,000andhasanindustryagnostic

focusbutaimsatsectorswithhighentrybarriers.Mostimportantlyisthescalabilityof

the firm as they make pre-series A investments. Their portfolio includes Cobo360, a

logistics company that provides services for trucks to optimize transportation,

SokoWatch, an FMCG distribution platform for small scale vendors, Safi Analytics,

describedearlier,theSavannahBrands,whichproducesnacksanddrinks“withatruly

Kenyan kick”, and Mobius Motors, a car manufacturer for the African mass-market

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(ChandariaCapital,n.d.).Asaconglomerate,ChandariaCapitalcantestandscaleupthe

investee’s solutions in their own businesses entities as well as referring them to

businesses in theirnetworks,which “provestobeveryusefultoalotofcompaniesthat

needbusinesscontractsandsupplierstoprovidethemgoodsatsubsidizedratesandsoon”

(interviewee1fromVC3,2020).

PearlCapitalPartners,VC4

Pearl Capital is a pan-AfricanVC firm, started as a holding company, that is currently

running its fourth fund since its launch in2005.The firm is categorised as an impact

fundasinvestmentsarevaluednotonlyonfinancialreturns,butalsoonsocio-economic

returns.AllthefundshaverunacrossAfricafocusingonsocial-,cultural-andfinancial

inclusion. Focusing on SME-investments within the agribusiness industry, the fund’s

investors include the International Fund for Agricultural Development (IFAD), Soros

Economic Development fund, the EU, and NSSF Uganda. Although Pearl Capital’s

currentlyrunningfundonlyholds investments inUganda, the firmhas inrecentyears

invested in agribusiness ventures inMalawi,Mozambique,Ethiopia andKenya,where

they also host their second office. The ticket sizes range between $500,000 - $2.5

million, but increasingly the funds have focused on more scalable companies in the

agribusiness,suchasthoseinlogisticsservicesandcoldchainfacilities.Duetothehigh

managementcostsrelatedtoeachinvestment,PearlCapitalisfocusingonmakingfewer

investmentstoensureamanageableportfolioofcompanies.

Asthefirmfocusesonimpactventures,avitalpartoftheirscreeningprocessincludes

anassessmentspecificallyforthisdimension.SomeoftheKPIstheylookfortherefore

includetheincreaseinhouseholdinvestmentperdollarinvestmentandtheincreasein

growthearningsperdollar investments, inadditiontoanumberofESGcriteria(Pearl

Capital, n.d.). These criteria limit the number of opportunities, Pearl Capital can pick.

Throughthesecondandthethirdfund,PearlCapitalinvestedin24venturesacrossEast

Africa. One of the investments included Real IPM in Uganda, a company providing

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services for farmers to grow their crops without pesticides, and thus also improving

theirenvironmentalimpact.

TheintervieweeatPearlCapitalisHiramGithuku,aninvestmentAnalyst,whohasbeen

withtheVCfirmforyearsandparticipatedinpreviousfundsacrossEastAfrica.Soforth

he will be referred to as “interviewee from VC 4”. His responsibilities include deal

sourcing,pipelinegeneration,screening,andportfoliomanagement.Theintervieweeis

located in the Kenyan office, but most of the team sits in the Kampala office, which

constitutes the administration and the finance department, totalling around 15

employees.

GoodwellCapital,VC5

GoodwellCapitalisaninternationalVCfirmwitharelativelylonghistoryofinvestingin

emergingmarkets.Startingoff focusingtheir investments in Indiabeforeturningtheir

focus toAfrica,Goodwell Capital hosts theirmainoffice in theNetherlands and today

hasregionaloffices inKenyaandSouthAfrica.Thecapital issourcedfromLPsaround

Europe.Thefirm’sGPsarebasedintheNetherlandswhiletheemployeesinKenyaare

associates and investment analysts. The venture capitalist, who participated in our

interview is JoelWanjohi, who sits as an associate. He has previously worked in the

KenyanDFI,Industrial&CommercialDevelopmentCorporation(ICDC).Soforthhewill

be referred to as “interviewee fromVC5”.Goodwell capital is currently running their

fourth fund,whichhasapan-African focus: fromSouth toEast toWest.The first fund

was launched in 2008 in India, focusing on investments in financial inclusion- and

microfinance solutions. The second fund additionally aimed at investments in India.

While the third fund was deployed across West Africa and South Africa. Goodwell

Capital’s office in Nairobi overlooks investment opportunities and portfolio

managementinKenya,Tanzania,Uganda,RwandaandpotentiallyEthiopia.

While the firstand thesecond fundwerepredominantly focusedat financial inclusion

type of investment, the two latter ones have been presented as ‘access funds’. This

means that the ventures they are focused on are offering access to basic goods and

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services to the bottom of the pyramid (BoP). Apart from financial inclusion, this also

includesagribusiness,mobilityandretailanddistribution.AsGoodwellCapitalusually

invests at Series A and Series B, their investment amounts are larger than the other

interviewees, rangingbetween$1 to$5million, and the investeeventuresareusually

moreestablished.OfnotableinvestmentsinKenya,theintervieweefromVC5highlights

Sendy, which has been presented earlier, and Copia, a shipping and delivery service

providerfortheBoPcustomersinAfrica.

4.2.3IndustryAssociation

EastAfricanPrivateEquityandVentureCapitalAssociation(EAVCA)

The East African private equity and venture capital Association (EAVCA), founded in

2013, is a business membership organization for private equity and venture capital

fundsthat invest inEastAfrica.Theirprimarymandate is twofold.One is toshowcase

the investment opportunities of East Africa, presenting the region as an attractive

destination for private capital. The secondmandate is to create awareness of private

capital and how it works. This is done across Kenya Uganda, Tanzania, Rwanda, and

Ethiopia. EAVCA has about 100 members and their work consists of carrying out

trainingaroundthefunctionsofprivatecapitalworkstothepublicsector,policymakers

aswell as entrepreneurs. As such the EAVCA is perceived as an official voice for the

members,lobbyingthestateagenciesthatgovernandsupporttheVCindustryinorder

to create awareness of issues experienced by the professionals. Hence, the industry

associationworksasaninterfacebetweentheregion’sstakeholders,thegeneralpublic

andtheinvestors.Inaddition,EAVCAconductsindustryspecificresearchtobeusedfor

investors.OurintervieweeatEAVCAisEvaWarigia,whoistheExecutiveDirectorofthe

industry association. So forth she will be referred to as the “interviewee from the

industryassociation”.Accordingtotheinterviewee1fromVC3,EAVCAisperceivedasa

usefulinstrumentandmediaforaffectingthelawmakers:“IthinktheEAVCAisactually

averyusefulinstitutionintheecosystembecausetheylooktodoawiderangeofactivities

andit'sreallytosupporttheventurecapitalandprivateequitywithintheseecosystems.”

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4.2.4Accelerator

PangeaAccelerator

Pangea is a business accelerator in Nairobi, funded by the Norwegian DFI, Norfund.

Through its accelerator programs, Pangeaprovides technical support to startups. The

accelerator ran its first program in 2018 and according to thewebsite,more than 15

startups have successfully been through the cohorts (Pangea, n.d. a). Unique to its

category in the region is that Pangea provides capital to the startups in the form of

convertible loans, which can be converted to equity or debt after three years. Being

aware of the investment gap that exists for local entrepreneurs in particular, the

accelerator alsohosts an investorprogram,whichaimsat educating foreignand local

highnetworth individuals inbecomingangel investors.The investorsare required to

contributewithatleast$13,000inordertoparticipate(Pangea,n.d.b).Astheprograms

run simultaneously the investors will get first hand experience from mentoring and

interacting with entrepreneurs, while the startups get additional mentoring from

engaging with potential investors. As such, the investment platform connects the

entrepreneurswithpotentialbusinessangels.

AtPangeaAcceleratorweinterviewedAnneLawi,whoisthecountrydirectorinKenya.

Soforth,wewillrefertoheras“theintervieweefromtheaccelerator”.Theinterviewee

from the accelerator describes the need for exactly such a model: “Whatwe do is to

provideinformationandcreateknowledge,adisseminationmechanismtotheinvestorsfor

themtounderstandwhytheyneedtoinvestasearlyasthebusinessstarts.”Aspresented

insection4.1.4,therearemanyacceleratorsandincubatorsappearingintheKenyanVC

landscape. A number of these accelerators are supported by foreign institutions, as

Pangea is, and increasingly begin to co-invest in the startups, togetherwith business

angels, and provide grants to the startups, as Pangea does. Hence, the Pangea

accelerator represents the population of other accelerators in Kenya on many

parameters.

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4.2.5Startup

SocialBites

SocialBiteswas founded in2017by JohannesTraerup fromDenmark,who isour last

intervieweeforthecaseentityinthemultiple-casestudy.Soforthhewillbereferredto

as“theintervieweefromthestartup”.Thestartup,SocialBites,isadairycompanythat

sellsfrozendairyproductscalledmilkpoptothelow-incomeearners.LocalsjoinSocial

Bites as vendors, whereby they are being provided with the means to sell and the

products on credit. Having sold the products, they return to the sales depot and are

reconciled.Theproducts areproducedandpacked inNairobi and sold in thewarmer

climatesinMombasa,Kenya’ssecondlargestcity.

Thefounderbuilttheconceptafterhavingworkedformanyyearswithsimilarproducts

inWestAfrica. In2018,hewas seekinghis firstofficial roundof fundingandwent to

pitchhisbusinessmodelformanyVCfirmsinNairobi,buteventuallyfoundthatSocial

Biteswasatatooearly-stageforVCfundstoenter.Consequently,hedecidedtolookfor

BAs,andasthissearchtookhimbacktohisorigins,hefoundthreeinvestors,twofrom

DenmarkandonefromtheUnitedKingdom.Theinvestorscameinovertworounds,the

firstoneinJuly,2018,andthenthesecondoneinJuly,2019atundisclosedamounts.

Summaryofchapter4.2

Chapter4.2presentsthe5VCfirms,theindustryassociation,EAVCA,Pangeaaccelerator

andthestartup,SocialBites,constitutingtheentitiesusedforthemultiplecasestudyof

thisresearch.Eachcaseholdsuniquecharacteristics,anglesandinsights,andtogether

theyprovideaholisticviewoftheinstitutionalchallengespertainingtotheVCindustry

andthegeneralprocessofearlystageventurefinancing.

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5Analysis

Having presented the developments of the VC industry in Kenya as well as the case

entities that have been selected for the multiple-case study, the following section

containstheanalysisandthepresentationofourfindings.

In the firstpart of thepresentationof the empirical findings,wewill answer the first

part of the research question. As outlined in the research purpose and the research

approach sections, this encompasses a confirmatoryapproachwhere thepropositions

are compared to the empirical data. Hence, the aim is to test whether the general

assumptionsaboutemergingmarketcharacteristics,referredtoasinstitutionalbarriers,

areapplicabletoVCinthecaseofKenya.Movingforwardinadeductive,confirmatory

approach, we aim at examining the three propositions one by one, starting with 5.1

Regulatory Uncertainties, followed by 5.2 Liability of Outsidership and Liability of

Foreignness, and lastly5.3UnderdevelopedSupportiveIndustries.In thisdeductivepart,

we takeapointofdeparture in the literatureaswestructure theanalysisaroundour

propositions. We further use our primary data, which is constituted by the semi-

structuredinterviewswhichhavebeencodedandstructured.Aswepresentthedatain

the form of citations, we make references to data sources by referring to the

intervieweesaccordingtotheirVCfirm.Anexampleis“intervieweefromVC1”,which

thenreferstotheintervieweefromVC1,aslabelledinthepresentationofcases-section.

At the end of the first part,we present the findings in a summary table of the firms’

perceptionsoftheinstitutionalbarriersinKenya.Insection5.4Qualificationoffindings,

weaddresstheinstitutionalbarriersinrelationtotheseverity,howtheyaffecttheVC

firmsdifferently,andatwhatstageinthefund’sinvestmentcycletheyoccur.

Thereafter,insection5.5CopingStrategies,wetakeaninductiveapproachtothedata,as

weaimtoexplorewhatstrategic implicationsthese institutionalbarriershavehadfor

the VC firms in Kenya. Hence we seek to answer the second part of our research

question. In this inductive section,we look for patterns in theways the interviewees

express their operations and their strategic considerations. As such, we find it

purposefultoincludethedataextensivelytodiscoverthesepatterns.Thesepatternsare

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thenpresentedascopingstrategiestotheinstitutionalbarriersfoundinthedeductive

part of the study. The inductive approach implies that we are not driven by any

literatureorexisting theory,butaredata-driven.Weaimtoseewhether thesecoping

strategiescanbeperceivedasgeneralisationsinabroaderperspective.

The table below contains a summary of the institutional barriers to VC in Kenya as

perceivedbyourinterviewees,structuredinaccordancetothepropositionandtoeach

ofthecases.

Inter-viewee

P1Regulatoryuncertainties P2Liabilityofoutsidership&-foreignness

P3Underdevelopedsupportiveindustries

VC1 Challengesrelatedtopoliticalcycles,positiveviewongovernment'seffortstoeasetaxpressureandimproveexitopportunitiesforprivateinvestments.Untrustworthyfinancialreporting.

Lackofinvestmentsinventuresfoundedbylocalswhichultimatelyimpliesthatmanyventureslackunderstandingofthelocalregulatory-andmarketspecifics.Challengingduediligenceprocessesifnolocalnetworksorlocalteam.

Inadequateinformationsources,particularlyinlesspopularindustries.Insufficientgrantsandotherearlystagefinancialsupportingmechanisms.Moreexitpossibilitiescomingintoplacethroughsupportivestockmarketregulations.

VC2 n/a VCsareheavilyreliantonforeignnetworksthatultimatelyaffectthelaterinvestmentroundsandexitopportunitieswherelessforeignnetworksexist.Challengerelatingtolocaladaptionoftheventures.

AlackofseedinvestorssuchasBAs.Lackoffamilyfriendsandfools.Acceleratorsarenotreallysufficient.Notreallyawareoftheaccelerators.Noopportunityforexits.

VC3 Unsupportivelegislativeenvironment

LackoftechnologyskillsandinternationalbestpracticesareconstrainingVCinvestmentsinlocalfounders.

Sufficientinformationsourcesarebeingestablished.Insufficientaccelerators,butimproving.Notreallyawareoftheaccelerators.Moreeducationonventurecapitalisneeded.

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VC4 Challengesrelatedtoelectioncycles.Taxregulationisbeneficiary.Lackofgovernance,accountingstandardandtrustworthyreporting.

Disconnectionbetweenmanyentrepreneursandforeignnetworks.Challengesrelatingtolackoflocalknowledgeamongstforeignledinvestees.LackoftechnologicalskillsamongstthelocalKenyanventures.

Manyinformationsourcesbutcoverageisnotsufficient.Acceleratorsaresupportivefordealsourcingastheyreducecostandtimeforconductingduediligence.

VC5 Generallysupportivegovernmentinterventions.Challengesrelatedtogovernanceandreporting.

Challengesrelatedtoforeignventureswholacklocalmarketknowledge.Ventureswithlocalfoundersaredisadvantagedeveninrelationtoangelnetworksanddonorfunding.

Informationfromagenciesisnotsufficient.LackoflocalLPswhocaninvestinVC.Limitedoptionsforexits.

IndustryAssociation

Challengesrelatingtocurrencyfluctuationduetopoliticaluncertainties.Opportunitiesrelatingtonewtaxbenefitsandlessregulationforinvestors.Challengesrelatedtoenforcementofshareholderprotection

Culturaldifferencesareenforcingnetworkbarriers.Lackoflocalpresenceandlocalknowledgehindersthecreationofadequateinvestmentcriteria

LackofBAs.MorelocalLPsarecomingintosupportprivatecapitalmarkets.Challengewithaninformationgap.

Accelerator n/a Needforlocalsolutionsandframeworksbothfrominvestorsandventures.

LackofBAs.Describinghowtheyaretryingtosolvethisbyofferingeducationtoinvestors.

Startup n/a Gettingaccesstoforeignnetworkswillincreasechancesthatyougetreferredtootherinvestors.Lackoflocalknowledgecansignificantlyhinderthescale-upprocessofventures,inparticularduringtherecruitmentprocess.

LackofBAs.

Table3:Listofinstitutionalbarriersfromourfindingsasdividedintothecaseentities.

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5.1Regulatoryuncertainties

The firstpropositionderived from the literatureas an institutionalbarrier toventure

capitalissummedbyourconceptofregulatoryuncertainties.Thepropositionreads:

1. Regulatory uncertainties are institutional barriers to venture capital in emerging

markets.

Fromthecodingofourempiricaldata,wefindthreemaintopicsrelatingtoregulatory

uncertainties. These include: 1) political uncertainties, 2) regulation and tax, 3) and

corporategovernance.Inthissection,wewillanalyseourempiricaldatainaccordance

to the categories listed above and investigate how the interviewees perceive these

challenges.

5.1.1Politicaluncertainties

TheKenyanVCindustryisrepeatedlydescribedasaffectedbythepoliticalfluctuations

inthecountry.Manyintervieweesemphasizethisasasignificantbarriertotheflowof

VCinvestments.ThisisbecausethelifecycleofaVCfundofabove10yearspotentially

existsoverseveralpoliticalregimes.TheIntervieweefromVC4emphasizesthis issue,

specifically highlighting the uncertainties relating to election times, mentioning, “In

Kenya,wearequitesensitivewiththeelectioncycles.Wheneverwehavegeneralelections,

VCs tendtoshyaway for thatperiod.”As the effects of such political uncertainties can

causecurrencyfluctuations,theintervieweefromtheindustryassociationdescribesthis

as a barrier for the flow of VC investments in Kenya, stating, “the returnswill not be

generatedinhardcurrency.Theyareearninginlocalcurrency,andcurrencyfluctuatesall

thetimefordevelopingcountrieslikeKenyaandwillalwaysbeatalowerpositionthanthe

hardcurrency”. Therefore, besides potential negative effects on thedomesticmarkets,

theuncertaintyisalsorelatedtocurrencyfluctuations.Hence,thepoliticalreformsare

also highlighted as risky factors, forming institutional barriers to the venture capital

industry.

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5.1.2Regulationandtax

Inspiteofsomeofthebarriersrelatingtothepoliticaluncertainty,manyinterviewees

express that the regulatory environment concerning tax is evolving positively.

Regarding the current regulatory frameworks, most of the interviewees highlight a

numberof regulations andgovernment interventions coming into effect toharmonize

privatecapitalmarkets.TheintervieweefromVC5expressesthat“Ifventurecapitalists

knockon theirdoorandgo to them, thegovernmentwillbeable to listen to them. [...] I

thinkwhatKenyaisknownforintheregionisthatthegovernmentdoesn'treallyinterfere

withtheprivatebusiness,theyworkashardaspossibletoattractanyentrepreneursand

investors, which is also provided through the tax holidays and all those aspects of

business.”ShowingthattheeffortsfromtheKenyangovernmentsetagoodenvironment

forVCfirmstoenterintothemarket.

Theintervieweefromtheindustryassociationhighlights,inrelationtotheirownwork

in lobbying thegovernment, thatoneof themajorsuccesses includes theCompetition

Authority of Kenya’s (CAK) exemption of regulatory approval requirements for VC

transactions. InrelationtotheM&As,shefurtherexplainsthatanother lawexemption

willdecreasetransactioncostsforVCfirms,“thentheoutcomeisthatthetimefortheVC

dealisshortenedbecauseyoudon'thavetowaitforaregulatortogiveyouthe‘goahead’.“

The perception of the government as a supporter of private capital markets is thus

graduallyevolvingasthegovernmentisintroducingregulationswhichwilldecreasethe

transaction costs involved with VC, improving the ease of doing business within the

sector.

Furthermore, many interviewees emphasized the tax exemptions which the Kenyan

governmenthasintroducedhaveshownpositiveeffectsontheindustry,inparticularfor

facilitatingstockmarketparticipation.TheintervieweefromVC1states,"thisisnotjust

toencourageventurecapitalfundstoparticipatebecausetheyhaveanexitroute,butalso

for local investors to start participating as angel investors.” Showing that there is a

general perception that the government is providing regulations,which seek to assist

theVCindustry,inthiscaserelatedtoexitopportunitiesandbusinessangelinvestors.In

addition,itisemphasizedbytheintervieweefromVC4thatthegovernmentistryingto

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makeitfeasiblefortheVCfirmstoregistertheirfundsinKenya.Hestatesthat“wehave

beenexploringtheoptionofinsteadofregisteringfundsintaxhavencountries,whichend

upincreasingtheadministrationcostofthefund,justtosetuphere.Wehavetriedtouse

local holding companies. Then the government can provide concessional periods or tax

holidays on investments.” As such, the interviewee shows that their fund is already

reaping the benefits from some of these exemptions. In relation to the regulations in

place and the tax exemptions given by the government, the interviewee from the

industry association states, “you can give them tax breaks, but if the underlying

shareholderisnotprotected,notmanypeoplewillbewillingtotakethatrisk.”Thus,she

highlightsthatalthoughthegovernmentisworkingtointroduceabeneficialregulatory

environmentfortheinvestors,thereisstillanissuearoundregulationandenforcement

oftheshareholdersprotectionprevailinginthecountry.

In summary, although there appears to be diverging perceptions around the

effectiveness of the financial markets, most interviewees perceive the efforts of the

Kenyangovernmentbodiestohaveapositiveeffect,enablingVCfirmstooperatemore

effectivelyinthemarket.Suchasbydecreasingthebureaucracyandthefacilitationfees,

creatingoptionsfordomesticfundregistration,makingtaxbenefits,andimprovingthe

financialmarkets.

5.1.3Corporategovernance

Corporategovernanceistheeffectoftheregulationsofacountryarounddistributionof

rightsandresponsibilitiesamongdifferentstakeholderssuchastheboard,managersor

shareholders, spelling out the rules for decision-making in corporate affairs.We find

thatmostVCshighlightbarriersrelatingtothegovernanceaswellasformalreporting

mechanismsof theventures. It is furtherperceived that this isaneffectof inadequate

institutional and legal requirements around financial reporting and structuring of the

firm.The interviewee fromVC5mentions that “forthefew[local]businessesyoucome

across the big challenge is always in their corporate governance. [...] people are not

accountable,theyhavesomeintegrity issueswhichisabigproblemfor localbusinesses.”

Similarly,theintervieweefromVC4mentionsthelackofgovernanceinrelationtowhy

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manyVCfirmsendupinvestinginventureswithforeignfounders.Hestates“theissueof

corporate governancemakes people fear a lot of the ventureswhich are started by the

locals”, highlighting that this is particularly a challenge when investing in Kenyan

founded ventures. The interviewee from VC 2 further notes that the lack of formal

reporting requirements is hindering proper due diligence processes and thus

proceeding investments in local firms.Assuch,heassertsthat"alotofthemhavedata

rooms, but most of them have a lot of information missing in that data room.” The

interviewee from VC 4 further highlights this issue and its complications for the due

diligence process, as some completely lack coherent reporting and accounting

standards, noting that “sometimes you will find that you know a founder who is

approaching a venture capital with a few sets of accounts, which he prepared for the

fundraising.Thentheyhaveanothersetofaccountswhichtheypreparedforthetaxman,

andathirdonewhichreflectstheactualpositionofthebusiness.”Hefurtherarguesthat

“it'soneofthechallengesthatwe'vebeenexperiencingintheindustry,someoneshowsthe

books just to impress you, but then if youdive into the business and youmakea simple

analysisofthevaluechain,thenyouwillunderstand.”Hence, it isacknowledgedtobea

serious issue with integrity, transparency and reliability in some of the ventures’

reportingandgovernancemechanisms.


To sum up, we find a number of issues having an effect on the VCs relating the

institutionalbarriersrelatingtoregulatoryuncertainties.Firstly,politicaluncertainties

relatedtotheelectioncyclescreaterisksassociatedwithVCinvestmentsinKenyaand

uncertainty about the futuremarket conditions. Secondly, shareholderprotectionwas

described as inadequate in the country. Despite this, many newly introduced

regulations, inparticularrelated to taxbenefits,areperceivedas favourable to theVC

industry.Thirdly,alackofformalgovernancerequirementsiscausingissuesrelatedto

reporting and accounting, particularly for local founders, thus becoming an integrity

issue. This challenges the due diligence process for many VCs, as the information

providedfromthestartupsisnotsufficient.

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5.2Liabilityofoutsidershipandliabilityofforeignness

The second proposition derived from the literature as a general institutional barrier

relatestoliabilityofoutsidershipandliabilityofforeignness.Thepropositionreads:

2.Liabilityofoutsidershipandliabilityofforeignnessareinstitutionalbarrierstoventure

capitalinemergingmarkets.

Fromourresearch,wefindthatmostcapitalthatgoesintotheVCsstemfromEuropeor

the US. Additionally, most ventures that receive VC investments are founded by

foreigners.Assuchtheforeignnetworksarecrucialtogainaccesstodealsaswellasto

investors.Wefindtendenciesthatshowthatthisbecomesaconstrainingfactorforthe

entire VC industry, as the lack of local knowledge infused in the industry affects the

successof theventuresnegatively. Inaddition,onlya limited investment flowreaches

locallyfoundedventures.Basedonourfindingswefurtherseparatethissectioninto1)

liability of outsidership, where we explain the dynamics of these networks and

challengeswhich arisesdue to lackof belonging 2) liability of foreignness,wherewe

portrayourfindingsinrelationtothelackofknowledgeonthelocalsetting.Theissueof

liabilityofforeignnesscanbeseenontwolevels:whethertheinvestorunderstandsthe

localcontext,andwhethertheinvesteeunderstandsthelocalcontext.Assuch,muchof

thisanalysiswillbe focusingon theentrepreneursaswellas theVC firms in termsof

liabilityofoutsidershipandliabilityofforeignness.

5.2.1Liabilityofoutsidership

ItisevidentthatmostoftheVCfirmsinKenyaarefundedbyforeignLPs,orarerunby

foreignGPs,oftenfromEuropeortheUS.Assuch,theVCindustryisatlargedescribed

asheavilydependentonforeignnetworksthatinvestinforeign-ledfounders.Although

it is perceived that without the influx of foreign capital the VC investments are very

limited,someintervieweeshighlightissuesrelatingtothisphenomenon.

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Inparticular, gainingaccess to the foreignVCs ishighlightedas amajor threshold for

localventures.TheintervieweefromVC1statesthat“localfoundersaredisadvantaged

tosomeextentbyvirtueofonenothavingthesenetworksthatmostforeignfoundershave

builtfromgoingtocertainuniversitiesandeducationalinstitutionsorworkingsomewhere

likeSiliconValleyor justhaving friends. [...]Formost local founders, raisingcapital isa

challenge.BecausegenerallyAfricadoesnothavealotoflocalcapital.”Thus,heexplains

thatmanyinvestmentsaremadeintoforeign-ledventuresasaneffectoftheirnetworks

fromtheirhomecountries,througheducationalandprofessionalbackgroundswhereas

local entrepreneurs are facing challenges related to the liability of outsidership. In a

similar fashion, it isacknowledgedthat localentrepreneurshavedifficulties ingaining

access to the networks of early-stage investors such as angels or donor agencies, the

intervieweefromVC5states“Whatweareseeingisthattheentrepreneurs,whoarefrom

theoriginof eitherAmericaorEurope,havegoodaccess toangel investorsand someof

thesedonors,butthelocalentrepreneurdoesnothavetheaccesstothat.Sothere'sagap

for that.”Additionally, the interviewee fromVC 2 highlights that foreign founders are

good at raising funds as “theycan sell thewholeAfrican storyand theneverybodygets

excited.“Hence, it is prevalent that the gap for investments at an early stage, prior to

venturecapitalinvestments,mainlypertainstolocallyfoundedventures.

The interviewee from the startup additionally describes theway the foreign investor

networks share information and investment opportunities, “Whenyouhaveameeting

withtheVCfirmand,theylikeyoubuttheycan'tinvestinyou,they'llalwaystrytorefer

youtosomeoneelse.”Thissuggeststhatreferralsformamajorbenefittothosewhocan

accesstheforeignVCnetworks.Thisagainhighlightsthatthereisanetworkofinvestors

andventures,where foreignmoney isbeing invested into foreignsolutions,and those

outsidethenetworksareinfactthelocalKenyanentrepreneurs.Theintervieweefrom

the accelerator explains this phenomenon as culturally embedded, saying that “If I’m

beinghonest,familiarityattractsfamiliarity,andwhiteVCsfinditeasiertogivemoneyto

white founders.” The interviewee from the startup additionally emphasizes the

importanceofeducation,consideringthefactthatmanyforeignVCsonlyreachforeign

ventures due to the quality of Kenyan education and the skill sets possessed by local

entrepreneurs. He states “Ialso think that itmaycomedownto skill set. Imean, if you

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haveaEuropeaneducation,youknow,you'veworkedinEurope,youhavetheupperhand

compared to someonewhotook theKenyaneducation.” Hence, he explains that foreign

foundedfirmsaremorelikelytoattractforeigninvestorsasaresultoftheireducational

andprofessionalbackground.

Itishoweverhighlightedthattheforeignnetworksonlyextendtocertainstagesofthe

investmentrounds,suggestingthatthismaylimitthebenefitofgainingaccesstosuch

networks, in particular relating to exit opportunities on the investments. The

interviewee fromVC 2 states, “butat somepoint, likewhenyoubecome sobig thatno

local African specialist funds can get into the rounds that you're organizing and your

valuation is one ofSilicon Valley, you're gonna get screwed.” This emphasizes a point

abouttheriskofdependencyonforeigninvestornetworks,asthesenetworksoftendo

not provide exit opportunities in Kenya. Furthermore, it appears that an effect of the

separationbetweenlocalventuresandforeigninvestornetworksisthatVCsoftenend

uplackingthenecessaryconnectionstogaininformationonthelocalmarketandlocal

ventures topursueduediligence.The interviewee fromVC1 states that “andinareas

whereyoudonotnecessarilyhavenetworks in thoseparticular sectors, it becomeseven

more difficult to get access to this information.” Although most of the VC firms have

employedlocalsintheinvestmentteamsasassociatesandanalysts,thenatureoftheVC

networks are rather foreign focused, and thus limited in information on the local

setting.

5.2.2.Liabilityofforeignness

ThefactthatthemajorityoftheVCinvestmentsaremadeinforeignfoundedbusinesses

isrepeatedlydescribedasanissuefortheVCs.Manyoftheintervieweeshighlightthat

thefactthatmostventuresareforeignfoundedisatopicofaheatedsocietaldebate.The

intervieweefromVC4states,“peoplewereworriedif,astheyarecoming,aretheycoming

intokill the localentrepreneurs?Oraretheycomingintopromote localentrepreneurs?

And, what are some of the synergies that we exploit from the process?” As various

interviewees are highlighting this on-going debate, we find it to be a symbol of the

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scepticism that still surrounds the VC scene. Although another interviewee highlights

that there is generally beingmademore effort today in finding locally born ventures,

manyofourintervieweesstatethattheydonothaveanyparticularstrategyorinterest

in finding ventures with local founders. In that regard, the interviewee from the

acceleratorprogramhighlightsthat,inordertofindlocallybornventures,VCfirmsmust

comeupwithdifferentstrategiesforscreeninganddealsourcing,specificallyinrelation

to the lackof theknowledgeof the localmarket, “It'snotacutandpaste. Justbecause

otherthings,otherinvestortools,andthewayofdoingthingsworkinEuropeorinSilicon

Valley doesn't mean it will work in Kenya, or in Africa.We have very different market

segments, and different nuances and you have to adapt and put in consideration those

marketsandnuancesthatcomewiththismarket.”Assuch,thelackofknowledgeonthe

local markets in the foreign networks, gives rise to certain liability of foreignness,

particularly for the foreign founded ventures where the lack of market specific

knowledgeisconstrainingthetractionandscale-upoftheVCfirmsinvestments.

It is argued that foreign entrepreneurs lack knowledge about the local markets and

consequentlytrytosellsomeproductsorservicesorapplybusinessmodelswhichdo

notmatchwiththelocalcontext.TheintervieweefromVC5states,“It'sachallengein

onewayortheotherbecausesometimeswhentheseforeignerscomein,theytrytocome

upwithsolutionswhichareWestern,buttheproblemsarehere.Sometimesmanyofthese

fail, because they lack that local nuance”. This shows that foreign founders, who

constitute themajorityof the foundersreceivingventurecapital,are facingchallenges

relatedtoliabilityofforeignness.

Inparticular, itwasshownthatmanyof thesolutionsthattheventuresareproviding,

arenotfitforthelocalsetting.TheintervieweefromVC1stressesthatforeignfounded

venturesoftenfaceissuesspecificallyrelatingtothepreferencesofthelocalconsumers,

hinderingthegrowthandsuccessoftheirventures.Hestatesinrelationtooneoftheir

portfoliocompaniesthat“Onethingtheycametorealiseisthatthere'sacertainstandard

of quality that's expected from the middle class in the country.“ As such, the lack of

understandingofthepreferredqualityamongstconsumershinderedtheinitialsuccess

oftheventure.

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TheintervieweefromVC4additionallyemphasizestheneedforknowledgeofthelocal

setting, referring specifically to supply chains and business partners amongst the

founderswho theVC firms invest in.He states, “Youhavetorelatewellwiththevalue

chainwhether you're sourcing products from the farmers, you have to be able to relate

well.” Further emphasizing exposure to the local market and building trust amongst

various business partners as important elements to navigate the local context. The

intervieweefromVC1additionallynotesthatsomeoftheventurestheyhaveinvested

in, have been facing this particular challenge. Telling the story of one American

entrepreneurwhosebusinesstheyhadinvestedin,“Hedidn'thaveagoodunderstanding

of the local context, the local farmers, the local framework, the policies around land,

policiesaroundfarming.Hehadgoodbusinessacumen,butthelackofunderstandingthe

localmarketmade thebusinessdrasticallyunderperformwithin the first fewyearsuntil

we brought on board professionals who had good understanding of the local market.”

Showingthatthelackofunderstandingextendsmerelymarketknowledgeandincludes

how to navigate the regulatory environment, ultimately creating a liability of

foreignness, forcing the VC firm to bring in external managerial support with local

knowledge.

Additionally, the interviewee from the startup mentions that the level of local

understanding will also affect the scale-up process of the ventures, which VC firms

investin,particularlyduringtherecruitmentprocess.Hestates,“thatmeansthatthere's

no structures in place, there are no processes in place regarding how things should be

carriedout.Thatmeansthatyougetpeoplewhoarenotempowered.”Thus,heexplains

thatstaffingisanotherliabilitytoforeignnessfacingtheinvesteeventure,inparticular

asmanyforeign-ledventuresreceiveinvestmentstostaffalotwhilescalinguprapidly.

Thelackofunderstandingoftrainingandlocalrecruitmentobstaclesisthusparticularly

constraining the success of the ventures. Furthermore, the level of digital and

technological development inKenyawasnoted as an areawhereVCs suffered froma

wrongful perception of the local context. The interviewee from VC 2 mentions that

“We'veseensomeexamples,eveninourportfolio,wherewemadesomewrongdecisions,

assumingthattakingadigitalapproachwouldworkandthemarketwouldadapt.It'snot

that easy. [...]Wedid lack local knowledgeas investors about the fully digital approach

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andwhat you think themarket is able to integratewhen in reality it's not.” Hence, the

challengesregardinglocalknowledgearenotonlypertainingtoentrepreneursbutalso

to VC firms, who face barriers relating to the liability of foreignness in relation to

understandingthelevelofdigitalisationinthemarket.

TheknowledgeoftheKenyanmarketisadditionallyperceivedasamajorbarriertothe

investors in terms of building a well-informed criteria framework for their

investments. The interviewee from the accelerator specifically highlights differences

related to the level of information andunderstanding of the local business landscape.

She mentions that this becomes particularly problematic when investors lack local

presenceandunderstandingofthemarketdynamics,statingthat“Thishappensifyou're

dealingwithdiaspora investors,because theyarenot in thismarket.Theymayhave the

businessknow-howandtheymayunderstandtheprinciplesofbuildingabusiness,butthey

can'tcontextualizethedynamicofthismarket.“The interviewee fromVC1additionally

stressestheimportanceofbuildinglocalknowledgetosupportthecreationofrelevant

investmentcriteria,statingthat“Itiscrucialtobeabletobuildresearchonthedifferent

problemsthatthecontinentisfacingandthenyoulookatthosebusinessesinthatcontext”.

Therefore, it canbesaid that the foreign-lednetworkscreatesbenefits for the foreign

foundedfirmswhocanmoreeasilygetaccessto investmentsthroughthesenetworks.

However, as many of these ventures face challenges relating to their lack of

understanding of the local context, the VCs face barriers relating to monitoring and

supporting their ventures. Additionally the VC firms seem to struggle gaining

information on the local markets and regulations as an effect of being heavily

centralizedaroundforeignerswholackthisparticularknowledge.


In relation to the liability of outsidership it can be said thatmost VCs constitute the

epicentre of the networks anddonot seem to be facing direct barriers related to the

liability of outsidership. These networks are to a large extent constructed around

foreign funded VCs and foreign founded-ventures and it can thus be said that the

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liability of outsidership seems to pertainwith locally founded ventures who struggle

gaining access to venture capital. An effect of this is thatmost ventureswho receive

venture capital are led by foreigners who lack knowledge of the local setting. Such

liability of foreignness particularly relates to understanding the local consumers,

business partners and regulatory framework, ultimately hindering the growth of the

ventures, constraining the success of the VC firms' investments. Additionally, the VC

firms, particularly the ones with limited local presence, face challenges related to

gaininginformationonthelocalmarketsandventures.

5.3Underdevelopedsupportiveindustries

Ourthirdpropositiondeductedfromtheliteratureoninstitutionaltheoryandventure

capitalinemergingmarketsconcernsthelackofsupportiveindustriesandreads:

3. Underdeveloped supportive industries are institutional barriers to venture capital in

emergingmarkets

From our study, we find that within this institutional barrier, there are four main

categories relating to underdeveloped supportive industries. These include: 1)

Information agencies, 2) intermediary financingmechanisms, 3) acceleratorprograms

for pipeline development, and 4) exit opportunities. These barriers are ultimately

affectingtheamountofinvestableventuresandlimitingthepossibilitiesforexitingthe

investments,whichareconsideredconstrainingfactorstotheVCfirms.Inthissection,

we will analyse our empirical data in accordance to the categories listed above and

investigatehowtheintervieweesperceivethesechallenges.

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5.3.1InformationAgencies

Information agencies include private and public market institutions that provide

information about new investable ventures, markets, and sectors. These institutions

haveanimpactontheduediligenceprocessconducted,inwhichtheVCfirmmakesan

assessmentoftheinvestee’sbusinessplan,itstrackrecordandthegrowthpotentialof

the venture, providing industry benchmarks, trend reports and market insights.

Betweenallourcasesthereisagreementthatthelevelofinformationisnotsufficientin

termsofcoverageofsectors.Additionally,intervieweeshighlightthattherearevarious

sourcesof information,but that thesesourcesare inadequate, inparticularrelating to

novelsectors.Nevertheless,manyintervieweesemphasizethatnewplatformscouldbe

changingthatinthenearfuture.

A number of interviewees highlight that there is an increasing number of platforms,

such as the Baobab Network and Venture Capital 4 Africa (VC4A) are emerging.

However the information from these sources is perceived as limited to those sectors,

which have been the primary target for VC investments, and other novel sectors are

ratheruncovered.AstheintervieweefromVC1describes,“Youwillfindthatifasectoris

notpopular,youwillnotfindresearchonitgenerally.So,likeFinTechEdTech,HealthTech,

there'salotofinformationonit,[...]butfornovelsectors,orsectorsthatarejustcoming

up, or solutions to problems that have not been thought of extensively you have to do

primaryresearch.”As such, he highlights the issue of intermediary agencies providing

inadequateinformationontheindustriesthatarenotconsideredtrendy,thuscreatinga

barrier for the VC firms. In addition, we found that the reliability of the information

provided through these platforms has been questioned. The interviewee from VC 5

claims that he has to use his ownmarket intelligence to confirm the information he

extractsfromtheseplatformsduetotheirprivatenature.Assuchhestates,“Canyourely

onsuchinformation?AndbythisImean,whateverpieceofinformationyoucomeacross,

youreallyneedtouseyourmarketintelligencetoseewhetherit'strueornot.[...]itwould

maketheduediligenceeasierandprobablytakeashorterperiodandbeabletovalidate

thisinformationifwehadaforumwhereallthishadbeengathered.”Hence,thereliability

andtheoutreachoftheinformationisanissue.

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WhentheVCsaredoingtheirduediligenceonventuresthatoperateinsectorsthatare

new, or rather unknown to the VC firms, they can to some degree use government

bodiesordonorfundedprojectsfrominternationalorganisationstoacquireadditional

marketinformation.TheintervieweefromVC4givesanexamplefromaninvestmentin

seedoilinUganda,wherehewouldreachouttotheUNagency,InternationalFundfor

Agricultural Development (IFAD), “Iamexpecting that theywouldhaveaccess to some

levelofresearchthatweprobablydon'thave.Sowewouldrelyontheresearchthatthey

have, since they are mandated to promote the seed oil industry and to catalyse the

industry.”Inthatway,theseinstitutionscanbeperceivedasanotherinformationsource.

The interviewee elaborates “So sometimes you work hand-in-hand with donor funded

projects togetexpertise fromthosewhoaredoingresearch in the localmarket,and the

government bodies come in handy around regulatory framework.” However, it is again

emphasizedthatthis informationisnotsufficient, inparticular,assomeindustriesare

notcoveredinthecurrentinformationmechanisms.

Although many different information agencies are established or currently being

developed,many VCs perceive these sources of information to be insufficient to fully

leverage the information for their investments.Hence, the informationprovided from

thesesourcesisnotconsideredadequateandtheVCshavetousetheirownsourcesof

marketintelligencetotestthevalidityoftheinformation.Aswefindthistobethecase

formany of the interviewees, we perceive the information level provided by various

agenciesasinsufficient,creatingbarriersforVCinKenya.

5.3.2Intermediaryfinancingmechanisms

Several interviewees describe that there is a need for more capital as well as

intermediaryfinanciersfortheventuresthatareinthepre-seedandseedstages.Thisis

particularlyimportantforventures,astheyneedworkingcapitaltotesttheirbusiness

modelandgettraction,asamatterofmakingventuresinvestorready.Theinterviewee

fromVC2describes theneed, aspeoplewithbusiness ideasenter the sceneknowing

that theywill not earnan income for a longperiod, “soIguess inordertogetmoreof

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those [entrepreneurs], we need seed investors. We need people who can write $50,000

checks.” The actors who could support the entrepreneurs at this stage are the ‘love

money’, grantor investmentsby accelerators, other typesof grants, andBAs.We find

that there are challenges related to all types of early stage intermediary investors,

particularly for the local entrepreneurs,which indeed create institutional barriers for

VC.

Amongourinterviewees,thereisacommonnotionpertainingtoAfricanentrepreneurs

facing difficulties finding ‘love money’, otherwise perceived as a crucial financing

mechanism for early stage ventures. Additionally, we find that most interviewees

explain that this relates to the demographic and economic status on one hand, and a

mindset,whichisnotculturallywiredtowardsventureinvestmentsontheotherhand.

By this theyrefer to the lackofwillingness topursue investments inalternativeasset

classes,astraditionalassetssuchaslandandfarmingareperceivedasmoreattractive.

Thisinfactcreatesadifferenceonthelevelofopportunitiesbetweenlocalfoundersand

foreignfounders,astheforeignfoundersusuallyhaveeasieraccessto‘lovemoney’.The

interviewee from the accelerator states “We don't have family, friends or a fool group

whereyoucangetinvestmentbecauseofthecountryandthedemographicandeconomic

status.”ThisnotionissupportedbyseveralintervieweesfromVCfirms.

Asanalternativeto ‘lovemoney’,several intervieweesstatethatmorestartupsshould

turn their attention towards impact fundingor grants as a solution to the investment

gap. However, the interviewees also acknowledge that many entrepreneurs will not

haveaccesstothese,andhencethegrantsarenotperceivedassufficienttospurearly

stage financing, as they are currently being provided. The interviewee from VC 5

comments on the lacking effect of grants, as they to a high degree are sector-based,

“Yeah,therearesomewhohaveaccesstogrants,butitdependsonthesector,andwhois

trying to promote that sector. Not everyone has access to grants.” It is perceived that

thosegrantsshouldbeprovidedmoreextensivelytotheearlystageventuresinthepre-

seed stage. Hence, the grants are not supporting entrepreneurs sufficiently as early

stagefinancingastheyareworkingintheindustrytoday.

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EventhoughbothPangeaAcceleratorandtheinternationalaccelerator,Antlerprovide

early stage financing to their incubees,many interviewees express an additionalneed

for early stage financial support from accelerators which is not currently provided

throughoutthesectortoday.Interviewee2fromaccelerator3highlightsAntler,hoping

that more andmore accelerators will begin to follow their example and provide the

startupswithapossibilitytogetcapital:“SowhenAntlerisactuallyprovidingthatmoney

theygivethemsomerunwaytogoandraisemoneyelsewhereandunderstandthevalueof

usingthismoney,cashburn,etc.Andit’sjustbringingingoodpractice.”Assuch,itwould

appearthatthereisaneedforthisalternativeofearlystagefinancingtostimulatethe

VCindustry.

AlthoughBAsaretraditionallythemostcommonvehicleforearlystageinvestmentsfor

startups, it is perceived by many interviewees that BAs do not provide sufficient

financial support in relation to the financing gap in the Kenyan VC industry. In that

regard, the interviewee from the industry association states that there are notmany

active BAs in Kenya nor in Africa in general, “We do not have a very prevalent Angel

community here.Wedonot havea lot of individuals that are angels on this part of the

continent, prettymuchmost of Africa.”As presented in section 4.1.4, there are a few

angel networks that are being established, but according to the interviewees, they do

notappeartobeveryactiveyet.

In terms of getting the BAs more active, interviewee 2 from VC3 states that more

education is needed as well as success stories to give high net worth individuals

confidence to make investments into startups and SME instead of the traditional

investments in real estate, general securities, government bonds etc. He states that

“There ismoney here. There are people herewho canwrite Angel tickets, andwho can

deploy that money. It is just about investor education and experience.” Hence, more

educationon investing in the local context and creationof success stories seem tobe

whatisexpectedbeforeBAsbecomemoreactive.Accordingtotheintervieweefromthe

industry association, the EAVCA appears to work on aligning the investors with the

expectationsofwhat is requiredandgettingagraspof the reality for the startups.As

such, the interviewee fromthe industryassociationargues that “oftentimesthe‘money

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people’ may not knowwhere the business side is sitting and the business side does not

knowwhere to find the ‘money people’.”As such it can be seen that although there is

currently a lack of early stage business angels, there are a number of facilitative

mechanismsoccurringintheindustry.

Additionally, there is a specific program to educate BAs taking place at Pangea

Accelerator.Theinvestorprogramisintendedtoeliminatetheinvestmentgapforearly

stage ventures, aswealthy individuals can get training in becoming a BA investor. As

such,localaswellasforeigninvestorsparticipateinaprogramthatrunssimultaneously

withtheacceleratorprogram,whereinvestorsattheendoftheprogramarepresented

withinvestmentopportunitiesintheincubeventures.Abouttheinvestorprogram,the

interviewee from the accelerator explains “What that does is it provides a better

understanding of these businesses, their areas ofweaknesses and how they can support

themasinvestors.”A similar thing is takingplaceatoneof theuniversities inNairobi,

StrathmoreBusinessSchool,whereVCisbecomingasubjectofresearchandhasbeen

addedtothecurriculumforsomebusinessprograms.Interviewee2fromVC3explains

that “there's a lot of other people who are taking action so for example Strathmore

businessschool is tryingaprogramwheretheyareeducatingpeopleonwhatthiswhole

newassetclass,theventurecapitalassetclass.”Hence,we find thatalthough initiatives

aretaken,suchastheinvestorprogram,thereisaninstitutionalbarrierwithregardsto

intermediary financialmechanisms, inparticularBAs.AstheVC industry isstillyoung

and developing, there is hope and confidence that the market will accommodate the

needs and that actors will come in and fill the institutional voids with different

solutions.

Ultimately,theeffectofalackofintermediaryfinancingmechanismsisreflectedinthe

small number of ventures that are ready to receive a VC investment, particularly

concerningtheventuresandstartupswithlocal,Kenyanfounders.Hence,thisaspectis

indeed perceived by the interviewees as a challenge, why it conforms with our

propositionofintermediaryfinancingisanunderdevelopedsupportiveindustryandan

institutional barrier to venture capital in Kenya. The interviewee from VC 1 firmly

describestheissue,“Thereareagoodnumberofstartups,butaverysmallproportionof

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themareinvestableandagain,itcomesbacktothelimitationsfacedbythelocalfounders.

Sothequestionyouendupinisyouhaveaverylargepooloffundschasingaverysmall

number of deals.” Hence, we highlight that there is an important institutional barrier

related to the early-stage financing,which is underdeveloped in termsof growing the

startupsandmakingthemmoreattractiveforVCinvestments.Itishighlightedthatthis

lackofintermediaryfinancingmechanismsismostsevereforlocalentrepreneurs.

5.3.3Acceleratorprogramsforpipelinedevelopment

Ingeneral,notmanyVCfirmsusetheincubatorsoracceleratorsforcreatingapipeline

ofinvestableopportunitiesandsourcingtheirdeals.Thishasmostlytodowiththefact

thattheVCsdonotperceivetheventuresthatcomeoutoftheacceleratorprogramsto

beinvestmentreadyastheirbusinessmodelsandmarketsarenotscalableenoughtobe

attractive foraVC investor.Hence it isperceivedthat theacceleratorsdonotseemto

provide ventures with enough traction, revenue and growth potential within fitting

industriestotheVCfirms.Usingtheanalogyofthehockeystickgrowth,theinterviewee

1fromVC3explainshowexponentialgrowthisoftenlackingamongtheventuresthat

havegonethroughtheaccelerators.Hestates,“noteverybusinessthatexistsisaventure

capitalkindofinvestment.Noteverybusinessisgonnahaveahockeystick.”Assuch, the

intervieweecontinues toconclude thatacceleratorshavenotbeenperceivedas fitting

mechanismsforVCpipelinegeneration,“SoIthinkthat'swhytheyhavesofarprovennot

tobeanecessary,goodmechanism.[...]Weareventurecapitalinvestors,sowearereally

looking for those scalable business models, and that kind of hockey stick kind of stuff.

Unfortunately, that's not what kind of pipeline we have been getting from the

accelerators.”TheintervieweefromVC5statesthatitparticularlyrelatestothecapacity

of the entrepreneurs, “I think there are too fewopportunities inKenya in relation to a

numberofinvestmentsintheregion.AndasIsay,thisismainlybecauseofthequalityof

entrepreneurs available in the country.” The interviewee 2 from VC 3 additionally

highlightsthisissue,arguingthatthereisalackofinternationalbestpracticesamongst

thelocalventures.Particularly,hearguesthatacceleratorshavenotbeengoodenough

atprovidingtheseinternationalbestpractices,hence,enablingknowledgetransfers.He

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statesthat“Someofthepeoplethatwererunningtheseacceleratorprogramswerenotas

experienced or were not bringing international best practices, which is obviously super

helpful for companies that are going to raise money from international funds in the

future.“ As such, this knowledge is particularly highlighted as being useful for the

ventures upon raising foreign capital. Based on our interviews, it is a common

perception that the accelerators do not provide the VC firms with the right type of

startups.

Nevertheless, some interviewees also highlight that there are improvements and

positiveaspectsonvarioustopicsrelatingtotheaccelerators.Assuch it ishighlighted

from various sources that the accelerators help professionalise the startups. One

exampleistheintervieweefromVC4,whostatesthatheandhisteamhaverealiseda

benefitfromusingtheacceleratorprogramsforscreeninganddealsourcing,astheycan

reduce the time forcarryingout theduediligence.This isbecause theacceleratorhas

beenablehelp thestartup inreportingandbecomemoreprofessional,“Whatwehave

cometorealizeisthatsometimesitbecomesmucheasierforus,asaninvestmentteam,to

closedealswhichhavecomedirectlyfromanaccelerator.Ifyoulookattheperiodoftime

wespendinaparticulardeal.Ittakeslesstimetocloseadealthathascomedirectlyfrom

an accelerator program.” Thus, he argues that the accelerators have some resources

available,whichneverthelessassisttheVCsintheirduediligenceprocess.

Eventhoughourresearchhasshownthatthenumberofincubatorsandacceleratorsin

Kenya isgrowing,notallventurecapital firmsseemtobeawareof them.Manyof the

interviewees expressed their relationship with the local accelerators as inadequate,

oftenstatingthattheydonotknowaboutthem.Theinterviewee2fromVC3highlights

thisissue,“TherearesomanyaccelerationsthatIjusthearabout,andIdon'tknowabout

them. In theory, they should know about us, and we should know about them.” He

consequently describes a lack of awareness about the operations of the accelerators,

which quite obviously is a prerequisite for establishing a supportive and mutually

beneficialrelationship.

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In summary, as we find that although there are some benefits related to using the

acceleratorprogramsintermsofshorteningtheduediligence,theacceleratorsarenot

perceivedsufficientforpipelinegeneration,thissupportiveindustryisunderdeveloped

and functions inadequately for the VC firms, and can therefore be perceived as an

institutionalbarrier.

5.3.4Exitopportunities

As we find that most VC firms operating in Kenya have foreign invests, most capital

invested in the VC firms comes from developed countries and foreign DFIs. It is

perceivedthatthiscapitalhassofarnotbeenabletoprovideasufficientamountofexit

opportunitiesthroughacquisitions.Itisacknowledgedthatthepensionfundsandother

PE investors are currently not perceived as supporting theVC industry sufficiently to

createopportunitiesforexits.Additionally,IPOsinKenyaarecurrentlyhighlylimitedas

aneffectofanunderdevelopedstockmarket.Asaresult,theexitopportunitiesarefew,

and the interviewee from VC 2 even claims, “No, I found out that there are none.”

However,ashighlightedearlier,newregulationsareenacted to facilitate the inflowof

domesticcapitaltotheindustryandintervieweeshavesomeconfidencethatwithtime

therewillbemoreexitopportunities.

ReinforcingthattheKenyanVCindustryisstilltooyoungtoseetherealpictureofthe

opportunities ofmaking an exit from investments, the interviewee from VC 5 argues

“Whenwe lookatVC in theregion, it isbarelyeightyearsold,meaningprobablyyou're

startingtoseethefirsttypeofexitscominginfromthisyeargoingon.[...]Theinvestment

periodisformostVCsbetweenfiveto10years.SoIthinkthattimewillbethebesthealer.I

know as timemoves on, to give us an opportunity to have more exit happening in the

regionandpeoplemakingmoneyfromtheseVCs.” In an equalmanner, the interviewee

from the industryassociation is ratherpositiveabout thedevelopmentof localLPs in

theKenyanprivatecapitalindustry,asinvestmentsarebeginningtocomeintoPEfunds.

Referringtothelawfrom2016,shenotesthat“Wehavebeenabletomobilizesomelocal

pension funds and insurance funds to invest in private equity as LPs.”As such, pension

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funds are increasingly looking into private capitalmarkets. Thismay have a positive

effectontheentireindustry,asventurefundsmayfinditmorecommontoexperience

exitsfromtheirinvestments,astheirsharesintheinvesteecompaniescouldbebought

byalocalPEfund,inadditiontootheracquisitions.

Intermsofexitinginvestmentsthroughaninitialpublicoffering(IPO),wefindthatthis

supportiveindustryisalsohighlyunderdevelopedanddoesnotsupporttheVCindustry

sufficiently.Lookingat the investments thathavebeenmade inKenyaover theyears,

oursecondarydatadoesnotseemtoconfirmanystartupexitsthroughIPOs.Thishasto

dowiththedevelopmentofthepublicstockmarkets.ThishasbeenanissuefortheVC

industryassociationsacrossAfrica.Assuch,theintervieweefromVC1referstoEAVCA,

stating that “Someof themeasures that the venture capitalassociations in thedifferent

countries are trying to promote are related to exits, which are a big problem in Africa,

generally. Not many venture capital funds have managed to exit.” In particular,

interviewees express little confidence for the development of a public stock market

whichcouldenable IPOsas thepublicdoesnothavemuch trust in thestockmarkets.

Referring to some IPOs that happened in the past, the interviewee from VC 5 states,

“Peopleprobablyfeeltheinformationflowiskindofsometimesinterferedwith.[...]andwe

didseeoneortwoIPOkindofcrashingdownfromthepricetheystartedonanditcrashed

almost likeahalfprice.So thatkindofgenerated some fear in thepublic.” As such, the

public markets are not working well in terms of providing exit opportunities for VC

firms.However,severalintervieweesrefertoarecentmodificationoftheKenyanstock

market, the NSE, concerning a new segment called the growth enterprise market

segment (GEMS) for SMEswith abookvalueof at least $100,000.This indicates that

measureshavebeentakentomakeitmoreattractivetobecomelisted,andsupposedly

thatcouldleadtomoreinformationbeingdistributedandincreasethepublic’strustin

thefinancialmarket.

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The industries andmarket institutions that supportVC investments inKenyaare to a

highdegreeunderdevelopedandconstituteaninstitutionalbarrierforVCinvestments.

This concerns the insufficient information agencies, where the VC cannot get enough

widespreadandreliabledata.Additionally,thelackofintermediaryfundingforstartup

financing rounds prior to VC investments,where especially BA investments and ‘love

money’ serves a vital role, are highlighted as problematic for ventures with local

founders.Moreover,thelackofexitopportunities,reflectedinapoorpublicmarketand

alowdegreeofpensionfundsinvestinginPEwereperceivedasaninstitutionalbarrier

relating to underdeveloped supportive industries.The figure below illustrates the

findingsinrelationtothepropositions.

Figure9:Illustrationoftheinstitutionalbarriersperceivedbytheinterviewees.Thefigureillustratesthe

deductive approach towhichwe explore the institutional challenges toVC in emergingmarkets, in the

contextonKenya.

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5.4Qualificationoffindings

ThefindingsshowthatallVC firms, independentof fundstructureandtypeof limited

partners, face institutional barriers to somedegree.Thesebarrierswereperceived as

challengingforVCfirmsfundedbyfamilyofficeswithlongpresencesinthecountry,as

for newly founded VC firms with foreign investors, as well as for impact focused VC

firms receiving funding from large development banks. Thus, it is shown that the

institutionalbarriersarewidespread, causing challenges forall actors in the industry.

WefoundhoweverthatthesebarrierspertaintothevariousstagesoftheVCfundcycle

and that these barriers additionally cause varying degrees of severity to theVC firms

dependingonwhichstageinthefundingcycletheyoccur.Forexample,theVCfirmsface

thebarriersrelatingtofinancialreportingandaccountingstandardsparticularlyduring

the screening and deal sourcing stage. At this stage many VCs struggle with the

reliability of information provided by the ventures, particularly local businesses that

may stem out of family businesses ormore informal business setups. Furthermore, a

lackofgovernanceandformalreportingmechanismswasalsoperceivedasanissueof

integrityduringthescreeninganddealsourcingstageaswellasduringthemonitoring

andsupportingstage.

Additionallyourfindingsshowthatalthoughthereisagrowingamountofintermediary

informationproviders,mostVCsdonotperceivethesetoprovideadequateinformation

on the industry. Further, some VCs perceived the regulatory uncertainty, specifically

relating to election cycles as a challenging factor. In particular the funding stages but

also the investing stage of the venturemay be complicated due toworries regarding

stability in the countryaswell as lackof regulatoryenforcingmechanisms.Moreover,

our findings show that the lack of intermediary supportive actors such as business

angels and accelerators are significantly hindering the development of early stage

ventures,thuslimitingtheamountofinvestableventuresavailableforVCfirmsduring

thescreeninganddealsourcingstage.Apartfromthefinancialaspect,ourfindingsshow

that the lackof international businesspractices and technical skills is further limiting

theeffectivenessoftheseaccelerators.Furthermore,exitopportunitieswereperceived

asoneofthegreatestchallengestotheVCindustryinKenya.Limitedopportunitiesfor

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IPO,aswellaslargerPEsandotheractorswhocouldenableexitsthroughacquisitions

wasadditionallyperceivedasabarrierrelatingtothelackofsupportiveindustries.Asa

result of these institutional uncertaintiesmany VCs turn to foreign founded ventures

who they perceive as better prepared in terms of providing accurate reporting,

contractual obligations and overall higher degree of startup experience. Hence, the

Kenyan VC industry is largely focused around networks of foreign founded ventures,

causing liabilityof outsidershipmainly topertain to local foundedventures.Although

theKenyanVCindustryisveryyoung,ourfindingsshowthatmanyVCshavestruggled

seeing their investmentscomethroughas foreign founders tendto lackknowledgeon

the localmarketdynamicsandregulatorysetting,ultimatelyconstraining thescale-up

and success of the venture, thus facing issues relating to the liability of foreignness.

Althoughourintervieweesdidnotseemtoperceivethelackofinvestableopportunities

as particularly challenging, many did see the lack of knowledge of the local market

dynamics as constraining, forcing the VCs to support the ventures in getting their

businessmodels,productsandservicestofittheKenyanmarket.Finally,althoughthere

isalackofinvestableventuresfoundedbyKenyans,networksaroundforeignfounders

presentanadequateamountofinvestableopportunitiesforVCfirms.

5.5CopingStrategies

Having answered the first part of the research question related to the institutional

barrierstoventurecapitalinemergingmarkets,thissectionanswersthesecondpartof

the research question, “and what strategies do venture capital firms use to overcome

these?”Basedonouranalysisofprimarydata,wefindpatternsfromtheVCfirmsthat

pertaintohowtheycopewithsomeoftheinstitutionalchallenges.Assuch,todiscover

thesepatterns,wefinditpurposefultoincludethedataextensivelyandpresentmultiple

quotesintheanalysis.Wehavefoundfourstrategies,whichVCfirmsusetocircumvent

the issues relating to institutional barriers. The section below starts by outlining the

institutionalavoidancestrategieswhichincludesstrategieswheretheVCfirmseeksto

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avoiddealingwiththelocalinstitution.Secondlyweproceedwiththelocalknowledge-

capturing strategies, which includes the strategies that firms adopt to gain local

knowledge and circumvent issuesmainly relating to the liability of foreignness. The

third type of strategywe call diversification strategies, including strategies that firms

mayadopttospreadtheriskrelatedtopoliticaluncertainties.Thelaststrategyincludes

strategiesspecificallyfocusingonovercomingtheissueoflackofgovernanceandformal

reporting. Combinedwe find these strategies to dealwith specific institutional issues

relatingtotheVCfundcycle.

5.5.1Institutionalavoidancestrategies

We found that as a result of the institutional barriers such as the lack of reporting

standards, inadequate supportive industries and regulatory uncertainties, many VC

firms turn their investments to foreign founded ventures. It is perceived that foreign

foundedventuresarenotasheavilyaffectedby the institutionalbarriersandare thus

better structured in terms of governance and formal reporting and hold an overall

betterpreparednessintermsofprofessionalizingandscalingstartups.Assuch,foreign

networks are crucial to take part in in order to copewith institutional barriers. Such

networks were perceived as particularly important during the screening and deal

sourcingstageoftheVCfirm.Interviewee2fromVC3explainsthat“Primarilywewill

get them [thedeals] throughournetworks, becausewehave extremely strongnetworks

between the three of us [...]. We have really, really strong networks.” He therefore

emphasizes theneed fornetworks in theKenyanVC industry.Leveragingnetworks to

overcometheissueofinadequateinformationwasparticularlyhighlightedinrelationto

screeninganddealsourcing.The interviewee fromVC1states that“Youhavesomany

otherrelatedventurecapitalfundswhohavedoneduediligenceandtheyhavesharedthis

informationwithco-investorsandsodetailsofthisparticularsectorindifferentcountries

isknown."Describinghowtheirscreeninganddealsourcingprocessisfacilitatedlargely

through the information they get from their network belonging. This notion was

additionally highlighted by the interviewee 2 fromVC 3,who explains, “Networksare

fundamental.Imean,youcan'tfinddealswithoutanetwork.Tolookatourselves,we'rea

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generalistfund,wearesectoragnostic,sowehavetobuildanetwork.Itwouldhavebeen

pointlesstobeageneralistfundandnothaveanetworkofpeopleacrosssectors.”Assuch,

it is emphasized that the need for networks to overcome the information gaps is

particularly importantfor industryagnostic firms.TheintervieweefromVC5explains

thattheirownduediligenceprocessisheavilyreliantontheirnetworksfortrustworthy

information, stating in relation to the issue of lack of corporate governance and

reportingthat“Yeah.Itdoesaffectduediligence,andthat'swhyprobablybeforewedothe

due diligence, we really have to look at a number of sources of information from the

expertspointofview,(..)which iswhywetrytogatherasmuchaspossiblethroughour

network.”He emphasizes the importance of networks and the information they may

provideinordertoovercomethechallengesrelatedtofaultyreportingandinformation

ontheventuresperformance.

Apart from providing information, networks are also described as direct sources for

discoveringdeals.IfoneinvestorisapproachedbyaVCbutmaynothavethepossibility

toinvestatthatparticulartime,he/shemayrefertheventuretoanotherVCwithintheir

network.TheintervieweefromVC4highlightsthatconnectionsandrelationstoother

investorsisthemostusefulmethodforscreeninganddeal-sourcing,“Referralcomesin

handy, investor conferences, subsectormarketing, youmap out and identify some of the

companiesoperating inaparticularsectorandthen,youknow,youpayavisit.The fact

thatwe'vebeenintheindustryformorethan15years,alsogivesusanedgewhenitcomes

tosourcingdeals.Imean,we'vecreatedagoodname,withinthenetworks.”Assuch,we

find the network amongst VC firms as crucial. The networks of founders were

additionally highlighted as important sources for deals. The interviewee from VC 1

states that “Ourapproachtogeneratingdealsandoriginatingthemisbasicallybuilding

thisnetworkwiththefounders.”Consequently,hehighlightstheimportanceofnetworks,

notonlybetweentheVCfirmsbutalsoamongstfounders.Inrelationtoscreeningand

deal sourcing foreign founders networks are crucial, asmost VC firms perceive these

venturestobelessaffectedbyinstitutionalchallenges,thusavoidingthesebyfocusing

on foreign founders. The interviewee from VC 1 states, “Oneway to do it is to take a

proactiveapproach.Soyoutraceback,basicallyhowthesebusinessesarestarted.Andyou

will realizemostof thesebusinessesareactually startedby foreign founders.Soyoucan

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either start by building a network of other founders who have actually already built

businesses in Africa or building a very good relationship with some of the top venture

capital funds in themarket.And so you canalways followuponany investmentsorget

windofadealfromsomeofthefoundersbeforeitblowsupandisquitepopular.”Hethus

states thatasmanyof theventures inKenyaare foreign founded, thesenetworksand

connectionsarecrucialforfindinginvestmentopportunities.Gettingintothenetworks

of the successful founders is highlighted to be quite feasible, as the VC would get to

knowaboutfutureinvestmentroundsdirectlyfromthefounders.

Thekey to joinsuchnetworks isperceived to include longexperience in the industry.

TheintervieweefromVC5statesthat“Likemyself,havingworkedinthesectorforlong,

I'mlookingataparticularVC,whichisinacertainarea,Iprobablyhaveacoupleofguys

whoImightreachoutto,andtrytogatherinformationforthesector,theirexpertiseand

allthat."Thus,hestressestheneedforexperiencewithinthesector.Itcouldtherefore

beaparticularstrategyforVCfirmstorecruitlocalstaffwithexperienceintheindustry,

togainaccesstothesenetworks.Furthermore,networkswerealsoconsideredasavital

source of agency against regulatory bodies and the government. In relation to the

importanceofnetworksininfluencingthepolicymakersandregulation,theinterviewee

from the industry association states, “Relationships are whatmakes the VC ecosystem

work.Peopleinvestintootherpeoplebasedontherelationshipstheyhold.SoIfyoucanget

relationswith thepolicymakersor theregulators, it is justoneothermeasure thathelps

youtodoyourbusinessmoreeffectivelyintermsof,youknow,therightpersontocallto

getthingsdone.“Hence,theimportanceofconnectionswith localgovernmentagencies

toensureasmoothregulatoryenvironment isemphasized.Thecollaborationbetween

these network partners extends purely information advantageous to include

cooperative efforts to spread risks. Moreover, the interviewee from the industry

associationhighlightsthebenefitofco-investingwithotherVCsasastrategytospread

theriskstatingthat“Mostofthemwilldoclubdealstospreadtherisk.”Hence,clubdeals

between twoormoreVCs from thenetworksare suggestedasanappropriateway to

dealwiththeriskyenvironment.

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5.5.2Localknowledge-capturingstrategies

ItwasperceivedasnecessarytorecruitlocalstotheinvestmentteamsoftheVCstogain

access to localmarket intel and understand the challenges facing theKenyanmarket.

TheintervieweefromVC5states“VCswhodon'thaveaconsistentpresenceinKenyaand

are still [investing] remotely from Silicon Valley are failing because the problem was

probably that the solution was not a local solution. So something is working either in

SiliconValleyorsomewhereinEurope,whichtheyaretryingtoplugintoKenya(..).Weare

quitecarefulonthat,andthat'swhywehavealocalteam.”Thus,havinga local teamis

considered crucial for investors to navigate the local setting. In light of the benefit of

local knowledge, the interviewee from the accelerator additionally states “Ifyou'rean

investor,andyou'reguidedbysomeonewhounderstandsthemarket,thenyou'reableto

seethebusinessopportunity,you'reabletoclearlyseethatbusinessmodelandhowthey

can sustain themselves and how they can scale to othermarkets.”Which refers to the

advantageofhavingstaffwhounderstandsthelocalenvironment.Theintervieweefrom

VC4furtherstates,inrelationtotheimportanceofhavingalocalteamthat”Oneofthe

reasonswhyweseeourselvesascompetitiveandthatwehaveanedgeisbecauseourteam

islocal.Weunderstandthelocalenvironment,weunderstandthelocalchallengesofthese

entrepreneurs.” This was particularly highlighted as a necessary strategy to adopt,

relatingtothescreeninganddealsourcingprocessoftheVC.Theintervieweefromthe

industryassociationadditionallymentions, “theLPswillbeforeignbutthebootsonthe

groundwillalotofthetimebelocals.Again,forthesameassumptionthatyouknowwhere

togotogetdealsasalocalyouknow,howtounderstandhowthemarketsworkasalocal,

andhowtoevaluatetheproductorserviceinthemarkettorealizethepotentialreturnsof

theinvestment.[...]Inparticular,theywanttousetheclub'sdealspacetoalsolearnabout

howtodobusinessintheregion.”relating to the importanceofrecruiting locals for the

investmentteam.

Consideringoneof themostcommonpitfallsofVCsandtheventures they invest in is

the knowledge of the Kenyan market context, gaining such knowledge is considered

crucial.Inrelationtothis,itwaswidelyacknowledgedthatinordertocircumventsome

ofthelocalchallengesandunderstandthelocalsetting,VCsneedtoinvestinlocalfirms.

TheintervieweefromVC2states,“Myfeelingisthatifyouwanttoberelevant,youwant

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toinvestinlocalfoundersbecausetheyjustknowtheplace.Youknow,Iwouldn'ttrusta

KenyanguytobuildaventureforFrenchpeople.Iguessitisthesamewaytheotherway

around. Even though, of course, if you have lived over there, you have experienced the

peopleandtheirhabits. Itmakesyoumoreandmorerelevantthroughouttheyears.”He

furtherarguesthat"I'vemetalotofforeignersthatwerenotgivingusagoodfeelingandI

metalotoflocalpeoplethatwerenotgivingusagoodfeeling.Inourportfoliowehavea

mix.”He thus highlights the need to include both foreign and local ventures in the

portfoliotospreadtheriskofliabilityofforeignness.TheintervieweefromVC4added

to the importance of including both foreign ventures and local ventures that, “we

leverage a lot on their understanding of the international market and if the foreign

foundersgettomeetwithlocalentrepreneurswhohaveagoodunderstandingofthelocal

environmentthenit'salwaysaveryimpactfulpartnership.”Thus,theneedforinvestingin

local ventures that hold specific knowledge on the Kenyan market is emphasized.In

relation to overcoming the challenges related to retrieving information about the

markets and sectors, interviewee 1 fromVC3 states that “I thinkyouhave tobeabit

proactivetogetit.LikeIcan'tgotoagovernmentdesktodaytoask[...]butifyougetinto

therightnetworksandmeet therightpeople.” Hence networks and the intel theymay

provide can help VC firms overcome institutional barriers relating to information

asymmetry. Apart from VC networks and founder networks, connections to industry

experts were also perceived as an important strategy for overcoming the challenges

relatedtothelackofinformationontheindustries.

5.5.3Diversificationstrategies

In order to spread the risks associated with investing in Kenya many interviewees

highlight the need for investment diversification. To diversify risk and not being too

vulnerableuponasinglemarket,theintervieweefromVC4emphasizetheimportance

ofbeingriskaverseintermsofdiversifyinginvestmentsacrossindustriesandcountries

in the region stating that “If IweretoadviseondevelopingorraisingfundswithinEast

Africa,thenitwouldbeidealtohaveamultiplecountryfocus,itwouldalsobeidealtonot

to limityourself intoonesector. Itwouldmakemoresense intermsofthede-riskprofile

andalsodiversifyingyourportfolio.”Accordingly,heproposesthatspreadingrisksover

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notonlyindustriesbutalsocountriesisnecessarytoovercomethechallengerelatedto

institutional risk.The interviewee fromVC4particularlyhighlights the importanceof

such diversification in relation to the uncertainty in the region stemming from the

election cycles, arguing, “It's always uncertain what will happen. We are trying to

overcome that through investments in diversified geographies. You know, having some

investment in Kenya, Uganda, Rwanda, Tanzania, which have different election cycles.”

Highlighting the political cycles as particularly challenging, and investing in various

countriesasaparticularstrategytoadopttoovercomethischallenge.

5.5.4Governancestrategies

OneofthemostevidentchallengesfacingtheVCfirmsisrelatingtothegovernanceand

reportingoftheventures,particularlyduringtheduediligenceandscreeningstage.We

found a number of measures that the VCs are taking to overcome these challenges.

Relating to the issues of governance, the interviewee from the industry association

emphasizetheimportanceoftrainingtheentrepreneurs,statingtheirowninvolvement

in this as focusing on “carrying out training to the communities around how private

capitalworksor specific fractionsofprivate capital likehow tobuild structures suchas

due diligence.” Such training is additionally required from the VC firms. As many

ventures are lacking routine in relation to reporting and their financial information

someVC firmsare forced to takeona supportive role,whichextends theirotherwise

strategicsupport.TheintervieweefromVC5statesthat“Evenifwetrytolookatitfrom

a strategic point of view,we often get in touchwith these ventures almost on aweekly

basis, where we'd be meeting and brainstorming on the best way to handle such

procedures.” Thus, the importance of taking an active role in the ventures to ensure

coherent and professional reporting procedures is emphasized. Additionally the

interviewee from VC 4 highlights the need for the VCs to take an active role in the

companies stating that, "these are integrity issues so you have to raise it with the

management.”Furtherhementionsthat thekeytosuccess is the founders'acceptance

onsuch involvement from the investors, suggestinga carefulapproach to training the

foundersonthesematters.Hefurtheremphasizedtheneedtobuildtrusttoovercome

this challenge, stating, “Youhave toearn their trust toaccess the realoriginalbooksof

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accounts,which speaks to the business performance, because that's the onlyway you're

goingtohaveaviableinvestmentdecision.”Assuch,itisshownthattrustisanimportant

cornerstone in the relationship and cooperation between the VC firms and their

portfolioventures.


InthischapterwehaveexploredthecopingstrategiesusedbytheVCfirmstoovercome

theinstitutionalbarriersintheindustry.Indoingso,wetookaninductiveapproachto

theempiricaldata,aswelookedforpatternsinhowtheVCfirmswereoperating,based

ontheinterviewees'considerationsandstatements.Throughthisprocess,weidentified

strategicandoperationalimplications,whichwehavesummedunderfourmaintypesof

strategies. These are Institutional avoidance strategies, Local knowledge-capturing

strategies,Diversificationstrategies,andGovernancestrategies.

Figure10:Inductiveapproachfrombarrierstostrategies.Anillustrationofhowourdeductiveapproach

toinstitutionalbarriersinemergingmarketshasbeenfollowedbyaninductiveapproachtoexploringthe

copingstrategiesusedbyVCfirms.

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6Discussion

Thetheoreticalandstrategicimplicationsandcontributionsofthefindingsisdiscussed

in the following sections. How the study contributes to knowledge on institutions in

emergingmarketsandtheirimplicationsfortheVCindustryisdelineated,followedby

insightsonhowthefindingscanbetranslatedintofocusareasforpolicydevelopment.

Subsequentlyweprovideacriticalassessmentofourresearchmethodandapproach.

6.1EmpiricalGeneralisations

6.1.1Thelackofcapitalinemergingmarkets

Withregards to theunderlyingpremiseof this research, that there isalackof capital

hindering the flow of investments and the growth of SMEs in emergingmarkets, our

primarydataraisesquestionsaroundthispremise.Inparticular,ourresearchhighlights

the importance of acknowledging the complexity and the roles of institutions in the

discussionaroundunlockingcapitalinemergingmarkets.Inrelationtoventurecapital,

we find that there is an abundance of capital and that the number of VC firms in the

industry is reaching saturation in relation to the amount of investable ventures in

Kenya.Hence,ourfindingsshowthatthereisalackofinvestableventures,particularly

venturestiedtothelocalpopulationthroughlocalfoundersormanagers.Itisshownin

ourfindingsthattheseventuressufferparticularlyfromtheliabilityofoutsidershipas

an effect of institutional barriers such as lack of reporting standards, early stage

financiersandadequatetechnologicalsupport.Thus,itisourfindingthattheappraisal

of Kenya as the startup hub, Silicon Savannah, mainly points to the development of

foreignfoundedventures.Despitealsofacingparticularchallengesrelatedtoliabilityof

foreignness it is emphasized in our findings that such ventures have the capacity of

circumventing institutional barriers in Kenyamuch due to the effects of institutional

stability in their home countries; relating to their overall governance and reporting

standards, early stage financing support throughbusinessangels andwell established

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acceleratorprograms, inadditiontotheirstrongnetworksstemmingfromeducational

andprofessionalbackgrounds.

Therefore,ourfindingsshowthattheperceptionofalackofcapital,astheoverarching

challengetoSMEgrowthandeconomicdevelopment,requiresfurtherinvestigation. in

particulararoundtheinstitutionswhichsupportthisdevelopment.Acknowledgingthat

the issuessurroundingVC investments indevelopingcountriesandemergingmarkets

are complex, we see our findings to be an important contribution. As in fact many

internationalorganisationsanddevelopmentprogramstaketheirpointofdeparturein

theverysamepremiseaboutalackofcapital,thisfindingfromourempiricalanalysisis

an important contribution toacademiaand to thepublicdebateabout the correlation

between early stage investments and economic development in developing countries

andemergingmarkets.

6.1.2Institutionalbarriersandstrategicimplications

By assessing the validity of our propositions, we bring forward unique empirical

findings, which connect previous contributions to institutional theory in emerging

marketswithchallengesfacingtheactorsintheVCindustry.Additionally,ourresearch

discloses aspects of previous contributions to institutional theory,which our findings

have revealed as less prevalent in the context. As such, we highlight that some

institutionalchallengesaremoresignificantthanothersinrelationtotheVCfundslife

cycle.ThelackofcapacityaroundacquisitionsandIPOsheavilyinfluencestheVCfirms'

abilitytoexittheirinvestments.Assuch,theexitopportunitiescurrentlyheldbyforeign

VCnetworksareportrayedaslimited.DespitepositiveattitudesamongtheVCsonthe

recent tax reformations, political fluctuations and regulatory uncertainty is increasing

theperceived risk to invest inventures inKenya.Particularly, inadequategovernance

and reporting requirements and capacitybuildingorganisations aswell as the lackof

earlystagefinancierssuchasbusinessangelsarebarrierstoproceedinginvestmentsin

localventures.TocopewiththesechallengeswefindthatVCsseektodiversifytheirrisk

byinvestinginnumerousindustriesandcountries.Additionally,ourfindingsshowthat

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VCsareincreasinglyinvestinginforeignfoundedventures,perceivedtobelessaffected

by institutional barriers. Although this may give rise to some initial liability of

foreignness, many VCs cope with this by inserting local teams with the capacity to

supporttheirventuresinnavigatingthelocalcontext.Wedofindthatthesustainability

ofproceedingwithaninvestmentstrategythatlargelyfocusesonforeignventureswas

questioned.Notonlybecauseofthesocietaldebate,whichthisphenomenapertainsto,

but also the capacity of long term business success these ventures may achieve

considering the liability of foreignness, which the founders are facing in relation to

product-marketfit.

Furthermore, we perceive our findings to contribute to the discussion about venture

capitalasasupportingmechanismtoentrepreneurshipandSMEgrowth.Inrelationto

thenotionhighlightedbyLerner(2010),thattheVCfirmssupportandprofessionalize

ventures,ourresearchshowslimitedproofofthis.AsourfindingsshowthatmostVCs

pursue investments in ventures with foreign founders who have proven business

acumen, the capacity of the VC to contribute to the entrepreneurial development in

Kenya is questionable. Looking at the entire VC industry, we find indications

highlighting a risk of economic enclaves where foreign capital is being strategically

investedbyforeigninvestorsintoforeignentrepreneurs.

Furthermore, we perceive our findings to confirm previous issues related to the

business context of emerging markets as suggested by Peng (2001), Hoskisson et al.

(2000)andKhannaandPalepu(1996).Assuchitisourbeliefthatthefindingsfromthis

researchmaytoalargeextentbegeneralizedwhenconsideringfacilitativemechanisms

forVCinvestmentsinotheremergingmarkets.

6.1.3Canwegeneralisefromtheempiricalfindings?

Givenourresearchapproach,thisthesisgeneratesimportant,in-depthknowledgeabout

the empiricalworldof venture capital indeveloping countries andemergingmarkets.

Throughthemultiple-casestudystrategy,wearefurthermoreabletocompareandsee

whethertheobservationsmadeinonecasealsooccurinothercases.Hence,asourcases

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aredifferentintheirnature,i.e.thetypeofVCfirm,compositionofstaffandinvestment

focus, themaximumdeviationselectioncriteria implies thatour findingsarebasedon

representativeandreliablefoundationsforgeneralisationsacrossinvestmentfirmsthat

operateinKenya.ThisrelatestothefactthattheVCfirmsexperiencealmosttheexact

sameinstitutionalbarriers,despitetheirorganisationalandstructuraldifferences.Since

we can confirmmany of the barriers highlighted in the IB literature on institutional

theoryinemergingmarketstobepresentinourcasestudyofKenya,itisourperception

thatthesefindingscantoalargeextentbegeneralisedacrossVCindustries,notonlyin

sub-Saharan Africa but in developing countries and emerging markets in general.

Additionally,wefindthatthecopingstrategiesrelatedtotheseinstitutionalbarrierscan

beusedtoexplainhowVCfirmsoperateinemergingmarketsingeneral.

The topic ofVC in emergingmarkets has beenhighlightedby other scholars to be an

under-researched topic (Hain & Jurowetzki, 2018). As such, this is particularly

interestingaspublicationsaboutventurecapital inemergingmarketsmostly focuson

VCinvestmentsinChinaandIndia(Dossani&Kenney,2002;Ahlstrom&Bruton,2006;

Daietal.,2012).Additionally, thespecific industry focusonKenya isacontributionto

theexploratoryreportsandpublicationsoneconomicandinstitutionaldevelopmentof

Kenya.

6.2TheoreticalContributions

Theinstitutionalapproachtoventurecapitalinemergingmarkets

By assessing the venture capital industry in emerging markets from an institutional

perspective, we have constructed a theoretical framework in which we combine

financial theory with institutional theory. As such, we have developed a theoretical

framework to understand the interaction between emerging market institutions and

venture capital. The international business literature that investigates strategy in

emerging markets from an institutional perspective commonly considers

internationalisation strategy for multinational companies. We find however that

previouscontributionsbyscholarssuchasHoskissonetal.(2000),Peng(2001),Khanna

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&Palepu(1997,2010),Marquis&Raynard(2015),canbeappliedtotheVCindustryin

emergingmarkets as well. Likewise, financial theory on venture capital in developed

markets(Gilson,2003;Rajan,2010;Hall&Lerner,2010;Breuer&Pinkwart,2018)as

well as inemergingmarkets (Dossani&Kenney,2002;Gugu&Mworia,2016;Hain&

Jurovetzki, 2018)have to a large extent avoided the institutional theory.As such, our

findings have shown new applicability to the institutional approach by combining

financialliteratureonprivateequityandventurecapitalwiththeliteratureonemerging

marketstrategyandinstitutionaltheory.

Asweperceivethefinancialliteraturetoshedlightontheunderlyingmechanismsand

strategicdecisionsandprocessesundertheVCfundlifecycle,combiningtheseinsights

with the particular focus on institutions as the “rules of the game” provides a novel

understandingofthenatureofventurecapitalinemergingmarkets.Althoughwefinda

numberofpublications,whichalsoapproachventurecapitalinemergingmarketswith

institutional theory, including Ahlstrom & Bruton (2003, 2006, 2010), Lingelbach

(2015),Li&Zahra(2012),Hainetal. (2016),Ekanemetal. (2019), it isourviewthat

thisresearchpaperhastakenauniquefocusonthespecific institutionalchallengesas

wellasthecopingstrategiesdeployedbyVCfirmsinemergingmarkets.Thus,thisthesis

provides furtherdepthon the importanceof institutionalqualityandconsiderationof

the institutional context for academia around business strategy in the VC industry in

emergingmarkets.

6.3Implicationsforpractice

6.3.1ImplicationsforVCfirms

AsweexploretheinstitutionalbarrierstoVCinemergingmarkets,weshredlightonthe

mostprevalentchallengesforVCfirmsfromaninstitutionalperspective.Ashighlighted

earlier,we find these challenges to be generic and thus VC firms should be aware of

theseuponenteringlessdevelopedVCindustriesinemergingmarkets.Furthermore,as

wehighlightsomeofthecopingstrategiesthatVCfirmsusetoovercomethesebarriers,

we are able to make generalisations and suggestions for best practices in emerging

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markets.Furthermore, we found that VC firms may circumvent some of the risks

relating to the institutional barriers by diversifying their portfolio through various

industriesandcountriesintheregion,thusadoptingdiversificationstrategies.

With regards to the institutionalbarriers concerning lackof informationagenciesand

intermediary actors for pipeline generations, VCs may rely on professional networks

andrelationshipswithcolleagues in the industry,as theycanshare informationabout

new investment opportunities, relating to aspects of the institutional avoidance

strategies. Concerning the lack of knowledge about the local market, VC firms can

benefitfromcreatingproximitybyestablishingalocalofficeandhiringlocalstaff,who

can assess the product-market fit of investment opportunities, relating to the local-

knowledgecapturingstrategies.

Lastly, we find that in order to overcome institutional barriers related to the lack of

professionalisationoflocalventures’corporategovernanceandreportingstandards,VC

firmsmayneedtoengageoperationallywiththeventuresandimprovetheirstructures

andprocedures througheducation, relating to thegovernance strategies.Additionally,

we find thatVC firmsmay invest inventuresestablishedby foreign founders;as such

theycanavoidsomeoftheselocal, institutionalbarriers,as intheotheraspectsofthe

institutional avoidance strategy. However,we do not find this strategy sustainable in

relation to supporting the local economy and integrating local innovations and

entrepreneursintheindustry.

6.3.2Policyconsideration

Relating to the premise of the lack of capital as themain constraining factor to SME

growth in emerging markets, our research suggests the need for a holistic market

approach to guide policy makers and efforts from the global development

community.Basedonourempiricalanalysis,ourresearchprovidesanumberofareas

of consideration for future policy development on the topic of unlocking capital in

emergingmarketsthroughprivatecapital.

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Ourfindingsshowthatfuturepoliciesandinitiativesshouldfocusonthefacilitationof

early stage investments. Thismay include, but is not limited to, early stage financing

through grants or additional tax breaks and benefits for business angels, particularly

relating to theinstitutions which serve local entrepreneurs. Furthermore, it is our

finding that efforts should be made to support the creation of nuanced and reliable

databases of information about various sectors, which can be easily accessed.

Additionally, domestic regulation policy should focus on improving the general

reporting and governance standards to get more coherent financial reporting

mechanisms. Moreover focus must be put on strengthening the legal enforcement

aroundcommercial lawandshareholderprotection.Lastly,policydevelopmentshould

facilitateVCinvestmentsintermsoflimitingthebureaucracyandcostsassociatedwith

investing.

SuchpolicydevelopmentmusthoweverconsidertherisksoftheVCindustrybecoming

extractive,showingtendenciesofeconomicenclave.Assuchitisfurtherhighlightedthat

futurepolicyshouldconsiderthespill-overeffectsandlinkageswhichtheinvestments

arecontributingwith, inparticular relating to theparticipationof foreign investors in

thelocalmarkets.

6.4Evaluationofresearchstrategyandmethods

In this section,we aimat evaluating anddiscussing the limitations of our research in

termsofansweringtheresearchquestion:Whataretheinstitutionalbarrierstoventure

capitalinemergingmarkets,presentinthecaseofKenya,andwhatstrategiesdoventure

capitalfirmsusetoovercomethese?Weevaluatetheapplicabilityofthechosenmethod

andassesstheusefulnessof theresearchstrategyanddesign ingeneral inthe lightof

theoverallphilosophyofscience.Furthermoreweprovidesomeoftheconsiderationsin

termsoftheselectionofcases.

Having analysed the data and discussed the findings, we conclude that the research

strategy of a multiple-case study has fulfilled the goal of supplying useful and

appropriate information about the institutional barriers to VC in Kenya. Further, the

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combinationofdeductiveand inductiveapproachhasenabledus tobothcompare the

perceptionsof the institutional environment across cases andobservepatterns in the

interviewees’ statements about how they cope with these barriers. Looking in

retrospect,wefindthatmorecasescouldhaveprovidedfurtherdepthtothestudy.This

includesamongstothersVCfirmswithoutanofficeinNairobi,localentrepreneursand

entrepreneurs that have received VC investments, other accelerator programs, and

otheractorsintheindustrysuchasthebusinessangels.However,ashighlightedinthe

Methodsection,wefindthatthereisatrade-offbetweenahighnumberofcasesandthe

richnessofdatafromeachcase.Assuch,weareawarethatwearemissingoutonsome

perspectives on VCwithin the industry, but as we focus on the institutional barriers

from a VC firm perspective, we evaluate the relevance of our data as sufficient.

Nevertheless, other methods could have been included to provide additional

perspectives andmore richness to thedata.As such, observationswouldhavebeena

matchlessmethod to accompany the semi-structured interviews, although impossible

duetotheon-goingpandemic.

Furthermore,otherresearchmethods focusingontriangulationof thedatacouldhave

been applied to improve the validity of our findings. One example is by combining

qualitative and quantitative methods, where we in addition to the semi-structured

interviews couldhavedonea survey, focusingondifferent aspectsof the institutional

barriers. Although such research strategy would rather resemble a mixed-methods

approach, itcouldprovidedata foramorecomplexanalysis.However,wedidnotuse

this method because of our philosophy of science position, in which we are mostly

interestedinqualitativedatatocreatereasoningabouttheinstitutionalbarriersthatVC

firmsexperienceinemergingmarkets.Additionally,aswefindthatVCfirmsexperience

moreorlessthesameinstitutionalbarriers,wehaveassessedourresearchstrategyofa

multiple-case study and find that also a single-case study could provide valuable

insights.Throughasingle-casestudy,theresearchcouldhaveincludedastudyoftheVC

firm’sportfoliotoactuallydeterminetheextentoftheimpactofbarrierssuchasliability

offoreignness,governanceandreporting.Yetwefindthatourqualitativemultiple-case

study fulfilled thenecessary insights in termsof answeringour research.However, as

theresearchontherolesofinstitutionsintheVCindustryinemergingmarketsisrather

112

unexplored,weseealargepotentialforotherapproachesandmethodstoprovidenew

insightswhichcanenrichbothacademiaandpraxisonthematter.Sinceourconclusions

areratherrelatedtoeconomic,andpolicyfocused-differenttypeofstudyisneededto

confirmthevalidityofthesefindings

6.5Suggestionsforfutureresearch

This paper takes its departure in the notion of a finance gap prevailing in emerging

markets, commonly proclaimed by The World Bank and other development

organizations. The finance gap has particularly shown to be a hindering factor to the

growth of SMEs, otherwise praised for their role in contributing to economic

developmentandprosperityinemergingmarkets.Ourfindingsshowthatalthoughthe

Kenyan startup ecosystem is growing at a rapid pace in terms of investments, it is

unclear how this contributes to knowledge spillovers and overall socio-economic

development.Assuch,webelievethatfutureresearchshouldinvestigatetheeffectsof

the investments and ventures pertaining to linkages and knowledge spillovers.

Particularly this research should focus on creating a facilitative environment for such

knowledge spillovers. Furthermore, through the lense of development and economic

prosperity, further research should include a thorough investigation on the impact of

venturecapitalonthe importantsocietal functions in thecommunities theyaffect.We

believethisparticularresearchfocustobeofmuchneedtoprovideanuancedinputon

the creation of frameworks under the emerging investment type commonly noted as

“impactinvesting”.

Moreover, as this research shows, we find it requisite within the stream of financial

literature to further the depth of the role of institutions in strategy formulation.We

believe this to be particularly important as investments into emerging markets and

developing countries are on the rise. Especially, as different actors ranging from

businessangelsandacceleratorsto investmentbanksandpensionfundsarewidening

theirgeographicscope, futureresearchshould investigate the institutionalsettingand

strategicimplicationstheyface.

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Additionally,ourstudyleaveslittleroomfornovelfinancialsolutionstostartupssuchas

crowdfunding or peer-to-peer lending. Future research should therefore focus on

alternativestoVCfundingtospurlocalinnovativeMSMEgrowth.

Moreover,asthestudyfocuseslargelyontheinstitutionalbarriersforthefirms,further

research should consider the effectiveness of capacity-building efforts for the

institutions that dictate the success of the venture capital industry. As our study is

limited to insights concerning barriers and coping strategies from the VC firms

perspective,futureresearchshouldconsidertheactorsinvolvedinfacilitatingastrong

institutional support for the VC and local SME development. This includes amongst

others, educational institutions, accelerators, entrepreneurs and other early stage

financiers.Thisparticularlypertainstoresearchfocusingonareasofpolicywhichmay

contribute to the creation of strong and effective institutions that can support the

privateandpubliccapitalmarkets.

7Conclusion

Due to increasing focus on venture capital as a vehicle to spur SME growth and

economic development in emerging markets, several international organisations are

focusing their attention on facilitating foreign capital directed towards startups and

SMEsinemergingmarkets.Assuch,wetakeourpointofdepartureinthepremisethat

local entrepreneurship is lacking capital in order to grow, create jobs and foster

economic development. Further, this study has focused on Kenya as the country of

analysis,muchduetoitsrecentreputationastheSiliconSavannah,attractingcapitaltoa

growingstartupecosystem.Througha literaturereviewof financial theoryonventure

capital and institutional theory in emerging markets as provided by Peng (2001),

Hoskisson et al. (2000) and Khanna & Palepu (2010), we formed the theoretical

framework used for this research. Combining these strands of literature, we further

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constructedthreepropositions,usedtoassesstheinstitutionalenvironmentpertaining

totheKenyanVCindustry.

Inouranalysiswefindthat,firstly,therearesomeinstitutionalbarriersthataffectthe

VCfirmsinKenyamorethanothers.Inrelationtoregulatoryuncertaintieswefindthat

thepoliticaluncertainties stemming fromthecountry’selectioncyclesprovidea risky

environment, inparticular around the fund-raising stageof theVC firm.Furthermore,

we found issues relating to governance and reporting regulations are providing

challengesforVCfirmsduringthescreeningphase,specificallypertainingtoassessing

the locally founded ventures. Despite this, we also found a positive attitude towards

government initiatives as newly introduced regulations concerning tax breaks and

transactionrequirementsareprovidingbenefitstotheVCfirms.Secondly,ourresearch

shows thatVC firmsoften invest in foreign foundedventures, as opposed to the local

ventures, which they perceive as constrained by the institutional challenges. Such

foreignfoundersmayhoweverstrugglewiththeliabilityofforeignnessstemmingfrom

their lack of knowledge around context contingent specifics such as consumer

preferencesandregulatoryenvironment,thusaffectingtheVCfirmsinmonitoringand

supportingtheirportfolioventures.Lastly,wefindanumberofchallengesforVCfirms

in Kenya relating to underdeveloped supportive industries. Inadequate information

agenciesandunreliablesourcesarehinderingthescreeninganddealsourcingphasefor

manyVCs.Furthermore,thelackofearlystagefinancingmechanisms,suchasbusiness

angels,and inadequate technical intermediaries,suchasacceleratorswhocansupport

theventuresinbecominginvestableopportunities,arehaltingthedealsourcingprocess

forventures.Additionallyan inadequatepublic stockmarketand the lackofPE funds

andotheractorscapableofpursuingacquisitionsarelimitingtheexitopportunitiesfor

VCfirms.

To circumvent these challenges we find that VC firms adopt four different coping

strategies: diversification strategies, governance strategies, local-knowledge capturing

strategies, and institutionalavoidancestrategies.Diversificationstrategies refer to the

strategyoftheVCfirm'sinvestments.WefindthatmanyVCsperceivetherisksrelating

tothecountry’selectioncyclesashigh.Therefore,VCfirmsseektospreadtheirriskby

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investing inseveralcountries in theregion, inadditiontospreadingtheir investments

throughout several industries, thus diversifying their portfolio. Governance strategies

refertotheVCfirm’sneedtoworkproactivelytocircumventissuesrelatingtoreporting

andcorporategovernance.Thisincludestakingahands-onapproachwiththeventures,

whichextendstheotherwisepurelystrategicroleoftheVCduringthemonitoringand

supportingphaseoftheirinvestments.Local-knowledgecapturingstrategiesrefertothe

fact thatmanyVCs firmshaveregionalofficesandemploy localstaffwithconnections

acrossvarioussectors.Assuch,theVCfirmscopewiththelackofinformationagencies

and the liabilityof foreignness. Lastlywe find thatVC firms invest in foreign founded

ventures,whichtheyperceiveaslessaffectedbyinstitutionalsetting,thusavoidingthe

institutional barriers in Kenya. We find that institutional avoidance strategies are

widespreadwithintheVCfirmsinKenya.

As our research shows that themajority of VC firms are investing in foreign founded

ventures, we find that the VC industry is constructed around foreign international

networks. Due to the nature of these networks we further find that locally founded

venturessufferfromtheliabilityofoutsidership.AssuchtheappraisalofKenyaasthe

Silicon Savannah mainly pertains to foreign funded VCs investing in foreign founded

ventures.Toconcludeonourfindings,wefindlittleevidencethatprovesthecapacityof

VC firms to contribute to the professionalization, knowledge spill-overs and thus

entrepreneurial improvement of locally founded startups. We further conclude that

althoughthereindeedisagapofinvestmentsintolocalSMEs,approachingtheissueof

the finance gap in emerging markets requires a holistic approach, highlighting the

importance of creating supportive institutions to avoid the risk of extraction and the

developmentofenclaveeconomiesinemergingmarkets.

116

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Appendices

Listofappendices:

A) SummaryofCases

B) InterviewGuide

C) InterviewwithintervieweefromVC1

D) InterviewwithintervieweefromVC2

E) Interviewwithinterviewee1and2fromVC3

F) InterviewwithintervieweefromVC4

G) InterviewwithintervieweefromVC5

H) Interviewwithintervieweefromtheindustryassociation

I) Interviewwithintervieweefromtheaccelerator

J) Interviewwithintervieweefromthestartup

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APPENDIXA. SummaryofCases

SummaryoftheVCfirmcaseentities

NameofVC

Focus/sectors Ticketsizes/stagesofinvestment

Characteristics

VC1EnzaCapital

Tech-relatedinnovationswithtriplebottom-lineimpact;InKenyamainly.

$50,000to1million;Firstinvestmentsrangefrompre-seedtoseriesA.

SmallteamofinvestorsbasedinKenyathatinvestscapitalfromLPsintheUSandEurope.Launchedin2019,Enzahasalreadyinvestedinfivestartups.

VC2SaviuVentures

Tech-focused,butseestechasalong-termprocess.InvestsacrossFrancophoneAfricatoEast-Africa.

$50,000to$800,000;Firstinvestmentsfrompre-seedtoseedstages.

NotaVCfirmwithatraditionalfundcyclebutaHoldingCompany;StaffarefromEurope.

VC3ChandariaCapital

Industryagnostic;Mainlyconcernedwithscalable,hockey-stickgrowthpotentialfirmsintheregion.

Ticketsizesrangefrom$150,000to$500,000.Firstinvestmentsareaimedforpre-seriesA.

TheVCfirmispartofafamily-ownedconglomerate,ChandariaIndustries,andhenceitisoneoftheonlywhollyKenyanVCfirms.Benefitsfromconglomeratethroughtestingandscalingofportfolioventures.

VC4PearlCapitalPartners

Focusonimpactventureswithsocio-economicmission,mainlyintheagribusinessvaluechain;Pan-Africanfocus

Theticketsizesrangebetween$500,000-$2.5million

Startedin2005asaholdingcompany;currentlyrunningitsfourthfund,whichisbasedinUgandaandraisedin2017;LPsincludeIFAD,theEU,andNSSFUganda

VC5GoodwellCapital

Industryagnostic‘access’fundthatfocusesonimprovingaccesstobasicgoodsfortheBoPsegment;pan-Africanfocus.

Ticketsizesrangefrom$1millionto$5million;GoodwellCapitalusuallyinvestsatAroundsandBrounds.

AstheLPsarefromEuropeandthemainofficeisintheNetherlands,GoodwellisalargeVCfirmthatinvestsacrossAfrica.ThefirsttwofundsfocusedonfinancialinclusioninIndia.

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SummaryofthecaseentitiesotherthanVCfirms

CompanyName

Placeinindustry

ImpactonVC Characteristic

EAVCA IndustryassociationforPEandVCfirms

Worksonpromotinginvestmentsintheregionbyattractinginvestorsandlobbyingauthoritiesinordertomakeamoreefficientmarket

Foundedin2013,EAVCAisanorganisationwithmorethan100membersacrossEast-Africa.

PangeaAccelerator

Acceleratorprogram

Asanaccelerator,Pangeaprofessionalisesstartupsthroughdevelopmentprogramsandprovidesthestartupswithinitialfunding.

Besidestheaccelerationofventures,Pangeahasaninvestorprogram,whicheducateshigh-net-worthindividualsinbecomingBAs.

SocialBites Startup Asastartup,SocialBitesisonthereceivingsideintermsoftheinvestments.

In2018,thefounderaimedfortakingininvestorsinKenya,butendedupwithafewBAsfromDenmarkandtheUK.

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APPENDIXB. InterviewGuide

Firstpart

• Introductions:Whoarewe?Whatisthepurposeofourthesis?HowcanitcontributetoyourVCfirm?

• Toincreasethevalidityofourdata,wewouldprefertorecordtheinterview.Anonymity.• Whatarewegoingthroughinthisinterview-presenttheparts.• Thisisauniversityprojectandisnottobepublishedinanyjournalandmagazine.

Secondpart

• Natureoftheiroperations• Canyoudescribeyourfundandwhatkindofinvestmentsyouaremaking?

• Industries,whatkindofventures?• Whatsizeofinvestments?• Requiredreturnofinvestment?• Howmanyemployees?• Organizationalstructurewithlimitedpartnersetc?• HowlonghasitbeenoperatinginKenya?• Anysuccessstoriesyouwanttoshare?

Thirdpart-Challenges

To begin with we have some questions regarding the challenges that you (VC firms) mayencounter intheKenyanindustry.Theyarebasedonthe literaturethatwehavereadpriortothisinterview.Wewillalsobeaskingsomemoreopenendedquestions.

-Notetoourselves:“Challenge”followedby“CopingStrategy”

1. WhatisyourperceptionoftheamountofinvestableventuresintheKenyanindustry?Isthereagoodfit?Wouldyousaythattherearetoofewventures?

2. Are you using the accelerator programs in Nairobi to discover viable firms forinvestments?Ifso,how?

• Copingstrategy:• Doyouengageinthedevelopmentoftheirpipelines?• Are you using any other type of pipeline? How does it work? What are the

advantages?• Socialnetwork-connections?

3. What is the level of information available about the ventures and the markets theyoperatein?Isitsufficient?

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• Coping strategy: If there isa lackof information,howdoyoudealwith it?Otherstrategiesforfindinginformationabouttheventures?

• Howdoesthisimpactyourperformanceofduediligenceonthefirm?

4. Whatisyourcurrentprocessforfindinglocallybornventures?

• Copingstrategy:Employmentofstaffwithlocalknowledge?• Ifnot,whatisyourprocesstofindgoodventures?• Howdoyouseethefunctionofsocialnetworkstodoso?• Neverreallyaskedyourselfthequestion.Metwitha-lotofforeginers,metwitha-lot

of foreignerbecause they lived. If youwant tobe relevant, youwan’t to invest inlocal founders. Lacked the local knowledge, fully digital approach. Foreignfounders,theycanselltheAfricanstoryandeveryoneget’sexcited.Butpeoplecanlearn.

5. Areyouworkingoperationallyinthecompaniesyouinvestin?

• Copingstrategy:Ifso,whyandhow?

6. Incomparisontootherpartsoftheworld,suchasSiliconValley,whereVCshavebeenaroundforamuchlongertime,whatwouldyousayisthebiggestdifferenceintheventuresyoufindinKenya?

• Copingstrategies:Isthereaneedtocompromisesomeoftheinvestmentcriteriainordertofindviableventurestoinvestin?(lowerinvestmentsize,rateofreturn,exitstrategy,industry)?

7. HowdoyouseethegovernmentiscurrentlyinfluencingtheVCindustry?Inwhatway?

• Copingstrategies:Whatkindofsupportivemechanismsexist?• Inwhatwaysdoesthelegalframeworksupportoropposeyourwork?

Ifthereistime:

8. Whatotherkindofchallengesareyoufacingandhowareyouovercomingthese?

9. Inrelationtoourfirstquestionaboutthelackofcapitalorlackofinvestableventures,doyouthinkthatthereisanissueregardingthetypesofcapitalthatareavailableinthemarket?

• Would there be some financial gaps e.g. investment sizes, growth rates? Anyimbalancebetweensupplyanddemand?

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APPENDIXC. InterviewwithintervieweefromVC1TranscriptofInterview.IntervieweefromVC1,EnzaCapitalInterviewer1: HenricHanssonInterviewer2: MadsRobdrupInterviewee: AnthonyKimaniTime: 57:16HenricHansson0:00Ihopewewillbeabletokeepitwithinonehour.Andfirstofall, Iwouldjust liketoaskyou, ifyoucandescribesortofEnzaCapitalasafundandwhatkindofinvestmentsthatyou'remakingingeneral.AnthonyKimani0:21Okay,soEnzacapitalisaVCtechfund,backedbyprivatecapital.Andwespecificallytargettechenabledbusinessesthataretryingtosolvelargeandmeaningfulproblemsonthecontinent.Wehaveticketsize,ourticketsizerangesfrombetween$50,000totoamilliondollars.HenricHansson0:54Okay,andaretheremaybejustwhatareyourmainresponsibilitiesatthefund?AnthonyKimani1:31Okay.SoatEnzaIbasicallyhandlefourthings.Somymainfunctionisdealpipeline,lookingatcompaniesthatyoucanpotentiallyinvestin,runningananalysisonthem,doingabitofstructuring.Intheeventwedoinvest,abitofportfoliomanagementandreporting.HenricHansson2:07Okay.Anddoyouhaveanyparticularfocusintermsofindustry?AnthonyKimani2:19Sofarwe'veinvestedinfivedifferententities.Iwilljustlisttheamountforyouandthenbrieflyjusttalkabout themforyoutounderstandhowweareoperating.So the firstoneyouhave isSendy,abusinesscalledSendy.It'squitepopularinAfricaandtheydologistics.Second,wehaveabusinesscalledFlair.It'sasolutionsbusinessthatprovidesemergencyresponseservices.Sosendinginlogisticsfliesinhealthtechinsomeway.YouhaveabusinesscalledLink,whichbasicallyisaplatformthatconnectsinformalsectorworkers topeople inneedof their services.ThenwehaveabusinesscalledTuteria,whichwerecentlyclosedatransactionon.It'sanettechbusinessbasedinLagos,Nigeria.Sobasicallythebusinessconnectstutors to students in need of tutors in Nigeria. The fifth investment is Safi Analytics, a business thatprovidesservices tomanufacturingcompaniesbasicallyprovidingsolutions tohelp them improve theirefficiency and efficient energy use. So, so far we in a nutshell, have investments in Logistics, Ed-tech,Healthcaretech,andnowSafiAnalytics.HenricHansson4:31Yeah,yeah.Soit'sratherindustryagnostic, Iguess.ButaremostoftheseinvestmentsinKenya?Oris itsortofspreadout?YousaidthatoneofthebusinesseswasbasedinLagosortheotherbasedinKenyaorisitspreadout?AnthonyKimani4:52

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all,sorry,youdisappearedforabitthere.CanImakeasuggestionCanwetryswitchingtojustaudio,toseewhetherithelpswiththenewboundaries.Isthatokaywithyou?AnthonyKimani5:30So,otherthanTuteria,alltheotherfourbusinessesarebasedinKenya.HenricHansson5:38okay.Andso,yousaidthattheticketsizesarebasicallyfrom$50,000to1million.So,atwhatstageWouldyousaythatyougoin,inbusinessesisitearlystage,ispre-seed,seedoratwhatstageingeneraltoyouenterthebusinesses?AnthonyKimani6:01Sointhisdifferentbusinesseswehaveinvestedin,inseedinseriesAanddidbridgefinancingondifferentpoints of the fundraising cycle. But generally we do target pre-seed, seed and series A. But in theinvestments we do we intend to follow up. So that means, consequently participating in Series Bpotentiallyinsomeoftheinvestmentswemakeinthepreviousfundingrounds.HenricHansson6:41Okay.Yeah.AndhowlonghasthecompanybeenoperatinginKenya?AnthonyKimani6:52So,wetwo,threeItstartedinMayMaylastyear2019andInthesamemonthiswhenweclosedourfirsttransaction,whichwasSendy.HenricHansson7:05Okay,okay.It'sverynew.Andhowmanyemployeesareyou?AnthonyKimani7:19Socurrentlyintermsoftheactive,theactiveteammembers,wearethree.Sothere'smyself.There'sMikeMompi,who'stheCEO.Andthenthere'sJohnLazar,who'sourchairmanandalsoourlimitedpartnerinthe fund.We have other limited partners. One of the limited partners is a member of the InvestmentCommittee.Somoreorless,wejustthreeintermsofthosewhoarerunningthefund.HenricHansson7:52Okay, so it's sort of three operational people in charge of operations. And then you said therewere acoupleoflimitedpartnersaswell,or?AnthonyKimani8:06Yes,wearebackedbyprivatecapital. so far.Wehave, I thinkcurrentlywehave three. I thinkwehavethree limitedpartners.WeintendtomakeoursecondclosebytheendofAprilofMaythisyear,andsothat number may go up, but essentially we are backed by private capital. Mostly high net worthindividuals.Yeah,well,eventhenumberofLPswillmostlikelygopastfiveorsix.HenricHansson8:45Okay.AndarethosealsobasedinKenyaorisitsortofforeignforeignprivateequity?AnthonyKimani8:56Soit's,it'sbasicallyforeign.PeoplefromEurope,fromtheUSandwehaveothersfromSouthAfrica.

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HenricHansson9:11And so I know that you're, you're rather new on the market and stuff like that. But are there anyparticular,youknow,successstories thatyou'veseenso far in termsofanythingthathassurprisedyousortofAnthonyKimani9:30Generallyintheventurecapitalspace,or?Generallyintheventurecapitalspace,orjustprivatemarkets,orImentionedtothespecificplanetech?HenricHansson9:50Yeah, yeah, I meant more in your investments. Are there any ventures that have been for example,performingabnormallywellorsomethingthatyou'veseenispanningouttobeagoodinvestment.AnthonyKimani10:06Yes. So Sendy,which is the first investmentwemade, is a very attractive business , it has very strongfundamentals.Notatthepointwhereit isprofitable,but it isquicklyheadingtowardsthatpoint.SoweenteredabridgeroundinMay.ThebusinesshasbeengrowingquiteaggressivelybyDecember,theydidanotherfundraiserwheretheyraised$20million,whichisoneofthelargerfundingroundsinthemarket,at least for last year.And soweare impressedwith the generaldirectionof thebusiness andbasicallywhattheyaretryingtodointhespaceit'soperating.SoIwould,Iwouldcallthatasuccessstory.HenricHansson10:59Has anyone at Enza capital been operating in that venture aswell? or supporting themwith businessadviceinanysense?AnthonyKimani11:26Well,oneofthevaluepropositionswehaveforcompaniesweinvestinorpotentiallyinvestinisbasicallybeing able to offer strategic and business advice to risk businesses. We pride ourselves in beingentrepreneurssoit'safundthatisbeingrunbyentrepreneurs.haveabitofabackgroundininvestmentbanking,privateequity, entrepreneurship.SodoesMikeand then John,ourchairmanaswell.HewasaCEOofabusinessintheUKcalledMetaswitch,Idon'tknowwhetheryou'veheardofit.HenricHansson12:10No,Ihaven't.AnthonyKimani12:13Yeah,hewastheCEOthereforIthink14or16years.Andthenhequitandthenjustcameintotheventurecapital space. So having that combination of skill sets, we believe we're very well positioned to offerstrategiclocalizedadvicetotheseentities.Andsoweregularlytendtohavemeetingswiththefoundersandtheteamsjusttounderstandwhatpainpointstheyhave,whatdifficultiesaretheyfacingandthenwetrytoseehoweitherwecanhelpthemorhowwecanreachouttoournetworkstohelpthem.Becauseallthingsconsideredthat that'sokay.Thebestwaytohelp thisentity is,given that inventurecapital,youalsodon'thavea lotofsay in thedirectionof thebusinessbyvirtueofhavingaverysmallstake in thebusiness.HenricHansson13:20Soundslikeareallygoodproposal.Butyou'renotoperatinglikenoneofyou'resittingphysically,withthecompanies.It'smoreofastrategicfocus?

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AnthonyKimani13:37Soforbusinessesthatdorequireourhelp,wehavealwaysofferedtostepintheinputassomeofusintheteam have an expertise in it andwe do try to help. Formost startups, at least inmy experiencewithdealingwithcompanies,theytendtobeverygoodintermsofstructuringfundraisingandbuildingmodelsandsuchthings.Andsoanytimewecomeintoabusinessandwedodecidetoinvest,thosearesomeofthe things we help them with, how they can improve their reporting, how they can improve theirbookkeepinginpreparationforthemtobereadyforsubsequentfundingrounds.Sowedosometimesgototheoperationsofthebusiness,butithastobeinawayalsothatwedon'tunderminetheteamitself.HenricHansson14:47Yeah,yeah,Iunderstand.Youcan'tsteponmanytoes,Iguess.AnthonyKimani14:53Yes.Maybe ithas tobethat theyactuallysee thatsense inushelpingthemandtheydoneedthathelp.Otherwise,itwouldjustbeusforcingourselvesonthecompanyandthatdoesn'tnecessarilyleadtoalongtermsustainablerelationshipbetweenusandthem.HenricHansson15:16No, no, I understand. Apart from the company in Lagos, are the companies based in Kenya, are theyfoundedbyKenyanfoundersorisitmostlyforeignfounders?AnthonyKimani15:35Someofthemdohaveforeignfounders,somehavebothlocalandforeign.SoforacompanylikeSendy,ithasagroupof founderswhichclosetohalfofthemarelocal.Andthenfortheotherones,youbasicallyhaveforeignaswell.ComingtoKenyaandthey'vemoreorlessdecidedtogotoliveinKenya.Andsowesupportthemonthatbasisforoneofthecompanies,whichisSafiAnalytics.ThefounderismarriedtoaKenyan.Andsoasfarasweareconcerned,theyarecitizensbyvirtueofbeingmarriedtoaKenyanandhavesetuprootshere. I thinkthebiggestconcernwehaveevenmoreventurecapital firmshave is theriskthatsomeonewillcomesetupanentityandtheydon'tnecessarilyhavelongtermprospects.Andsoin our efforts to try to support businesses that are solving large and meaningful problems for thesebusinessestobesustainable,theyalsohavetoberunbythepeoplewhoareactuallyexperiencingtheseproblems.Andsoitmakessenseforyoutohavelocalsorpeoplewhohavepermanenceintheregion.HenricHansson17:13Yeah, yeah. But that's also what I've heard before, but I was just wondering, are there any particularchallenges that you think that those with foreign founders are facing? Like, do you see some specificchallengesthatforeignfoundersarefacingthatperhapslocalfoundersarenotfacing?AnthonyKimani17:41Iwouldactuallyarguethatit'stheotherwayaround.Youhavemorechallengesfacingthelocalfoundersasopposedtotheforeignfounders.Ifyoulookatitinthecontextoftheproblemsfacedbystartupswerethemainonebeingrunningonoutofcashandbasicallybeingabletoattractreallytalentedpeopletojointheteamandbuildthebusiness.You'llfindlocalfoundersaredisadvantagedtosomeextentbyvirtueofone not having this networks that most foreign founders have or have built from going to certainuniversities and educational institutions or working in somewhere like Silicon Valley or just havingfriendsinthatregionandthentonothavingworkedinplaceswherethey'reabletobuildnetworkswithtalentedpeoplewhoeventuallycanjointheminthatentrepreneurialjourney.Soyoufindformostlocalfounders,raisingcapitalisachallenge.BecausegenerallyAfricadoesnothavealotoflocalcapital.AndsomostofthecapitalthatisattractedtotheVCspacetendstocomefromdevelopedmarkets.Andthentoo,

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byvirtueofnothavingnetworks, they'renotable toattract really talentedpeople to join thebusiness.Andsothiscreatesa loopwherethebusinessdoesnothavecashanditcannotscaleanditalsodoesn'thavea good team. So thebusiness cannot grow toadecent size to attractmore capital, and that limitsthem.HenricHansson19:31Okay. So in terms of finding capital and finding the network that holds the capital, foreign firms areactuallyusuallybetter off because they alreadyhave thatnetwork.But Iwas thinking a little bit aboutoperationallywhenthestartuporasmallerventureoperationorhastheiroperationsinKenya,isittheotherwayaround,aretheysometimesmorereliantonyouknow,localnetworksandlocalknowledgeInsomesense,wouldyousay?AnthonyKimani20:03Tosomeextent,yes,especiallyiftheproblemproblemthatthebusinessistryingtosolveishighlylocal,youwillfindthatlocalfundershaveanadvantageinthattheyhavegrownupwiththeseproblemsandsotheyunderstandfirsthandwhatitmeansforforthe,forthefortheproblemtobesolved,theyhavedecentexperience in understanding how previous businesses or even the government has tried solving theseproblems.So, theyhaveaverygood ideaofwhatcanwork,whatcannotworkandbasically the fastestway to get to there in terms of using the resources that are around them. So, they have a very deepknowledgeofbasically regulations,howbusinessworks,wheredo Igo if Ineed to findABCD,which issomethingforeignfoundersstruggledwithinitially.Butyoufindafterall,thenthat,thatthatceasestobeanadvantage.HenricHansson21:15Okay,understand,and..Sorry,Ilostmyselfalittlebit..Oh,yeah,Iwantedtoaskyou;Haveyouseensomestartupsstrugglewithlimitedlocalknowledgeorthesekindsofthings?AnthonyKimani21:58Forsomeofthem,yes.Duringdiscussionswithsomeofthefounders,wehavefoundsomeoftheirforeignfoundersadmittingtothefactthattheywereonalearningexperiencewheretheyhadacertainviewofthemarket they're operating in, and then they got into it. And then they realize things are very, verydifferent. And a good example is Link in the business, that's a platform that is providing services forinformalworkersorconnectinginformalworkerstopeopleinneedoftheirservices.Onethingtheycameto realize is there's a certain standard of quality that's expected from themiddle class in the countrybecauseinitiallyrestructuretheplatformforinformalworkerstoprovideservicestothemiddleclassinaway that the quality can be controlled. Yeah. So what happened was initially when they started thebusiness, they just offered the platform, but then they realized the uptake was not as fast. And whentracingsomeofthemaincomplaintsthattheclientshadwithabusinessthequalitybeingofferedbytheworkers is not to our standard. So the business was faced with two options, either they somehowmanagedtogetourcoststoacertainlevelorbringdownthequalityoftheirservices.Andsothe,theysortofhadtobackwardintegrateand,andcomeupwithsortofanacademythatteachesinformalworkersandsosortofboththeirthequalityoftheworktheydoforthattomatchtheclient.HenricHansson23:54Yeah,Iunderstand.ThankyousomuchfortellingusaboutEnzacapital,andsomeofyourinvestments.Ijustwanted toknow.Furthermore,wehad somemoregeneralquestions, so I'll just jump straight intothem.WhatisyourperceptionoftheamountofallventuresintheKenyanindustry?Isthereagoodfit?OrwouldyousaythattherearetoofewventuresortoomanyventuresincomparisontoVCs?

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AnthonyKimani24:27Okay,byventuresYoumeanliketheVCfundsthemselvesorstartups?HenricHansson24:36So,soImeantthestartupslikewouldyousaythatthereareenoughinvestableopportunitiesAnthonyKimani24:46There are a good number of startups, but a very small proportion of them are investable and again, itcomesbacktothelimitationsfacedbythelocalfounders.Sothequestionyouendupinisyouhaveaverylargepooloffundschasingaverysmallnumberofdeals.Yeah.HenricHansson25:19Andwhatkindofstrategycanyouadopttostillfindthese,theseventurestheseinvestableventures?AnthonyKimani25:32Oneonewaytodoitistotakeaproactiveapproach.Soyoutraceback,basicallyhowthesebusinessesarestarted. And youwill realizemost of these businesses actually started by foreign founders. So you caneitherstartbybuildinganetworkofotherfounderswhohaveactuallyalreadybuiltbusinessesinAfricaorbuildingaverygoodrelationshipwithsomeofthetopventurecapitalfundsinthemarket.Andsoyoucanalwaysfollowuponanyinvestmentsorgetwindofadealfromsomeofthefoundersbeforeitblowsupand isquitepopular.Andanotheroption is touse incubators,but thereare somany incubatorsbutveryfewactuallyhaveoutputthatisactuallyattractivetothemarket.HenricHansson26:41Okay.Andareyoucurrentlyusinganyacceleratorprogramsororincubatorprograms?AnthonyKimani26:49No, currentlywe'renot engagedwithany incubatorsor accelerators.Ourapproach to generatingdealsandoriginatingthemisbasicallybuildingthisnetworkwiththefounders.OurstrategypersonallyinEnzais slightly different from the typical funds, you see, because we are targeting businesses that have anAfrica focus and are trying to follow like businesses generally that are solving problems that are quitepressing in on the continent. And so our approach to origination comes from the problems. And that'sproactive inthesensewhatarethemajorproblemsthatarebeingfaced inthecontinentnowyouhaveaccess to financing,access tohealthcare,access tocheapereducation,andsoyouyoumovedown thatfunnelbasicallylookingatthesebusinessesuntilyoufindabusinessthatisthebestintermsofhowtheyapproachsolvingthatproblem.HenricHansson28:10Yeah.ButI justwantedtogobacktoacceleratetheprograms.Whatdoyouthinkisthemainissuewiththefirmsthatgothroughtheacceleratorprograms?Whycan'tyoureallyinvestinthem?AnthonyKimani28:25Oneof thebiggest issues isvaluation.So, thereexistsaconflictof interest for theacceleratorprogramsthemselves. Because you want your graduates or the businesses that come out of the accelerator toactuallygetfundingatthesametimeyoualsojudgedonthebasisofjusthowmuchofavaluationyoucangetforthebusinessesthatactuallygraduatefromtheacceleratorprograms.Youwillfindthosetoconflictbecausethepeopleyou'resellingthebusinesstowantstocomeinatalowerprice.Andyouwanttocomeinataatahigherprice.Andsothatdiscouragesventurecapitalfunds.

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HenricHansson29:16Okay.Andareyousortofengaginginthedevelopmentofanyotherpipelinestofindearlystagestartups?AnthonyKimani29:29Yes,you'realwaystryingtocomeupwithHenricHansson29:34Pardon?AreyouusinganyothertypeofpipelineAnthonyKimani29:41Those are ourmain ones. Butwe're currently trying to comeupwithways, proactiveways at least orbeefing up the deal pipeline, but more or less, that's what we rely on mostly relationships and ourproactiveapproachtodealorigination.HenricHansson30:01Andwhenyousayyou'remostlyreliantonrelationships,soyoukindofmeetsomeoneonthegroundwithrelationshipstheretoactuallyfindthedeals.AnthonyKimani30:13NotnecessarilybecauselikeinKenya,soIhaveworkedintheprivatecapitalmarketsforsometimeandtheprivateequityandventurecapitalspaceforsometime.So,betweenMike,myselfandJohn,wehavedeveloped quite deep networks into the continent and personally forme in easternAfrica, so I do notnecessarilyfinditachallengetoreachouttoanyone.Ifabusinessisattractive,wewillquiteeasilyfindawaytogettothem.HenricHansson30:55Yeah,andAndwhataboutinformation?Whatwouldyousayisthelevelinformationavailableabouttheseventuresandthemarketstheyoperatein.Isitsufficient?AnthonyKimani31:07Definitely,it'snotsufficient(information).Butweseethatasanissuewithhowfundsbasicallyapproachorigination.Sosomefundsdotheirownresearchandduediligenceinparticularsectors.Andsoanytimethey target a business and look at it in the context of that knowledge,which is somethingwe also do.Basicallybeingabletobuildresearchonthedifferentproblemsthatthecontinentisfacingandthenyoulookatthosebusinessesinthatcontext.Butthebusinessesthemselves,understandably,areincentivizedtogiveyouinformationthatpaintsthesectorortheirbusinessinagoodlight.Forifsectorisnotdoingsowellandthebusinessistryingtosolveaprobleminthatsector,itisverydifficultforthemtocomeintellyougrowthinthissectorisactuallydecelerating,toughregulationsarecomingetc.Youwillneverseethatonapitchdeck.So,wealwaystrytoformanindependentviewthatisdifferentfromwhatthecompanyistellingusaboutthesectorbecausegiventhespacetheyarein,youcanunderstandwhytheywouldsufferfromaconfirmationbiaswhenlookingforinformationandbuildingabusinesscase.HenricHansson32:39Yeah,naturally,but,so,howwouldyousaythatthislackofinformationisimpactingyourperformanceofduediligenceonfirms?AnthonyKimani32:51It makes due diligence much more difficult because you have to go in basically do primary researchyourselforasagroupofinvestors,ifyou'regoinginascoinvestors.Youhavetoputinalotofresources

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intopreparingaduediligencereport,whichcanbecostlyandtimeconsuming.Andinareaswhereyoudonotnecessarilyhavenetworksinthoseparticularsectors,itbecomesevenmoredifficulttogetaccesstothisinformation.HenricHansson33:31So,yousaidthatsometimesyouhavetodotheresearchyourself.Howdoesthatwork?AnthonyKimani33:41So,basically,youwouldifyou'relookingatabusinessinanycountry,let'ssayinBotswana,thefirstthingyouwoulddoisbasicallytrygetalistofcontactsfromthecompanyaboutwhotheythinkinthatspaceunderstandsthatbusiness.Sobasicallykindoflikewhatyou'vedonethewayyoureachedouttoEnza,totrytofindoutourviewinthemarketwemoreorlessdothesamethingwithsectorexpertsandbasicallygetsomeinsightfromthemandiftheyknowanyoneelsewhocanassistusalsointerviewthem,andthenwe slowly start to form a view of the sector and check whether that actually is reflected in what thebusinessistelling.HenricHansson34:34Yeah,sofromwhatIknow,inEurope,sometimespeopleuseforexample,TechCrunch,whichisanonlineplatformwhereyoucanfindalotofdataaboutcompanies,doyouhavetodosomethingsimilarorareyoualsousingTechCrunch?AnthonyKimani34:49So,therearesomesolutionsthatarecurrentlybeingbuilt.Youhave,there'sanentitycalledtheBaobabNetwork, which is basically trying to build a database of information on startups in Africa. You haveVentureCapital4Africa,whichisaplatformalsoprovidingdataonsomeofthesestartups.Sowetendtouse someof this, but then again, they suffer from the same challenges thatwehavewhen going into abusiness,because formostof thesebusinesses,youwill findthat ifasector isnotpopular,youwillnotfindresearchonitgenerally.So,likeFinTechEdTech,HealthTech,there'salotofinformationonit.SoyouhavesomanyotherrelatedventurecapitalfundswhohavedoneduediligenceandtheyhavesharedthisinformationwithCOinvestorsandsodetailsofthisparticularsectorindifferentcountriesisknown.Butfornovelsectorsorsectorsthatarejustcominguporsolutionstoproblemsthathavenotbeenthoughtofextensively.Andforthoseonesyouhavetodoprimaryresearch.HenricHansson36:22Okay. And I just wanted to we talked a little bit before about, you know, local ventures and foreignventuresandlocalfoundersandforeignfoundersandthesekindsofthings.Yeah,doyouhaveacurrentprocessforfindinglocallybornventureswithlocalfounders?AnthonyKimani36:41Currently,weusethesameprocesswehave.Butthechallengeyouwillendupwithisthateventuallyyouwill find that thesystemor the finalnumberorpotentialdealsyouendupwithwillhavemore foreignfounders.Again,forthesebusinessestoattractcapital,theyneedmoney.Andtheseforeignfoundershaveaccesstomoney.Andsoforlocalfounders,someofthethingswe'retryingtoworkaround,atleastinthecourseof thisyear is to lookatbusinesses thatpotentiallywecango inat anearlier stage.AndoneofthemwasactuallyTuteria.SoTuteria, is foundedby twoNigeriansbornandraised inNigeria.Andourthesisbehindtheinvestmentwasthebusinessmaynotbeata levelwhereitattracts largefundsandisquite popular. But you have a very strong team that is dedicated, that has a lot of integrity, andwhoactually believe in what they're trying to do. They just need some direction to get to a point wherebusinesscanbecomparedtoabusinessthathasaforeignfounder.

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HenricHansson38:04Yeah.AnddidyoudoanythingdifferentlyintermsofyourinvestmentforTuteria?AnthonyKimani38:15No,no,notreally.We judgethemonthesamebasis.Areyoutryingtosolveaproblem?Is thebusinesssustainable?Andbasicallyalsolookingattheteam.Soweencourageorwetendtopreferbusinessesthat,evenifthefounderisforeign,hasaverylargeportionoftheteamthatislocal.HenricHansson38:40Yeah, yeah, I understand. But did youdo any?What do you call it? group investments in the in this inrelationtoTuteriaordidyou?Didyouloweryourinvestmentticketoranythinglikethat?Sincetheywerenoedge?AnthonyKimani38:57No,nobecause it fitswell inour investment range. Soour investment range isquitewide. Imean, youknow, from50,000 toamilliondollarUSD, Imean, it accommodatesa goodnumberofbusinesses. Fortoday,weputin$250,000,whichistheamounttheyneededto,togettothesubsequentfundinground.Sowe didwe did not necessarily increase or decrease our ticket size on the based onwhere the foundercomesfrom.HenricHansson39:34Yeah,Iunderstand.Ijustwantedtoknow,switchtopicalittlebit,buthowdoyouthinkthegovernmentiscurrentlyinfluencingtheVCindustry?AnthonyKimani39:48Someofthemeasuresthattheventurecapitalassociationsinthedifferentcountriesaretryingtopromoteare related to exits,which are a big problem inAfrica, generally.Notmany venture capital funds havemanagedtoexit.Andsoonethingthey'retryingtopushfor is for investment intoventurecapital tobesustainableonthecontinent.Fundshavetobeabletoexitandredeploythiscapitalinotherbusinesses.AnthonyKimani40:19Andso,associationsandevenfundsarelobbyingthegovernmenttomakeitquiteeasyforbusinessestolistonstockmarket. Ingeneral,youalsogivethemincentives for themtobeable tooperateorat leastcushionthemfromsomeofthechallengesthatwouldotherwiseaffecttheperformanceofhisbusinesses.Socurrently,Kenyaisoneofthecountriesthathastriedtomakestridesonthis.Sothereisasegmentofthe stockmarket called thegems. It is thegrowthenterprisemarket segmenton theNairobiSecuritiesExchangewhereabusinesshastohaveatleastabookvalueof$100,000,tobeabletolist,theydon'thavetobeprofitable,andforthefirstthreeyears,theygetataxbreakoncorporatetax.Andsothisisjusttoencouragenotjustventurecapitalfundstoparticipatebecausetheyhaveanexitroute,butalsoforlocalinvestorstostartparticipatingeitherasangelinvestorsaregenerallyjuststreaminginthisbusinessestoincreaseliquidityforanyonewhoisinvestinginthesmallerprojects.HenricHansson41:44SowhenyousaythattheindividualVCsandandothertypeofinvestorsarekindofreliantononthissortoflobbyingrelationshipwiththegovernmentwiththelocalgovernmentAnthonyKimani41:59

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Yes.Becauseithastoithastobedonethroughtheseassociationsbecausetheyrepresentamuchlargernumberofpeoplesoyouhaveaconsolidatedvoicewhengoingtoregulatorsandthegovernment.HenricHansson42:12Okay.Andhowdoyouseethat?foreignVCs?Imean,theyprobablydon'tknowabouttheseassociations.AnthonyKimani42:23So,theydoandmostofthemarelikefortheEastAfricaventurecapitalAssociation.Youhavemostofthefunds actually not from from East Africa. What's normally required is not East Africa is one of yourinvestmentareas.Sothatbasicallymakesyouastakeholderbecauseyouwillbeaffected.Anyregulationsthataffecttheprivatecapitalspaceinthesecountrieswillinonewayoranotheraffecthowyouchoosetoinvest.HenricHansson43:03Understand,yeah.Butso,soforeignforeignfirmsarekindofreliantontheserelationshipswiththelocalauthorities.okay,understand?Ijustliketoknowaswell,ifwetakethisonaverybroadperspective,ifwecomparetootherpartsoftheworldlikeSiliconValleywhereVChasbeenaroundforamuchlongertime,maybe30yearsandotherpartsoftheworld,asyouknow,caughtupmuchlater.WhatwouldyousayisthebiggestdifferenceintheventuresyoufindinKenyaAnthonyKimani43:52incomparisontodevelopedmarketsor,orotherAfricancountriesHenricHansson43:57Yeah.Especially inmaybedevelopedVCindustries, ifweseethat, forexample,venturecapitalhasbeenaroundfor30or40years.Yeah,ininSiliconValley.Whatwouldyousayisthebiggestdifferenceintheintheactualventures?AnthonyKimani44:17I think,generally,anunderstandingof theVCculture. In thesemarkets(developed),peopleunderstandhow VC works. They understand funds need to invest and also exit. In Kenya, most funders don'tnecessarily have an appreciation for that because they don't understand how private equity fundstructureworks.Sotherearesomethatyouwillfindseekingcapitalthatideallyshouldbelongterm,butgo to someonewhohas a very long termview.And so youhave that conflict in termsof how long thecapital should stay in the business. Second one is expectations in terms of reporting, and generallystructuring the business. So in developedmarkets, you have peoplewho understand how to structuretheirbusiness,basicallyhowtodofundraising,howtobeabletoattractpeopleandjustplugthemintoateamquite fast. For African entities, you have a challengewith that. Because also attracting talent is alimitationinitself.Overandabove,knowinghowtodeployit.HenricHansson45:45Yeah,butdoyouthink?DoyouthinkthattheVCsalsohavevariousstuffwetalkedaboutthatforexampleyouhavesomecompanieslikeTuteria,thatwasquiteearlystageandperhapstraditionally,youwouldnothaveinvestedinthem.IstheresortofaneedforVCs ingeneraltocompromisesomeofthe investmentcriteria?Perhaps, Idon'tknow, lowerrequiredreturnmorepatients in termsofexpirationuntilexitorperhapsthatyoucoulddosmallerinvestmentsizes.Whatisyouropiniononthat?AnthonyKimani46:35

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Personally,havingoperatedinthedifferentprivatemarketsineasternAfrica,Icansaythemodelneedstochange.ForentitiesinAfrica,theyneedmorepatientcapital.Soyouhaveafundstructurethatis,formostof them, it's 10 years with a two year extension plus one plus one. And you'll find for most of thesebusinesses,theyareaffectedbypoliticalcycles,whichisnotsomethingthatyouseeindevelopedmarkets.Soevengenerallyscalingandpurchasingpowerofthecustomersofthisbusinessesisnotthesameasyouhaveindevelopedmarkets.Andsoitwilltakeamuchlongerperiodforthissuchbusinessestoscaleandsotheyrequirecapitalthatisthatpatientandso,theymaynotnecessarilyrequirepermanentcapitalorpermanent investment vehicles to come in, but longer term funds will be more appropriate for suchbusinesses.HenricHansson47:51Yeah,yeah,understand,andbecauseitseemslikethere,aswetalkedaboutbefore,withacceleratorsandincubatorsthattherearealotoffirmsthatperhapsareatthetooearlystagetoseekVCfunding.Doyoustillthinkthatthere'ssomesortofinvestmentthatVCsorperhapsanothertypeofinvestorscan,candointermsoffillingthisgap?AnthonyKimani48:21Theycan,theycan.Sowhatisneededtoalargeextentismoreplayersinthepre-seedandseedsideofthefundingcycle.Andtheseneedtobepeoplewhoarereadytotakeonwaymoreriskthanpeoplethatareindifferentsegmentsofthefundingcycle.Grantfundingalsoneedstobedirectedtowardsthatendofthegrowthcurve.Becauseonce thesebusinessesable toproveproductmarket fit, and inapositionwheretheycanscale,thenthey'reinapositiontotakeonmorecapital,capitalthatiscommercialinnature.Andonthatend,Iwouldsayyou'drequiremoreimpactfundingandgrantfunding,basically.HenricHansson49:27Understand?Well,IthinkIhadallmyquestionsonmysheetandI'veaskedthem,thankyousomuchforthat.Idon'tknow,Mads,youhaveanyfollowupquestions.I'msureyoudo.MadsRobdrup49:42Yeah.Hi,again,AnthonyandHenrik.MadsRobdrup49:46No, I thinkactually,whatyou'vebeenaround throughout this interview isprettymuchwhatwewouldhave thought about them prior to the interviewAnthony. So actually no additional questions frommyside.HenricHansson50:08That'snicetohear.Doyouhaveanyquestionsforusinregardingthistopic,thisthesisoranythingelse?AnthonyKimani50:19Really, but I would be curious to to finally see your findings. I don't know whether you guys willcommissionareportoryou'reallowedtoshareyour,yourthesisonceyou'redone.HenricHansson50:33Yeah,weareallowedtoshareitandwewilldoso.Itwillprobablybealongreport.Hmm.MadsRobdrup50:44Whatwecanshare isanabstractof thereport,andwhereyouget themain findingsaswellasourourresearchstrategyandsoon.Andofcoursewewewouldliketosharethatwithyou.

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AnthonyKimani51:09Yeah,wheneveryoucan,youcanonlyshareitwealsogenerallyjustquitecurioustounderstandhowwecanhelpthesethesebusinesses.Yeah.Inyourthesis,areyoutalkingtointrapreneurs?HenricHansson51:28as of now,we'remostly talking to various type of investors.We also spoke to the East African privateequityAssociationthismorning,thatwewillmostlyactuallybetheinvestorssiteandvariousacceleratorsandthesekindofthings.Butifwegetincontactwiththewithsomeofthestartupsthatwouldofcoursebe very interesting. I don't know if it would it be possible to talk to some of your entrepreneurs, youthink?AnthonyKimani52:01Yes,wewouldbeverymuchwillingtoconnectyouwiththemifithelpsyouwithyourthesis.Yeah,likeagoodexample.Sothefounderof,Tuteria.TheNigerian,Ipreviouslymentionedisisheisalocalfounderanditwouldbeinterestingforyoutopleasealsounderstandhisviewthechallengeshehasfacedintryingtoraisecapitalasalocalfounder.Hewouldbesomeonequiteinterestingforyoutotalkto.MadsRobdrup52:48IthinkweareexperiencingabitofalagalsowiththeInternet,andnow.Yeah,ofcoursetheasHenricsaysthatwouldbeinterestingforus,butYeah,infact,wearemostlyfocusingontheindustryinKenya.So,thisthis investment was in terms of their expansion into the Kenyan market, or did you perform theinvestmentinNigeria?AnthonyKimani53:16Okay,performthe investment inNigeria.Fornow, theydon'tnecessarily tend togooutsideNigeria forthemtostrengthentheirpresenceinNigeriabasicallythensubsequentfundingroundswecanconsiderthemmovingtoothermarkets.MadsRobdrup53:38In that case, I think itwill be a bit out of scope aswe are trying to focus on only one venture capitalindustry.HenricHansson55:55okay,butyeah,Iwishyouallthebestandandlet'sthinkLikeAnthonyKimani56:01Okay,okaysure.YoutotakecareTranscribedbyhttps://otter.aiEditedbyMadsRobdrup

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APPENDIXD. InterviewwithintervieweefromVC2TranscriptofInterview.IntervieweefromVC2,SaviuVenturesInterviewer1: HenricHanssonInterviewer2: MadsRobdrupInterviewee: ArthurThuetTime: 42:45HenricHansson0:00isnotgoingtobepublishedinanyexternaljournalsoranythinglikethis.Butwe're,we'restillhappytosendyoutheresults,ifthat'sofinterest.ArthurThuet0:08Oh,yeah, that is Iwork in, Iwork in thatarea.So ifanything interestingcomesup,youknow,happytohavealook.HenricHansson0:15Yeah,that'swhatIthought.Okay,somaybewecanjustjumpstraightintoit.AndIjustwanttoaskyoualittlebitabout,aboutyourfundandandmaybeyoucanjustcommentingeneralhowisitstructuredandwhatkindofinvestmentsyou'redoing.ArthurThuet0:36So,I'msosorry,Ididn'tgetthefirstpartofthesentencehowwhatisstructurethe,the,the,thefundSaviuVenturesortheindustryorthesectorininKenyaorinEastAfricaisHenricHansson0:53justjustthefund.Howishowisitstructured?Well,ArthurThuet0:57We are not a fund. We were more like We are an investment holding. So we don't have the samecompliance as a fund even thoughwe have some compliances of course, but it'smore like any type ofbusiness that receives funding from external investors. But everything is gathered under one, oneumbrellawhich is Saviu ventures and there is not a GP company and then a fund that is fueled by byinstitutionalinvestors.Sowegatherfamilyoffices,EuropeanandAfricanfamilyoffices,EuropeanwiththeentrepreneursandtheprivateequityfundfromMauritiusthatwantedtoeitherdiscoverthetechindustryin Africa because they have interests on the continent, or, you know, like people that were purelyinterested inexploringanewarea that theydon'tknowabout. It's just like theybelievedwhatwe toldthem. And, and they, they, they just bought what we had to what we had to offer because they theythoughtitwouldbeagoodagoodinvestment.ArthurThuet2:32So that'swhy like itgivesusmaybeabitmore flexibilityandweareable togo faster than theaveragefund,whichhastodoacertainamountofthings.Itdoesn'tmeanthatwedon'tdoduediligenceproperly,butIguessourinternalprocessesareabitlessheavythansomeofthoseguysoutthere.ArthurThuet3:04Italsomeans thatwe,weraisecapitaleveryyear.Sousually likeclosedend fundsbecause theydo thefirst one, then theyhave, youknow,10years aheadof them, and they they raise another another fund

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during that time.Wedon'tdo thateveryyearweraisenewnewcapital fromexisting investorsornewinvestorsthatweconvincedto investduringthenextround.Andit's, it'skindof, it's lesscomfortable, Iguess, forus,because like,weneed to fundraise. Samewayasentrepreneursdo, andat the same time,deal with the existing portfolio, look for new opportunities, analyze interesting startups and run duediligence.SoAllthatatthesametime.Butontheotherhandyouknow,Iguessthatwastheonlywayforustodoso.Becauseit's,it'sreallyhardtoraiseventurecapitalfund,especiallyasmypartnerandIarenotnecessarily investors. But so we don't have like the background that would allow us to say, okay, weraised50or15milliondollarfund,andwe'regonnaraisecashwiththeDFIsorwithlike,bigcorporatesorwiththefundsoffunds,becausethoseguysjustdon'tgivemoneytopeoplelikeus.Sowehadtofindawayaroundthatand,andtheonlywaywastofindpeoplethathaveinterestsinthatparticulararea.Andthat, you know, like, understand that the profiles thatwehave is not necessarily a badprofilewhen itcomestoinvestinginstartups,whereverintheworld,butyeah,inAfricaaswell.HenricHansson5:16Andyoumentionedthatit's,theTechissortofyournichemarketArthurThuet5:22Yeah.Butyeah,soweinvestinstartupsandtech,it'salwayslikea,youknow,Icansaylike,you'rerightnow, thenumberofpure tech companies thatwehave in theportfolio isnot it'snot thathigh.Tech ismoreof a long termprocess.Andkindof, it'smore likeamindset. Soweknow thatwe'regoing togetthere.Butweknowthatinordertogetthere,youwanttodothingsoffline.Otherwise,like,it'sjustit'snotgonnawork. Andwe've seen some examples. Even in our portfolio, just likewe,we took somewrongdecisions,assumingthattakingadigitalapproachwouldworkandthemarketwouldadapt.It'snotthateasy.So,yeah,I'dsaylike,wewekeepthatinmindallthetime,thatrealitieshavebeendifferent.HenricHansson6:34Yeah.Sorry.Isthatsomethingyoufoundoutalongtheway?ArthurThuet6:40Yeah, yeah,definitely.And then I guess the situation's areverydifferentdependingon the countries.Atechentrepreneur inKenya isgoing tohavemuchmorecanwesay facilities inEnglish Idon'tknow isgoing tohaveaneasyandeasier life than theguy in, in inFrancophoneAfricabecauseof thehabitsofdifferentpeoplepeople inNairobioreven in rural areasareused to certain things thatpeople in ruralIvoryCoast or ruralBenin arenotused to. So youprobablyhave ahigher reach anda lotmoredigitalhabits.I'mnotsayingthattheyarelike10yearsahead,butprobablyafewyears.Soit'sdefinitelygonnacomeintheotherpartsofAfricabutfornow,it'snotlikethat.SotherearealotofdifferencesdependingonthecountriesandIguessalotofdifferencesbetweenNigeriaandKenyaandmaybeGhanaandtherestofthecountries.It'salwayslikewespeakaboutEnglishspeakingAfricabeingsuperaheadintermsofVCandTech.Butno,that'sbothNigeria,KenyaandSouthAfrica.Otherwise,likeawhilemaybeUgandaisbutI'mnotevensure.Idon'tknowUgandaverywell.Imean,thereareacoupleoftimesbutonlyinKampala,soIcan'ttalkaboutthat.Butifyougotoothercountries,it'snotthatit'sbeautiful.ArthurThuet8:47I thinkbasically, ifyouwanttobuildsomethingfullydigitalnowyouneedtodothat intheCapitalCityotherwise itwill require a lot ofOPEX,which is fine, honestly,we just need to find entrepreneurs thatknowaboutthat,whoarenotgonnajusttotrytoexecuteonafullydigitalapproach.We'velearnedthatofcourse, likeourselves,we'vemadesomesmallmistakes, assuming that itwouldworkand itdidnot sonowwetrytobecarefulwiththat.Nonetheless,Iguessit'stherighttimetopushforthoseservicesanditistherighttimetoinvestmoneyontheconversionofyourcustomersfromanofflineapproachtowards

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anonlineone.Especially,duringthosehardtimes,wherewe'regoingtohavesometimetocommunicatewithourcustomers,andtrytogetthemtolearnhowtousethedigitalplatformsthatwe'vecreatedandseehowtheyreactandhowtheygiveusfeedbacks.Soyeah,righttiming,butlong,longprocess.HenricHansson10:21Yeah.Yeah.Butbutsoit'smostlytechstartups.Andisthatanearlystageorwhat?ArthurThuet10:30We'vedonefromvery,veryearly,we'veevencreatedacompany.Somorelikeonastartupstudiomode.And all thewaywe've done all theway from pre-revenue.We've never done the pre-series A as firstinvestment,we'vedonepreseriesas followon investments,butotherwise,allof the investmentswereearlystage,seedorpre-seed.Wehavestoppeddoingpre-revenueforasimplereasonthatIthinkifyoudoifyoudopre-revenueitmustbesomekindofabusinessmodelasafund,andyouneedtoknowtheminordertosucceed.Kindoflikeanindustrialapproachtoinvestmentwhereyoucandofiveinvestmentspermonth.Andwedon'thave,wedidn't take thatpath.Wewant tohaveasmallportfoliowithcompaniesthatwe really like and thatwe really believe in.Wewould rather have like 10 companies thatwe cansupportthroughouttheirinvestmentlifethanyouknow40-50companiesintheportfolio,wherewedon'tevenknowwhothe foundersare,andwewerenotable tocommunicatewiththem.Andwherewewilljustwait for thosewhowilldie todieand thosewhowill succeed tosucceed,and thenwe'llbeable tospendsometimewiththecompany.Imean,it'snotthatitwouldn'tbeinteresting,butthat'snotwhatwewant. So nowwe do companies that have a few thousands of dollars of revenue permonthwhenweinvest.Sofrom,Iguessthesmallestorthesmallestwaszero,butnowwestartthesmallestwaslike5Kandthebiggestrevenueatinvestmentwasaround20kamonth.HenricHansson13:00Andsortofwheredoesthisleaveyouintermsofticketsizes?ArthurThuet13:06We'vedonebetween$50,000and$800,000asfirstticket,andthenwiththefollowons.Wewereabletoputmoremoneyineachofthosecompaniesifwe,ifwebelieveinit.HenricHansson13:28Yeah,Isee.AndhowlonghaveyoubeenoperatinginKenya?ArthurThuet13:34So in Kenya, our first investment happened in September 2018. Itwas investment at Lapierre glasses,whichisaneyecarecompany,andnowwehavethreeportfoliocompanies inKenya.Weareclosingonthefourthonerightnow.SoapproximatelyhalfofourportfoliowillbeinKenyaoncewe'redonewiththatnewinvestment.HenricHansson14:02Okay,sotheothercompaniesareinotherpartsofAfrica?ArthurThuet14:05Yeah,theothercompaniesareinFrancophoneAfrica.Rico,Senegal.We'llsetsomesubsidiariesinMaliinnow.Okay,that'sit.AndnowwetriedtostopdoingFrancophoneAfricabecausewe'retiredofbeingtheonly ones doing venture capital over there. And sowewant tomitigate or resolve a little bit. Sowe'dratheryouknow,makeafewinvestmentsinKenyaasit'sanareawhereweknowwecanfindweknow

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forsurethatinthecompany'steens,wecanfindsomesomesomesomefollowoninvestorsthatthatwilljoinusintheintheadventure.HenricHansson14:53Yeah, yeah, I see.And inKenya, are there any like success stories and ventures that you'vebeen therefairlyforafairlyshorttime,butstill,arethereanysuccessstoriesor?ArthurThuet15:06Yeah,yeah,definitely.Thatglass,thatglassescompanywhenweinvesteditwas, likefivemonthsold.Itwas only operating in Kenya doing $4,000 revenue per month. Really, you know, really, really youngcompany. Very, very early stages of its life and now it's in five countries in both English and FrenchspeakingAfrica. It'sdoing likearound$60,000ofrevenuepermonth,profitable.Youknow,kindof likepioneeringthenewwaytoselleyeglasses,prescriptioneyeglassesinAfricainanaffordableway.Soit'sagoodstory.Good,goodhumanstory,Iguess.Andandit'salsolikefinanciallyit'sbeenquiteimpressive,howtheyusedourmoney to just increase the footprintandalsodramatically increase therevenueyouwhilestayingnearprofitability.So,andthisisreallysomethekindofcompaniesthatwearelookingfor.We'renot looking for theonesburninghundredsof thousandsofdollarspermonth.Wedon't feelverycomfortablewiththat fortworeasons.Thefirstone is that,okay, it'sournotverydeeponserviceside.Ourfundisquitesmall,weneedtoraisecapitaleveryyear.Sowedon'thavethatkindofmattresswhereifoneintrapreneurcomesandsay-Hey,I'mindeepshit,mynumbersarenotlookinggood.Ineed200K-wedon'tknowifwe'regoingtobeabletodothat,becauseitcandependonthetimingthatwehaveforourownfundraising.Andtheotherreason isactuallyquiterelevantrightnow,asweneverknowwhatwasgoingtohappen.ArthurThuet17:36Iwouldn'thavesaidthataboutvirusesafewweeksago,butmorelikeonthefundingcyclesand,andit'snevereasytofindmoneyanywhereintheworld.Ofcourse,it'seasierifyouhaveagoodproject,butyoucan take longer time than expected. It's just like it depends on the random encounters, how big yournetworkis,doyoumeetwiththerightpeopleattherighttime?So,youknow,likeyoucanhaveadeltaofof sixmonths I guess for fundraising. So, youwant tomake sure that your companies are not like youknowburningtoomuchotherwisethosecouldbecomplicatedcurves.SonowwiththeCOVIDthatissamesamekindofexplanation, Iwouldn't like tohaveor toberunningacompanythat isburning200kpermonthbecauserevenuearebasicallygonnagodowntozero.Sothenwhatdoyoudo?Wehavealotmore,alotmorepeopletofirethantheguyswhotrytobeabitmorebalancedintheirdevelopment.AndIthinkthatacompanyliketheeyeglasseshasagoodpersonnelfortheexplainingtypeofcompanythatwetrytofind.HenricHansson19:14I see. And in general, what is your perception about the amount of investable ventures in the Kenyanindustry?Istheresortofagoodfit?Orwouldyousaythattherearetoofewventuresliketheonesyoujustexplained?Thinkcomparedtomoredevelopedindustries.ArthurThuet19:35Idon'tknow,because like, I'veneverdoneVC in inotherpartsof theworld.But Iguess it'seither likeKenyaisabitdifferent.Youcanseemoreandmoreentrepreneurs,moreandmorepeoplewhojustquittheir jobstostartaventure,eventhoughtheyknowthatthey'renotgoingtomakemoneyforforafewmonths.SoIguessinordertogetmoremoreofthose,weneedseedinvestors.Weneedpeoplewhocanwrite$50,000checks.Weneedincubatorswhoareabletojustgivethem20kor30ktodothefirsthirings.Andaslongasyoudon'thavethat,aswemighthaveinwesterncountries,andtroublefindinglovemoney,

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asAfricanpeopleusuallydon'thavelovemoney,sowehavetorelyonthesmallerstructuretobeabletowritesmallerchecks.ArthurThuet20:47Alotofpeoplewon'tbeabletotocreatecompaniesthatcanputfoodonthetable.Youdon'tnecessarilywanttotaketheriskorisgoingtowaitabitmore,abitmoreabitmore.Andattheendoftheday,that'swhat's reallymatters, I guess. Andminimizing the number of startups that could exist on the on thatmarket.Buthonestly,wereceivealotofdealflow,andwearenotlackinginvestmentopportunities.Wedon'thavetimetorevieweverythingsothat'swhynowwegettobepickyonrevenueorstufflikethat.Idon't see, especially not in Kenya, I don't see the deal flow as a problem. There are many and theecosystem isquite richand isquite interconnected, soyoucanmeetpeopleeasily. It is reallyunique, Iguess, and Idon'tknowNigeriaquitewell.ButKenya is abitunique in the sense that it's alwaysbeenquite livable, and small and quite nice. You have the few tech hubs that everybody knows about.EverybodyislikemovingaroundandinvestorsallhaveanofficeinNairobi.Soit'salsolikeagoodwaytosharegoodopportunitiesandsharethethoughtswithpeopledoingthesamejobonthemarketoronthetheentrepreneurs thatweget tomeet.At theendof theday, ifyouhad,youknow, likeall those fundsaroundtheyallsaythatwecanwrite$50,000checksis,orevenlike200or300or500.Butthetruthisthatinvestorsmainlyworkonitforbigfunds,theymainlyworkon,youknow,multimilliondollardealsbecausetheyjustneedtouseittoinvesttheircash.Today,theymightbeabletotakesomesmallerbitsjust because they, they can tick all the boxes and say like, it's a super team. Themarket is great, theproduct isgreat.Themomentumisgreat.Wedon'thavea lotofworkrightnowa lotofgooddeals.Sookay,we'regoingtobeabletoexecuteona500kdollardeal.ArthurThuet23:52But ifyouhave100million in thebank,you'renotgonnayoucan't focusonsuchdealsand I'dsay likeevenevensmaller investors, I can seea trend.And that'squite interestinghonestly.And ifwecan findsomeopportunitylikethatwe'dbehappytogetthem.What'sthebestwaytogetbecauseattheendoftheday, your job is to getmoney back to your investors. In order to getmoney back to your investors, ofcourse,youneedtodoanexit.And,andmyquestionandmaybeyouhaveanopiniononthat,butmyinopinionitiseasiertogetmoneybacktotoyourinvestorsifyouown40pluspercentor30pluspercentofsignificantstartupsyouknow,kindofbelikeseriesAstartupsdoingroundsaboveamilliondollarsdoingrevenueaboveamilliondollarseveryyear.Butyouown40%ofit?Orisiteasierifyouown3%ofahugedeal startup valued above $50 million, that's gonna have some new rounds of funding in the comingmonths.Andasasmallinvestor,you'relike,Okay,yeah,I'vebeenthereforfortwoyears,Iwanttocashout.Icandoagooddealgooddiscountonthepriceontheunderroundprice.AndsowecanevenseelikesomesmallerseedfundtryingtofocusonthoseseriesAdealsthattheyknowaregoingtogotoSeriesBorseriesC.AndatseriesC,they'regonnaraisetheflagandsay,Iwantout.ButIguessifyoureallytrytodoseedinvestment,youcouldgetstuck,becausenooneisgoingtobuyyouout,nooneisgoingtobuy40%ofcompoundsharesinseriesA.thatisthat'sjustnotwhattheywanttodowithcash,theywantcashtobe injected in thecompany, theywant it toactuallycreatevalue,and theydon'twant togivemoneybacktoSaviusothatSaviucanpleasetheirinvestors.HenricHansson26:26Sotherearenotreallyanyopportunitiesofdoingexits,actually?ArthurThuet26:30Mmhmm.Yeah.No,Ifoundoutthattherearenone.AndthisiswhyIbelievethatthosesmallermicroVCsaremaybemakingmakingtherightdecision.Nowbecausetheit'sprobablyabetterwaytoamoresecurewaytodoanexitthanjustinvestingbigticketsinfuturebigstartups.Soofcourse,likeyoucanyoucould

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cash out a little bit, you know, like, one quarter of your investment. And there are always somepossibilities.Myself,ifIinvestinaseriesAstartup,I'mgonnabelike,Idon'twantanyonetogooutrightnow,becauseIdon'twantmymoneytobeusedforthat.ThemostIcandoistobuyoutsomesharesfromthefoundersbecauseIknowthattheyarepaidlike1500dollarspermonth,andtheywantabitofcash.SoIcoulddothat.Buyingoutthebusinessangelsthathavebeenthereforayearwouldbelikeapainintheass.Soyeah,Igeteverybody'spointonthattopic.Butit'satrickythingtohandle.AndIguessI'mnotsayingthatwe'regoingtogetstuckinfiveyears.Wearequiteflexible.AsIwassaying,wedon'thaveacleartimeline,wecanstayaslongaswewant,andweevenputthatinourthesis,sayingthatwedoallthehard work with the entrepreneurs for the first years that are shaky. Whether it's about finding thecustomers,tryingtosecurethem,tryingtogrowthecompanytomakeitprofitable.Whywouldweforceourselves to just sell our sharesonce theyget above that thresholdwhere it'snowstarting tobe abigcompanythathasareputationandallthat?Whyshouldn'twesayso,andIguessourinvestorsarequitehappywith that stateofmind.But forother funds that are closed then, I'm curious to seehow they'regonnahandlethesituationinfiveyears,becauseweseealotofclosed-endfundsthataregoingtohavetogivemoneybacktotheinvestors,andI'mcurioustoseehowtheymanagetogetthatcash.HenricHansson29:11Yeah.Sothere'sabitofasortofliquidationissuethere.ArthurThuet29:16Yeah, either they're gonna give some huge discount, or they're going to extend their extended funds.anywaytheydon'thavemuchofachoice.HenricHansson29:26Yeah,Igetyourpoint.Iwasjustalittlebitcurious.Youjustsaidbeforethat.Youindustryingeneral.No,you'rekidding.Thelackofhope.Soyeah.Sorry.Okay.SoIwasjustwondering,areyouusingacceleratorprogramstoalargeextent,todiscoverviablefirmsforinvestment?ArthurThuet29:58No,notatall.HenricHansson30:01Notatall.Andhowisthat?ArthurThuet30:06Howisthat?HowdoIfindthatwhenwefindthedealsthatwedo,orwhydon'tweuseaccelerators?HenricHansson30:14Yeah,maybewhydon'tyouusetheaccelerator?ArthurThuet30:19Because?Idon'tknow.That'sagoodquestion.Wehaven'tfeltweneededtousethem[theaccelerators]inordertofindgoodopportunities.LikeIwassaying,Wehaveplentyofdealsonthefloor.Formostoftheinvestments that we have done, we received the opportunities through our network. So there wasvalidationfrompeoplethatwetrustthat it isagoodopportunity,andthenitwasconfirmedduringtheduediligenceperiod.Sowedon'treallyfeeltheneed.Andagain,wedon'tdo10investmentsperyear,wedo two to three new investments and then all the rest is follow on. So if I was speaking to all theaccelerators in that in that area, and I would receive like 20 opportunities per month from differentsource,andIwouldhaveto lieall thetimesaying,yeah,pleasesendyourdeal flow,sendyour infoand

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neverexecutingonasingledeal,whichIguesswouldputmeinabadpositiononthemarket.Sofirstofall,wewanttobehonestwithwhatweareabletodo,wetrynottooversellSaviuasaveryactive[investmentcompany].Weareprobablyoneofthemostactiveseedfundsbutnotnecessarily intermsofvolumeofnewinvestments.Butasweareabletoreinvesteveryyear inourcompanies,westillhavesomeprettystrong activity compared to the other people in the market for seed and pre seed companies. But Iwouldn't liketohavemyinboxfilledwithnewopportunitieseveryweek.Andalsolikewhenyouspeakabout accelerators like I know a few of them like Growth Africa, Katapult but it's more in NorthernEurope, but they have some African ventures. There is also one in England, Founder's Factory. Butotherwise,Iguesstherearenotthatmany.Therearenotthatmany.Ijustspeakwiththem.Andwhenwespeakwiththem,forexample,ifIcanrememberwhenItalkedtotheGrowthAfricaguys,wemadeitclearwhatourcriteriawere.Sothatwe,youknow,wejustmakesurethattheysendusrelevant,relevantcases,andnot justall thethingsthat theyhave in thepipeline.Now, themainreason is thatwedon'tneedtohavesuchahighnumberofdealflow.HenricHansson33:44Yeah.Andyouwere talking a littlebit about thenetwork's there. Is that somethingyouhadgoing intoKenyaoristhatsomethingyou'vehadtobuild?buildonit?ArthurThuet33:55No, no,we had to build it. Sowe hadmore of an operational network for potential customers, formercompanies,butotherwiseitwasaitwaswehadtobuildthat.HenricHansson34:09Okay,andwhatwouldyousayingeneral?Isthelevelofinformationavailableabouttheventuresandthemarketstheyoperatein?Isitsufficient?Orhowdoyougetitinformation?ArthurThuet34:20Whatdoyoumeanthelevelofinformationabouttheventures?It'squiteconfidential.AndweImean,youmeanbeforewespeaktothetotheentrepreneurs?HenricHansson34:30Yeah. Iwasthinkingmore ingeneral.PerhapsVC firms inEuropeareoperatinga lotonTechCrunchorusingthesesortof?ArthurThuet34:44Wereadallthat.It'sinterestingtoreadaboutitbecauseyouneedtoknowaboutthemarketandyouneedtoknowpeopletoknownames.Soit'skindofmandatory.Butwedon'tdocoldsourcingeither. I'mnotlookingatTechCrunchAfricaeverymorningandsendingoutemailstomeetwiththefoundersthattheytalkabout.Becausetheydon'thavetimeandwedon'thavetimetodothat.Weareasmallteamandwedon'tdomuchnewinvestmentseveryyear.It'sjustlikehavinganoverviewofwhat'shappeningandwhatinvestors are investing and making some deals. So we use Disrupt Africa, Qvartz, Jeune Afrique andTechCrunch.ArthurThuet35:46Butmorelikeinakindofasporadicway.HenricHansson35:50

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Andisthataffectingsortof,I'mthinkingnowmoreabouttheinformationyouactuallyreceive.OnceyouhaveinitiatedarelationshipwiththeventureIsthatsortofslowingdownyourduediligenceprocess?Orhaveyounoticedanysortofdifferencein?ArthurThuet36:06Alotofthem[thestartups]arenotprepared,andtheydon'tknowwhatittakestoraisecapital.Alotofthemhavedatarooms,butmostof themhavea lotof informationmissing in thatdataroom.So this issomething thatwe try to transmit to our portfolio companies, helping them to actually be investmentready. And that makes such a big difference for the first conversations that you have with anentrepreneur, if everything iswell organized, all thedocuments are there.Thenyoualwayshave someadditional information thatyou require.Whenyouknow90%of it is already there, it justgives suchagoodimpressiononthecompany.It'sveryimportant.HenricHansson37:15Yeah. And another thingwe've seen a lot in the literature is sort of there seems to be somewhat of adebate between locally born ventures and you know, foreign founded ventures. And do you see anydifferenceinthewayyousortoffindthelocallybornventuresinrelationtotheonesthatareforeign?ArthurThuet37:43Honestly, we've never really asked ourselves the question. We invest in people, because we do seesomethinginthem.I'vemetalotofforeignersthatwerenotgivingusagoodfeelingandImetalotoflocalpeople thatwerenotgivingusagood feeling. Inourportfoliowehaveamix.Wehave60-70%of localfoundersand the rest are foreigners that justwanted to createa company inAfrica,because theyhavelivedoverthere.Usually,it'sbecausetheyhavelivedoverthere.Wedon'treallymakeanydifference.Myfeelingisthatifyouwanttoberelevantandyouwanttoinvestinlocalfoundersbecausetheyjustknowtheplace.Youknow,Iwouldn'ttrustaKenyanguytobuildaventureforFrenchpeople.Iguessitisthesame way the other way around. Even though, of course, if you have lived over there, you haveexperiencedthepeopleandtheirhabits.Itmakesyoumoreandmorerelevantthroughouttheyears.Butyeah,no.AKenyanguycomingtoParistobuildsomethingthereforthefirsttime,I'mnotgoingtoriskmymoneythere.HenricHansson39:18StartmakingFrenchcrèpes.No,but I seeyourpoint.Buthaveyouseenalso that therearesomesomechallengesthatImean,youthoughtyoutalkedabitaboutthislocalknowledge?Haveyouseenforeignersfoundingcompanieswhohaveleftthatsortoflocalknowledge?ArthurThuet39:40Yeah.Andwedidlacklocalknowledgeaswellasinvestors.AsIwassayingbeforeaboutthefullydigitalapproachandwhatyouthinkthemarket isableto integrateandwhen it'snot.Definitelywe'veseen it.We'vealsoseenlikesome,youknow,IthinkthatmaybeforeignersaremoreusedtoventurecapitalandstartupssotheycometoAfrica,theylaunchastartup,theyraisecapitalmoreeasilythanlocalfounders.Theyreachveryhighvaluationsthatarenotsustainableandnotnecessarily justifiedbystrongrevenuegrowth.Justbecauseyouknow,theyfindcapitalallovertheplace,intheUSorinEurope.Andtheyspeakwell,and theycansell thewholeAfricanstoryand theneverybodygetsexcited.Butat somepoint, likewhenyoubecomesobigthatnolocalAfricans,Africaspecialistfundscangetintotheroundsthatyou'reorganizing.AndyourvaluationisoneofSiliconValley,you'regonnagetscrewed.SoIguessthat'smaybeabiggerissuethanpeoplemightthink.ArthurThuet41:13

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Forforeigners,it'sliketheyaretryingtoreplicatetheschemethattheyhaveseenintheirhomecountriesor home continents in Africa,while like, you know, things are not stable yet as it could be inwesterncountries in terms of VC. I'd be careful about thatwith foreigners. And then yeah, local context. Yeah,habitsandstuff,butpeoplecan learn.And Imean,of course, soaftera fewmonthsora fewyearsago,you'retotally,nottotallybutyouweremoreabletocreatealocallocalstartupasaforeigner.Forexamplewemadethesemistakes.ArthurThuet42:13Guys. I hope you don’t mind, I have a call starting in two minutes. Maybe I don't if you have otherquestions.Sorrytointerruptthat.HenricHansson42:21no,no.ArthurThuet42:23Iamabletohaveanotherchatwheneveryouwant.HenricHansson42:26Yeah.ArthurThuet42:28Ican'tmissthatone.HenricHansson42:29Perfect.Ofcourse.Thankyousomuchfortakingyourtimeandwewillletyouknowoncewe'redonewiththisreport.Transcribedbyhttps://otter.aiEditedbyMadsRobdrup

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APPENDIXE. Interviewwithinterviewee1and2fromVC3TranscriptofInterview.IntervieweesfromVC3,ChandariaCapitalInterviewer1: HenricHanssonInterviewer2: MadsRobdrupInterviewee1: BruceLule(Principal)Interviewee2: HamzaButt(Associate)Time: 1:09:51HamzaButt0:09IthinkprobablywegothroughChandariacapital,whoweareandhowwewereformedandthenwejusttakeitfromthereandseehowwecanhelptheseguysoutasmuchaswecan.Takeanyquestionsifweneedto.Iguesstheyhavequestionsthatthey'realreadypreparedinadvance.Sowecanprobablyjumpintothatandthenjustseehowtheconversationgoes.Sodoyouwanttodotheintroduction?Ordoyouwantmetotheintroduction?BruceLule0:36I'lldothe intro,andthenyouadd in,soundgood?Yeah,great.Soeffectively,Chandariacapital.We'reaventurecapitalfundforahighnetworthfamilyandagroupofcompanies.SotheGroupofCompaniesarecalledtheChandariagroupofcompaniesandhavereallybeenoperationalwithintheregionforupto60yearsthroughtheirprimarybusiness,ChandariaIndustries.ChandariaIndustriessellshygieneandtissueproducts. So they've been doing this effectively for 60 years. And have grown to be one of the biggestproducersoftissueandhygieneproductsintermsofmarketsharewithintheSub-Saharanregionandindoing so have developed a lot of business links and business networks. Yeah, and I guess throughdeveloping all of these business links and business networks and seeing the opportunity for otherbusinesses, within the Chandaria group, they formed various entities to take advantage of variousbusiness opportunities in Africa. So the group also has an entity called Chandaria ventures. Chandariaventures invest in more mature companies and has made investments in banks, insurers holdingsignificantpositionswithin them.And then theyhaveanotherentity consideringpropertieswhichsellsandleasespropertieswithinAfrica,UAEandEuropeandtheneffectivelyus,Chandariacapital.Sotojustgive a broad understanding, the Chandaria group is owned by a high networth family, called theChandarias,which are in various kinds of business interests, as I've described as awhole family, evengreaterthanthisfamilythatownstheChandariagroup,inparticular.Soeffectivelytwoandahalfyearsago,Myself and the Chandaria group, formed this venture capital fund, Chandaria capital to effectivelyinvest in early stagebusinesses thatwebelieved could confidently scale acrossAfrica. So I'm sure thatHamzahasexplainedwhatwebelievearethosekindsofcompanies.HamzaButt3:21ActuallyIwasn'tsomaybeyoucanjusttouchuponthat.BruceLule3:31Okay,sowithregardstothesecompaniesthatwebelievecanconfidentlyscale,obviously,theymustberunningabusinessmodelthatisscalable.Sointermsofbeingscalable,itcanbeofferedtoawiderangeofcustomers,we see, can continuallybe increasing, andbasically canbe customizedacross the continent.Wewantedtoinvest inbusinessmodels,whereweseethattheyhaveverystrongbarrierstoentryandcompetitiveadvantage.Sothatasthebusinesstakesonmorecustomersandsoon,competitorswouldn'tnecessarilycomeinandtaketheirmarketshareeasily.Wewanttoinvestincompaniesledbyteamsthatreallyunderstandhowtooperateabusinessefficientlyandhavedevelopedwhatwebelievearestrong

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ideasintermsofscalingitacrossAfrica,andthatwecanusetheexpertisefromourgroupofcompaniestoverify and check if they're thinking in the rightkindofway.And then, lastly, iswewanted to invest incompanies where they provide an impact to the broader ecosystem. Being helping people getemployment, improve their standards of living, and so that there is a general positive impact from theservicesthatwe'reproviding.Now,anotherpartofourthesisisweliketoinvestinearlystagecompanies.Butweliketoinvestinearlystagecompaniesthathaveaproventrackrecord.Sointermsofuslookingatthese,basicallyfourelements,wewanttoseethatbusinessesaresoactuallyhavingascalablebusinessmodel.SotractiontousisverykeyHenricHansson5:50sorryifI'minterruptingyou,Iwasjustalittlebitcuriousthere.Whatdoesthatmeanforforyourticketsizes?Whatareyourticketsizes,typically?BruceLule5:59Okay,cool,I'llgetintothat.Yeah,I'llgetintothat.I'lljustfinishthispointandgetrightintoit.Sointermsoftraction,wereallyneedabusinesstoprovethatA;it'sprovidingaproducttoanunderservedmarketthat'swillingtopayapremiumforitandthatmoreandmorecustomersareattractedtothat.Sothat's,that's,that'sreallythekeything.Soreallyprovingthebusinessconcept,andreallyprovingthatthereisamarket.Soeffectively,we'reapre-seriesAinvestor.Ourticketsizesbasicallyrangefrom,I'dsay$150Kto$500kwepreviouslyusedtoinvestfrom$50kbutwe'veseenthatthereisaneedforbiggertickets.Evenwithinthispreseriesaspace.Wefollowonincompaniesthatweinvestin.Ifitmakessenseintermsofeconomics,weinvestupto150Kto500kinacompanyandwe'resectoragnostic.So,wereallyacrosssectorsaslongaswereallybelievethatit'sinlinewithourthesis,andnotparticularlysectors.Andreallywhat'sthekeythingthat'simportanttousandtoourinvestorsisthatweusetheexpertiseorexperienceofourgroupofcompaniestohelpthesecompanies.BruceLule7:57That is quite unique to us. We play a role as we do invest money, and capital, but we really use theexpertisethatwehavefromourselvesasteammembers,becauseweareallactuallyquiteknowledgeableontheAfricancontextandactuallyhavestrongnetwork,butthenalsouseourgroupofcompaniestohelpthesecompaniesscale.Yeah.Andthatprovestobeveryusefultoa lotofcompanies thatneedbusinesscontractsandsupplierstoprovidethemgoodsatsubsidizedratesandsoon.Hamzaisthereanythingelsetoaddontothat?HamzaButt8:43Iwouldn'tnecessarilyaddon,butmaybejustaddalittlebitofcolor,Isuppose,onwhatBruceissaying.So,youknow,Brucehasalready touchedon therequirements thatwewouldneed tosee incompaniesthat we're investing in. So that's traction, product-market fit, strong team, clear barriers to entry andabilitytocontinuetodevelopdefensibility.Thoseareallreallyimportanttous.Andonthevalueaddside,youknow,typically,becauseofthetypesofentrepreneurswedecidetoback,thesearetheentrepreneursthatneedhand-holdingeveryday.Theseareentrepreneurswho justneedstrategicsupportandadviceandalsothethingsthatwecanreallyaddonto.Sotypically,asBruceissaying,thattendstobenetworks,that tends to be strategy development, and that tends to be brand building, and just overall businessdevelopment.Andbasically,justnavigationthroughboththebusinessandpoliticalside.Ithinkwestartedinprettywell,um,Idon'tthinkthere'smuchmoretoaddonthat.Yeah.BruceLule9:42Okay. I guessmaybe just a quick background on our team. Sowe have amanaging partnerwho is thegroupCEO.HehasledChandariaindustriesfrom2012,reallyscalingthatcompanyintooneofthebiggest

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tissueandhygieneproductmanufacturershereineasterncentralAfrica.Thenyouhavemyself,IambornandbroughtuphereinKenya.IstudiedabroadintheUK,economicsandpolitics,workedatCreditSuissewhere I assisted in themanagement and setupof investmentbankingbusinesses in emergingmarkets.That'seffectivelymybackground,didanMBAandthencameandhelpedsetupthisventurecapitalfund,andthenmaybeHamzacanyoujustgiveaquickbackgroundonyourself.HamzaButt10:48Sure.Sosimilarly,bornandraisedinKenya,IstudiedintheUK.IdidmyundergradinternationalbusinessandIdidaMaster'satKing'sCollegeininternationalmanagement.ThenItookanothermaster'sdegreeinenergytradeandfinance.AfterthatIcamebackheretoKenya,Ididn'tendupworkinginfinance,Iendedupworking in operations because I had an operations background andmanagement background. So Iended up being the head of operations at a group of healthcare companies, wewere setting up sevenhospitalsacrossthecountry.Sooversawthesettingupofhospitalsacrossthecountry.Ireallydidn'tlikebeinginhealthcare,it'snotsomethingI'dgrownupwantingtodo.It'snotsomethingthatIfeltlikeIhadthe emotional capacity to dealwith because it's quite challenging, as you can imagine. So I took a stepback,I'dalwayswantedtogetbackintoinvesting,andit'swhatI'dstudied.ButgiventhatIhadhelpsetup to early stage companies and then essentially grow them and take them to a certain point ofoperational capacity, I reallywanted toget into theventuresidemore than theprivateequity sideandreally just get involved in you know, helping grow businesses, helping scale businesses. Leveraging astrong operational background tomyunderstanding of businesses, and combining that a little bitwithfinance,sothenIendedupjoiningtheteam.I'vebeenwiththemforabouttwoyearsnow.Soyeah,that'sme,that'sBruce,that'spassion,andthat'sChandariacapital.Sohappytojumpintoyourquestionsnow.HenricHansson12:18Thank you. Thank you somuch. You ticked all the boxes for our background questions. So, thanks forbeing soprepared for that.One thing Iwaswondering is just if youhaveany sortof success stories intermsofinvestments?You'veonlybeenoperationalfortwoandahalfyearsbutbutmaybeyou'vealreadyseensomeofyourventuresthathaveoutperformedothers?BruceLule13:00So effectively, I think, you know, we have had a lot of successes on our portfolio already. I'd like topotentiallyhighlight2,andthenmaybeHamzacantakeoverfromthere.So,intwoandahalfyears,we'veactuallyinvestedin12companies.Soourportfoliohasgrownquiteproactively,andIbelieveit's,it'snotbeen equal in terms of year on year, I think it was something like 3,5,6 or something of thatsort,somethingmorelikethat.Sosoasaswehavebeenintheindustry,asournamehasgrownandsoon,we'vetakenonmoreeachyear.Butyeah, justtogooverour,oursuccesses. I thinkoneofourclearsuccessesisCobo360.Cobo360isacompanythatisoptimizinglogisticsintermsoftruckingservices.Soeffectivelyit'salmostlikeanUberfortrucks.Fleetownerscanbasicallyputtheirfleetsonthisplatformand businesses can order trucking services to pick up and deliver goods. They also provide additionalvalueaddservices,suchassortingoutthegoodsthatarebeingtransportedandprovidingfinancingfordriverswhoactuallydothesetrips,sothattheycanhavefinancingtopayfor,kidsschoolfeesandsoon.Theyalsophavesubsidizedratesforfleetownersonfuel.Alsotheyoptimizepayments.Sotypicallyinthiskind of industry, payments between firms tend to take 60-90 days. Through their platform, they'reoptimizing it so ensuring that its owners get payments. The company has grown relatively well. WeinvestedinthemabouttwoyearsagonowwhentheywereonlyoperationalinNigeriaandtheywereatavaluationthatwasjustgettingdoubledigitsandeffectivelythelastvaluationonthatcompanyhasbeenatripledigitnumberinUSD.GoldmanSachshasinvestedinit.Shortlyafterweinvested,IFCinvestedinthecompany. The company is now operational in several countries in Africa. It's operational in Kenya, inUgandaandTogo.SoinseveralcompaniesinAfrica.Thereforeit isemployinga lotofpeopleandreally

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optimizing logistics,delivery,andreallyprovidingastrongservice.WhatIreally likeaboutCobo360isthatit'sreallyproventhatourinvestmentthesisisviable.Therearecompaniesthatyoucaninvestinatarelativelyearlystage,scale themandprovethat theyhavecompetitiveadvantages throughtheservicesthat they provide. And yes, as an investor, we also get the additional benefit that we have made aconsiderable return. If you thinkof thedifferencebetween thevaluationweentered, and thevaluationthatweareinatthemoment,wearealreadylookingat7-8Xonourmoney,sowe'requitehappyaboutthatparticularinvestment.HenricHansson17:35Okay,Iwouldjustliketoaskyou,ingeneral,whatisyourperceptionoftheamountofinvestableventuresintheKenyanindustry?Doyouthinkthere'sagoodfitforthesesortofVenturesthatyoujustmentionedorsortoftoofewincomparisontoavailableinvestors?HamzaButt18:08Yeah,I'dliketoanswerthatasit'ssomethingthatwe'vebeenspeakingaboutquiteabitanddoingalittlebit of reading on recently as well. So look, I think it's important to note that as an overall the wholeventure industry in Africa is young, right? It's less than 10 years old, across the continent, maybe it'stouching10years, ifyoureally factor inhowsolarcompaniesgrew,andhowtheyraisedmoney in thepast,especially,DFI'sandnoncommercialfunds,essentially.Soit'saveryyoungindustry.Theamountofinvestableisprobablynotlikewhatyou'dseeintheWest,it'sobviouslyincomparisontoSiliconValleyorwhenyoucomparetoSoutheastAsia,it'snotthathigh.Butalotofthatwillchangeastheindustrygainsalittlebitmoreexperienceastheindustrygetsalittlebitmoresuccessstories.Youknow,themorekindsofdeals thatare likeCobo360willencourageentrepreneursandentrepreneurship .Thiswill takepeoplefromcorporate jobsandmove intoentrepreneurship similarly.Already there'sagoodamountof fundscomingin,rightbutitwillprobablynotreachedapointofsaturation.BecausetheventuresceneisverysplitintermsofNorth,West,EastandSouthAfrica.SoyourNorthAfricadealswhichtypicallytendtogetfundsfromMENAbasedfunds.SoMiddleEastandNorthAfricanfunds.TheWestAfricanmarketwasalittlebitmoredevelopedbecauseNigeriaisjustsuchahugepopulation.It'sgotsuchayoungpopulation,and it's got a very high number of engineers and software engineers. We've seen a huge growth insoftwareandtechbusinessesandthenhereinEastAfrica,Kenyahasbeenthehubandisprimarilybeendrivenbystronginfrastructureandmobilemoney,right?SomobilemoneytoKenyasoyoucanseeitinthetrendsright.FinTechissomethingthat'sdonereally,reallywellinAfrica.Andthat'sbecausemoreandmorepeoplehave access tomobilemoney. InEastAfrica, inparticular, you seeBranchandTaladoingextremelywell in the past. You look inWest Africa ,inmobilemoney, you have guys like Flutterwave,they'vejust,youknow,raised$25millionfromvisaaloneandtheyarealmosthittingunicornlevel.Right?So,look,there'smoreandmoreopportunity.There'sactuallybeenon,SouthAfricanedtechstartupandtheydidafullexitdrivinghugereturnstotheinvestor.Sotheirdealsright.But,youknow,theindustryisgrowing, it needs to grow, itwill grow.Wewill seemore startups coming in and itwill just justify thefunds. Right. And, you know, I know it s a lot of implications already at themoment, you know,moremoney,moremoniesLessstartupsmeaningithasanimpactonvaluationsespeciallyright.Sosometimesitcandistortvaluationsaspurelyademandandsupplything.HamzaButt21:11So,yeahit'saninterestingquestion.There'sroom,right.Andit'sactuallypartofwhyweareinvestinginthisspacethatweareinvestingin.Typicallythere'sbeenverylittlecapitalavailabletostartupsbetweenseedandseriesA.There'salotofriskforfundstotakeon,especiallyfundswhodidn'thavelocalcontext.Sothefactthattherearemoreandmorefundssettingupwithlocalcontext,localLP's,localGP's,andlocalteams,orforeignfundsarecominginandgettinginlocalGP'Sandlocalteamsisreallyhelpingtodrivealotofcontext.Butalsothatbyinvestinginthespacethatweinvestinwearelikelytoseemorereturns

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becausethere'salreadyfundsthataretherethatdoseriesA,seriesB,SeriesCinvestmentsthanprivateequity,right?Thestagethatweplay inalmostpresentsabitofanarbitrageopportunity tomakesomemoney,becauseA;nobody'scomingintothespace,andB;ticketsizesatAandBroundabiggersoit'slessandlesslikelythatpeoplewillbuyeachotheroutatthatparticularstageespeciallybecausefundshavesimilarticketsizebasedatthatpoint.Thereforeitalsogivesusanopportunitydowntheroadwithmoreexitopportunities,itwillseemorefunds,allocatesomeattentiontowardsthisspaceandit'llbringmorestartups into the system.Wehave a lot of good international players coming into the space likeAntlerwhichisnowhereinKenyaandthey'redoingreallywell.Theywillalsohelpgrowthequalityofstartupsandentrepreneursingeneral.Ithinkit'simportanttoaddtothecontext,thatit'sanearlyindustry.HenricHansson23:00Thatsoundsabit likeyou'reyou'resortofwinningstrategyhereistohitthatsweetspotbetweenseedandseriesAisthattrue?HamzaButt23:09Itsawin-winsituationasit'sbeneficialtousandalsotostart-upsbecausewe'reactuallyprovidingreallycriticalcapital.BruceLule23:18Maybejusttoaddontothat,whatwe'rebeginningtofindisthat,withtheverysuccessfulentrepreneurshere, thatmaybe started startups that have grown from about 2014 and 2015 there's starting to nowcomeupwithideasfornewfornewstartupsgivenwhattheyhavelearnedgiventhatthecompanieshavescaled.Soeventhoughwetypically lookatpre-seriesA,wearestartingtodabblewithoneortwoseedseriesfromprovenentrepreneurs.AsHamzasumsperfectlyput,effectivelythereislittlefundingtowardsthebeginningwithin.There'salotofmorelaterstageVC,andlaterkindofmoney.Sowhatwe'redoingisefficienttothewholeecosystembecausewe'rereallyhelpingtobuildthesecompaniesatthatearlystage.Andit'sgreatforusbecausethenwehaveexitopportunities.HenricHansson24:26That'ssuperinteresting.I'djustliketoaskyoualittlebitabouthowyou'reactuallyfindingyourventures?BruceLule24:32Yehbeforethat,HamzadoyouwanttotalkaboutSokoWatch,whichanothergreatcompanythatwe'requiteproudof?HamzaButt24:47Sokowatch isvery interestingdeal.Sokowatch isanondemanddeliverydistributionsystemplatform,and they basically deliver goods to informal retailers, small informal retailers. Now, by profile theseretailersare,peoplelivingatthebottomofthepyramidthemselves,theyareentrepreneurialthemselves,buttheyhavecashcycleproblems,theirbusinessesturnoververylittlemoneyinaday.Sothey'resellingFCMGgoodsfromthesideoftheroad.Idon'tknowwhetheryouguysarefamiliarwithkiosksbuttheyareessentially kiosks here. Sokowatch is able to deliver to the goods that theywould normally distributewithintwoto2-24hourswithafleetofdeliverytuk-tuksandthuseliminatingtheneedfortheseguystogoearlymorningsintothecenteroftownand,takeapullcartwiththematfiveo'clockinthemorning.toget some goods. Soko grew organically. And Imean, they grew reallywell.Whenwe invested in Sokowatch, theyweredoingverysmall revenuesandnowthey'redoingyouknowhugeamounts.Whenweinvestedinthemtheyweredoinginthethousandsofrevenuepermonthandnowthey'rehittinginthemillionsUSDrangepermonthinrevenue.Bydoingthatthey'vebeenabletogrowtheirgrossmarginsoon and so forth and naturally. This is the kind of successwe're talking about, not just based on paper

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returnsorgrossvalueoftheequityvalueofthecompanybutseeingthiscompanygrowfromatinyfleetoflike20TukTuks,servicinga200-300kiosks,tonowservicingover15,000kiosksintheregionwithafleet of over 500TukTuks, growing themonthly revenue so significantly and then pivoting into a veryinteresting sector. Because they have been able to build up enough data on the customers who werebuying fromthem, theyhavedevelopedtrust,etc,etc,and introducedcredit.This issomethingthathasnever been available to this particular consumer right, to be able to get these goods and pay for themseven days later, rather than pay for them immediately, right? So it's giving them a little bit of cashreserves,helpingthembuymoregoodsandsellmoregoods.So,thesuccessesaredifferent.SimilarlywithSokowatch,weinvestedinthemataveryearlystage,weinvestedatasub$10millionvaluation,andthevaluationthatisnowinasignificantrange.They'vedonereallywell.HamzaButt25:09They'reabove$50million.HamzaButt25:34Yeah,above$50millionwithinoneandahalfyears.Well, twoyears.They'vegrownthevaluationfromsub10toa$50millionplusvaluation.So that'sasuccess.Similarlyacrossourportfolio,wehaveotherportfolio companies that started offwith in one particular place, Coconetworks is another really goodexample.SoCoconetworksisaisatechcompanythathasbothhardwareandsoftwaresolutionsaimedattheurbanretailmarket.Andessentially,theirfirstproductisagascookerthatusesethanolfuel,andtheybuiltATMsthatactuallydispensethisfuel.SoyoujustgototheATMandyoudispenseanewfuelcanisterwithethanol.TheyhavereallystrongpartnershipswiththemainsupplyofthatherewhichisVivoenergy.Thesecookersarebetterthanyouknowkeroseneandcharcoalandtheyweredoinggoodstuffwithit,butsuccessforthemhasashasalsochangedalittlebitbecausenowtheyalsosellcarbonemissioncreditstothese huge carbon emissionmarketplaces across theworld, because of reducing the amount of carbonemissionsso theygetcertain tokens, theycanthensell themintoexchanges.So thisbusinesswentandbuiltamultimilliondollarrevenuelineasanaddon,andthat'ssomethingthatwasjustfromthestrengthoftheentrepreneurs,theknowledgeoftheentrepreneursandthenetworkoftheentrepreneurstogoandbuild out something like that. So success for us is bothpaper basedbut also youknow, invalidationofbusinessmodelsandgrowthofbusinessmodels,andyouknow,alsojustingeneralintechnicalstuffthatthey'redoing.HenricHansson29:42Yeah,that'ssuperinteresting.I'djustliketoknowalittlebitabouthowareyoufindingtheseventures?Areyouusingacceleratorprograms?HamzaButt29:53Primarilywewillgetthemthroughournetworks,becausewehaveextremelystrongnetworksbetweenthe three of usDash, Bruce andmyself.We have really, really strong networks.We have a co-investorpipelineofalmost80fundsacrosstheworld.Sowesharedeals,wetalkaboutdeals,wesharestuffthat'shard.Similarly,wehaveareallygoodreputationandrelationshipwithentrepreneurs.Soentrepreneurstendtorefertheircolleaguestous.Acceleratorslessandlessso.AlittlebitofthatcomesdowntothefactthatacceleratorsherehaveabitofadifferentapproachandhavenotnecessarilyhadthebesttrackrecordyetbutthenyouknowactorslikeAntlerandBaobabnetworksandtheyhavedifferentapproaches.Theseacceleratorsarealsoputtingtheirownmoneyintothebusinessesandactuallyhaveskininthegame.SoAntlerandBaobabaredefinitelygoingtobefuturesourcesofpipelineforus,Icanseethat.Seethat.BruceLule30:59

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I totally I totally agree with what you're saying, I think with regards to the accelerators, we've hadaccelerators that teach good business practice, which is great. And it really helped people to managebusinesseswell, however,we are venture capital investors. Sowe are really looking for those scalablebusinessmodels,andthatkindofhockeystickkindofstuff.Unfortunately,that'snotwhatkindofpipelinewehavebeengettingfromtheaccelerators.However,withwithoneortwonewaccelerators,weseethatwewillprobablygetmorehockeystickkindofgrowthcompanies.Yeah,soourbestthingscomefromisVCnetworks,orpersonalnetworks.We'reallbornandbroughtuphere.Weallwenttogoodschools.Soweknowa lotof entrepreneurspersonally.Andyes, theentrepreneurs thatwe've invested inand thatinteractwithuswillgivereferences.HamzaButt32:08Wegetapproachedaswell.Alotofgoodstartupswillapproachusandthenifwehaven'theardofthem,youknow,we'llgetamessagefromthemsayingthey'reraisingcapitalsoonandsoforth.BruceLule32:22Inthebeginningofthefund,IalwaysthoughtthatitwasveryimportantthatweestablishedaveryvisibletrackrecordsothatinthelongrunpeoplewouldbecomingtousanditseemstobelikeHenricHansson32:41I justliketoaskyouwhatdoyouthinkistheisthemainissueswithacceleratorsisn'tthattheyarenotprovidinglargeenoughsortofticketssizes?Orwhatissortofhinderingyoufromactuallygoingthereandfindingyourinvestmentsthere?BruceLule33:06Ithinkwhattheacceleratorsarehelpingtosolveaproblem.Thatisaroundhowweprofessionalizeourbusinessessothatanyformofinvestororfinancierwouldcomeinandhelpthosebusinessesgrow.Fairenough, that's what they have done. But you know, there's always two ways to look at it. Not everybusinessthatexistsisaventurecapitalkindofinvestment.Business,noteverybusinessisgonnahaveahockeystick.So theyweredealingwitha lotofbusinesses thatare justnotparticularlyventurecapitalbusinesses. Further on that, the coursematerial is not really providingwhat is needed to be a venturecapitalbusiness.It'smorejustaboutprofessionalizingthebusiness.SoIthinkthat'swhytheyhavesofarproventobenotnecessarilygoodmechanism.HamzaButt34:25Ialsothink,youknow,locally,again,I'llgobacktotheexperienceofthegeneralindustry,right.LocallyinKenya,therewasthewholewaveoftechbusinesses, ingeneralofthesestartupsandpeoplewantingtoenter into entrepreneurship and stuff. So some of the people that were running these acceleratorprogramswerenotasexperiencedorwhatnotandwerenotbringinginternationalbestpractices,whichisobviouslysuperhelpful forcompaniesthataregoingtogoandraisemoneyfrominternational funds inthefuture.SoIthinkitwasjustalittlebitaboutalearningcurveforsomeoftheacceleratorsaswell.Andit'ssomethingthatthey'redoing.They'redeveloping,they'reiterating.Onethingthatisquiteinterestingis actors like Antler and Baobab, they put theirmoneywhere theirmouth is. They don't just take youthroughtheprogram,theywilltakeyouthroughtheprogramandyou'lleitherfalloutoftheprogramoryougothroughtheprogramandactuallygetmoneyintothebusiness.HamzaButt35:27Sothesebusinesseswillneedmoneyatthatearlystagesuperearlynomatterwhatright?SowhenAntleris actually providing that money they give them some runway to go and raise money elsewhere andunderstandthevalueofusingthismoney,cashburn,etc,etc.Andit'sjustbringingingoodpractice.More

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andmorepeoplewilldoit.AndIthinkyouknow,we'llseeasituationwhereacceleratorsarebringingoutgoodqualitydealsinthefuture.ButIthinkit'lltakeagain,somemoresuccessstories,understandingbestpracticesandbuildingtherighttypesofnetworks.Imeanforexample,someofthelocalacceleratorsherehave never even approached us. Andmaybe that's not their own fault.Maybe it's just a capacity issuewherethey'reworkingwithstartupsanddon'thavethecapacitytohavepeopleworkingonthefundraisesideaswell.Butthere'ssomanyacceleratesthatIjusthearabout,andIdontknowaboutthem.Intheory,theyshouldknowaboutus,andweshouldknowaboutthem.Butyouknow,Idon'tnecessarilywantthesector down because there's some really good people there. There's some really smart people there.There'ssomereallyhardworkingpeople,thenthere'speoplethataregoingtomakeadifference.ButlikeIsaidearlier,theindustryneedstogrowexperienceingeneral.HenricHansson36:51But it soundsabit likeyoubelieve that thekey factor for theseaccelerators is toprovide thispre-seedfunding?HamzaButt37:00Maybethat'snotanyoneelse'sopinionorthefund'sopinionasanoverallbutformepersonally,IbelieveinitandthereasonwhyIpersonallybelieveinit.Ithinkthesebusinessesneedmoneyright.Attheendofthe day if you don't have money, you don't know you can't keep the lights on. You can't pay youremployees,youcan'tscale,youcan'tsellandbusinesswilldie,right.Ittakesawhiletoraisemoney.It'snotaoneortwoweekprocess.Itcansometimetakeayeartoraisemoney,right?Somewillfundraisefortwo years. Eventually they raise their money but these are companies who are raising much largertickets. But can you imagine for a small company that's going through an accelerator program that issuperyoung,theyhavenocapacityandnorunwaytobeabletobeengaginginasuperlongfundraisingprocess, right?Especially if the funds thataregoing to lookat themaregoing toask them for traction.So it'saweirddichotomybetweenthestartupintermsofwhatdowedowiththemoney?Dowehavemoneytodostuff?Andwithoutthatmoneytodostuffwecanactuallygoto?Youknow,it'skindoflikewithunistudents, right?Theemployers like, "doyouhaveworkexperience?"Andyou're like, "No, I'mtrying to get work experience to get a job" So it's something similar to that. I think it's a bit of aninterestingspace.Soifcompanieshavealittlebitofmoney,wheretheycangoandgettraction,likebrucewassaying,right,thebeginningtractionisimportant,especiallywhenit'scompetitive.HenricHansson39:23Now,canIjustask.Doyouthinkthisinitialfundinggap,thatseemssosonecessary?DoyouthinkthereisawayforVCstofillthatgap?HamzaButt39:39I wait for more angel investors to fill the gap. Typically that would be the process in most ventureeconomies.Peoplewouldraisethatmoneyfromangelsor fromfriendsandfamilyright?Butagain,youknowitcomesbacktotheuseoftheindustryasanoverall.Thereismoneyhere.Therearepeopleherewho can write Angel tickets, and who can deploy that money. It's just about investor education andexperience, right? Because these investors have traditionally been used to traditional investment. Realestate,generalsecurities,governmentbondsandsoon,so forth.Theyareused to thatkindofstuff.So,moreandmorepeopleneedtoproveout that there'sanopportunity forangels in thisspace tomakealittlebitofmoneyandconvertthemandgetthemthinkingaboutthespace.Andwe'veseenit,we'veseengroups of high networth individuals come together and set up in informal SPVs to make theseinvestments.We'veseenanincrease,especiallyoverthelastyear,ofangelinvestors,andIthinkthereiswherethere'sgoingtobegrowthforthesecompaniestogetthesemoneyandhowtheyreachtheseangelinvestorswillbeimportant.

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BruceLule41:02So effectively I agreewithHamza. I think it's really a place for angel investors to really becomemoreactiveandreallyhelpsupporttheecosystem'sgrowth.Ithinkit'sachallengeasthere'salotoftalkhereaboutvariousgroups,findingiteasiertoraise.Andtypicallywhatwearebeginningtofindasatrendisthat a lot of entrepreneurswho are struggling to raisemoney is because they are finding it difficult tounlockanangelnetworkthatwillenablethemtoeffectivelystartupthebusinessandgrow.Intermsofventurecapital,capitalist,maybeevenlaterstagefundsplayingapart inthat. Idon'tknowwecouldalldedicatemaybepercentageofourportfoliotoearlystage,likeseedstage,butyouhavetothinkofaverybespokemodel, given the economics of doing so in terms of a fund is very difficult to justify. So, yeah,gettingbacktoit,it'sreallyaboutgettingourangelsactive.AndIfeelifwedogetourangelsactive,youwillseealotmorehomegrownbusinessesscaling.HenricHansson42:27Andjustrelatingtothat.Youtalkedalittlebitaboutgettingtheinvestorstrainedandtheknowledgeandthesekindofthings.Whatdoyouthinkabouttheinformationavailableaboutventurestoday?Andalsothemarkets thatventuresoperate in? Is it sufficient, is iteasy togain this informationandhowdoyoudealwithit?HamzaButt42:53Ifyouareinspace,youknowwheretheinformationis.BruceLule42:57Yeah,Iagree.(onthelevelofinformation)ButIthinkyouhavetobeabitproactivetogetit.LikeIcan'tgotoagovernmentdesktodayask,whatisventurecapital?HowdoI invest?WhatstructureshouldIuse?But if you get into the right networks andmeet the right people, you need to be quite ambitious. Andprobablythereisroomformoreinformationtobemademorereadilyavailableto local investors.Localinvestorscangoontotheinternetandgetthis;it'squiteavailableworldwide.HamzaButt43:48I mean, you know, you can use databases like TechCrunch, Disrupt Africa also Baobab have built anincredibleplatformwhereyoucanfindoutalotofstuffaboutwhat'sgoingonintheventurecapitalspacehere.Ifyou'resigneduptoplayyouknow,resourceslikepitchbook,yougetalotofinformationontheglobalscene.Onewaythatitwilllikelyhappenisagainonsuccessstoriesright?Forexampleoursisabitofaninterestingsituationbecausewewereaangelinvestorturnedintoaventurecapitalfund.SomeonelikeDarshan,ourManagingPartnerobviously,youknow,theirfamilyisexposedtoalotofotherhighnetworth individuals. Similarly, you know,we are exposed to the high networth individuals so you get totalking, you get to speaking, you get to explaining the type of risk profile of the deals and thensubsequently the typeof returnprofile on thedeal right. So themore success stories thatwill come, itbecomesaneasierconversation,youknow,peoplewillhaveadrinkoveraglassofwineandtalkaboutthestuffsoit'llhappenbutitisagradualprocess.Similarly,there'salotofotherpeoplewhoaretakingactionsoforexampleStrathmorebusinessschoolaretryingaprogramweretheyareeducatingpeopleonwhat this whole new asset class is, the venture capital asset class. Everyone knows private equity,everyoneknows,pensionfundsandgovernmentbondsandstuff.Sopeoplearenowtryingtogetpeopletalking,butyouknow,thenit'llcomebacktoarethequalityofthepeoplewhoarecomingforthesethings.SoIthinkit'llhappenovertimedrivenbysuccessstories.HenricHansson45:41

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Soitsoundsabitlikesinceyouhavethebootsontheground,andyou'vehadthatyou'vebothgrownupinKenyaandsortofhavethenetworks.Itfeelslikeyoucangetsome,somesortof,Idon'tknowyoucangetmoreknowledgeoutofyouractualnetworks.HowdoyouthinkitworksforforeignVCsforexample,howdidtheygetthisinformation?HamzaButt46:05Foreign VCs are gettingmore andmore turned on to the space in general, because Imean, everybodyknowsAfrica's and there's all the good things a venture capital fundwouldbe lookingatwhen they'relookingatemergingmarkets.SoAfricaissexyforventurecapital,becauseit'sgottheyoungestpopulationof any continent, the middle class is growing faster than in any other continent, government andinfrastructureischangingfrequently.It'sarguablethattheAfricaneconomyisgrowing,atanexponentialrate.Sogoodfundswillbeturnedontothisin,anycase.Thisisinformationthatthey'dbeawareofthisinformationandthatthey'dbelookingtofactorintotheirdecisionmaking,especiallybecausealotofhighnetworthindividualsalsowanttostartmakingpositiveimpact.Soyouseepeoplefromabroad,whoarelookingatwhattheycandotomakeanimpact,butalsomakecommercialreturns.It'shappening,andit'shardtoignorethedatathatthecontinentisproviding.HenricHansson47:12Okay.Andwhatisyourcurrentprocessforfindinglocallybornventures?BruceLule47:27Ithinkit'sthesameaswhatwehadmentionedbefore.Soit'sreallythroughnetworks,rawventurecapitalnetworks, to the networks that we have established on the ground through us growing up here andknowingentrepreneurshere,throughentrepreneursthatwe'veinvestedinandinteractedwiththathadapositiveexperiencewithus.Idon'tthinkitdoesn'treallychangebetweenwhetherthebusinessislocallygrownperse,orhasbeengrownforeignlyandthenbroughthereorbyforeigners,it'sthesame.HamzaButt48:14Howwouldwelookatitisif,CompanyAissolvingavaluableproblemwitharealsolution?Right.Andiftheyare,thenwelookatthem.Typically,Imean,ifyouseeourportfolio,thesearetheseareallAfricanproblemsthatarebeingsolvedbyAfricantypesolutions.Sothereisproduct-marketfit,theseareAfricansolutionsforAfricanproblemsatthemoment.Yeah.HenricHansson48:51Yeah, the reason why I'm asking about this is that you often read about that, you know, one of thestrategies for finding ventures is throughnetworks inKenya. And and I thinkwhere the literature hasbeendividedisthatsomepeopletalkalotaboutthatyoufindthisthroughthenetworks.Andifyouhavealotoflocalnetworks,that'swhereyoufindtheventures.Andifyou'vestudiedabroad,likebothyouandBrucehavedone,that'susuallywhereyougetyournetworksfrom.SoI'mjustwondering,doyouthinkthere'sanytruthtothatargument?HamzaButt49:36Inanycase, it's true. Imean, if I just flip ita littlebit,oneof thethingswe lookatwhenwelookatourentrepreneurs, when wemake our decision to invest in them, we look at their ability to raise capitalwithout us. People come to funds and they're like, Oh, hey, I'm raising funds, Can you make a fewintroductions? Then good entrepreneurs have a pipeline of who they should be talking to, and areapproachingthemthemselves.Sowelookattheirabilitytohavetheirownnetworkasentrepreneurs,butthen to flip it onto the investor side. Networks are fundamental. I mean, you can't find deals withoutnetwork. To look at ourselves, we're a generalist fund, we are sector agnostic. So we have to build a

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network, itwouldhavebeenpointless tobeageneralist fundandnothaveanetworkofpeopleacrosssectors,right.Soforinstance,ifwewanttoknowwhat'shappeninginthehealthcaresector,naturally,wewould need to know investors in the healthcare sector who are looking specifically at the healthcaresector,right.Sobygoingtothemthemweareabletounderstandwhat'shappeninginthatsector.Becausetheecosystemismuchsmallerhere.Andyou'vealreadytouchedonearlierintermsoftheavailabilityofdeals locally, or inAfrica, ingeneral, you'reaware,okay, you can'tdoall thedeals.You'renevergonnaknowall thedeals, right? It'sdifficult toknowall thedeals.Butyou ifyoustayalert, justyesterday, forexample,wewerehavingaconversationwithaventurecapital fundbased inSiliconValley,but they'refunded by North African LPs primarily. I was speaking to him, and he pointed out that there's a veryinteresting healthcare deal inNigeria thatwe had never heard of and that'swhy the network drive toknowtobespeakingtoandyou'reluckysometimestohearaboutreallygooddeals,andthat'showyoufindthem.Sonetworkisfundamentaltotheventurespace.HenricHansson51:56That'sreallyinteresting,andIjustwantedtoknowyoumentionedthatyouprovidethisstrategicservicesto to your ventures, or to the ventures that you invest in as well. Are you working operationally incompaniesyouinvestinaswell?HamzaButt52:12Sothat'sinteresting.Whatwedoisslightlyuniquetothecontinent,andthereareveryfewotherpeoplewho candowhatwedo.We'repart of a larger groupof operating companies, right?We can even testproducts by plugging them in. So for example, Cobo 360 they are essentially, you know, providing thesupertrucksecuritysolution.Sowecantest them,wecanusethem,wecanreferencethem,wecandoanythingwewanttotounderstandtherebusiness.Similarly,oneofourotherinvestmentsisinacompanycalledSatfianalyticsandthey'rebasicallybuiltapieceofaverycleverhardwareandsoftware,whichislikeaFitbitbutformachines.Soitgivesyouarealtimedataontheperformanceofthesemachines.Andit's basically helps companieswith their operational engineering efficiency, or basically just efficiency,right.Wecantestthat.Wecanliterallytakethatpieceofhardware,connectintoourfactories,andthenbasicallyget that information real time to see if this isvaluable?And then, in the caseofSafi analytics,wherewe'veinvestedinthem,wecanhelpthemiteratewecanhelpthembuildtheproduct,wecanhelpthemunderstandtheproduct,what'sworking,what'snotworking.WithCobo360wecandothesame.Wecantellyouourpainpoints,youcanunderstandourpainpointsasalargecustomergobackandsortthat out. Soko watch for example are distributing our products so we can get data from them andconsumerwewerenevergettingdataonbeforeandwecansubsequentlyalsogivethemmoreefficientways,wecanhelpthembuildtheirownnetwork,wecanhelpthemgetmoreandmoresupplies,credits,andsoonandsoforth.Sowewouldn'tgo inonadaytodayoperationalrole,wewouldn'tgoasmeorBruceandsitinthecompanyinperiodoftime,likeIsaid,theentrepreneursthatweinvestin,oftendon'tneed this kindof support, theywouldneedmuch larger, biggerpicture support, likewhat I'mgoing towrite. Insomecases,obviously,wecan'tdo that. Insomecases,wewill siton theboardandwe'llgiveadviceonaboard level. Insomecases,wehavenoboardseat,butwe'llessentiallysitwith themeveryquarter tobasicallyrip throughthe lastquarterunderstandwhathasbeenhappening,operationalpainpoints,youknow,economicfinancialpainpoints,growthchallenges,soonandsoforth,andreallydelveinto thebusinessandthenseewhat theycanbedoingandwhatwecanbedoing,andhowtobasicallyhelpthemwiththeseproblems.HenricHansson55:00Andyoumentionedbefore,thatyouhavesortofAfricanentrepreneurswithAfricansolutionstoAfricanproblems.AndIjustwantedtoknow,howdoyouthinkitwouldworkfor?Forsomeonewhodoesn'thave

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that knowledge?Whodoesn't have this, this local knowledge if youhave a completely foreign foundedcompany?HamzaButt55:18Wehaveforeignfounders!Imean,look,it'sAfricanproblemsandAfricansolutions,Imean,nowisamixofboth localandforeignfounders.Wedohavea lotof foreignfounder, the founderofSokowatch,he'sfromChicago.Hekepthis really goodbusinessmodel anddid a great jobwith it. Theguys fromcocoanetworks areAustralian and they came andbuilt thismodel. The founders of Cobo360 are local guys.Theybuilt out a really really strongbusiness and really helped it grow in scale by being so so it's justaboutbackintherightentrepreneur.It'sgotnothingtodowithwherethey'refromandwhatyouknowtheir social background is, itsmore to dowith their ability to grow a business and execute a businessproperly.HenricHansson56:05Yeah.And in termsof that, sortof likeunderstanding the local context.Doyou seeadifference inhowforeignfirmsorforeignventuresandlocalventuresdo?HamzaButt56:16Wejustseeadifferenceinhowgoodentrepreneursandbadentrepreneursdo.That'sit.HenricHansson56:24And I just wanted to ask you, how do you see that the government is currently influencing the VCindustry?BruceLule56:42Doyoumindusnotansweringthatquestion?Yeah,wecouldjusteliminatethatquestion.Okay.HamzaButt56:57There'salotofreadingavailableonhowtoelementshere,notjustinKenya,butinAfrica,there'salotofreading available on steps and measures that the governments are taking towards supportingentrepreneurshipandyoungentrepreneursinparticular.Soyouwouldn'tfindalackofresourcesonthatparticularsubjectmatter.BruceLule57:15That'strue.ButthenwhatI'dsaytoaddontothatis,thenthink,howeffectivearetheseservices?Andaretheyactuallyprovidingwhatthey'remeantto?HenricHansson57:24Correct? And the reason why I'm asking these sort of questions about the external environment, thegovernmentabouthowit is for localsor foreign foundersor foreignemployeesand localemployees,asyou as we spoke about before, the VC sector and and the sort of startup sector is rather young, in incomparison to, for example, SiliconValley, orEnglandorLondonorwhatever.And so that's justwhy IthoughtitwouldbeinterestingtoseewhatissortofdifferentinKenyaandandperhapsineasternAfrica,in comparison to, for example, SiliconValley. Becausewhat you see,when you read a lot in the in theliterature,youoftenseethatitlooksonatheoreticallevel,likethere'salotofcopypastelikethatyou'vetakentheVCindustryin,inSiliconValleyandandthatit'sbeenbasicallyjustpastedontoKenya.SoIjustwanted toknow if that's sortofwhatwe're trying to findoutaswell. Is that agoodmodelor if it alsoneedssomesortoflocaladjustments?That'swhyIaskedabitmoreKenyaspecificquestions.

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HamzaButt58:36Thatsavalidpoint.Icansaythere'salotofdiscussionsthataregoingonandthegovernmentdoesengageinthat.Andagain,likeIsaid,ifyoureaduponit,you'llfindit.There'salotofsandboxdiscussionsaroundregulationand,andhowtosupportthisparticularecosystem..HenricHansson59:18Okay,butI thinkthatIsortoftickedallmyboxes. I'msupergratefulthatyoutookyourtimetodothiswithus.MadsdoyouhaveanythingthatthatwesortofthatyouthinkImissedduringthisgraduateHamzaButt59:34HisjustbeenbusywritingnotesMadsRobdrup59:37ThatscorrectHamza!It'sniceforHenricandItodividetheroleswhenweinterview.SoIthinkintermsoftheboxes,IalsoagreewithHenrikthatwekindoftickedallofthem,whetherornotthatthatgoesforThe legalor institutional frameworkaround theKenyan industry that'sokay thatyoudon'twant togointothatandfullyunderstand.Andifithasanythingtodowithwhetherwewillpublishanythinginthereport, I'll just say that our thesis is only to be used for university purposes. So, so you should not beafraidofanythinggoingouttopublic.BruceLule1:00:25Ithinktobehonestwithyou,it'salsoacomplexquestion.AndIdon'tthinkwecanansweritwell,becausethereisalotofgovernmenteffortstodostuffandtohelptheecosystemgrowth,butwe'requiteactiveinthe ecosystem. So have we really felt the effectiveness of what we're doing? That's, that's a, that's aquestionon itsown.And,youknow, is it thatwedon'tknow?Or is it that they'renotbeingeffective inlettingusknowso.MadsRobdrup1:01:12Yeah,IthinkperhapsIcan,Icanaskadifferentquestion.SoweknowthatthereistheEastAfricanprivateequityandventurecapitalAssociation,thatlobbiesthegovernmentonbehalfofallVCfirmsandprivateequityfirms.SohowdoesthisworkforforChandariacapital?DoyouhaveavoiceintermsofthisEAVCA?Ordoyoufeelthatyourneedsaresortofbeingheardanywhere?BruceLule1:01:45I think theEAVCA is actually a veryuseful institution in theecosystembecause they look todoawiderange of activities and it's really to support the venture capital and private equity within theseecosystems.Thisisintermsofgrowthandintermsofhavingtherightenvironment,toproceedandsoon.Sowecanpitchourviewsoncertainitemstothem,andtheycanrepresentus.AndI'veseenthemactuallyrepresenting the whole ecosystem on very important issues such as taxation. And so in terms ofrepresentation and what we believe is right, and how the ecosystem should grow. I think they haveproven tobeaveryvaluablepart in the in theecosystem.Actually theyarealsoeducating investors intermsof investmentpractice,howx,y,zedshouldbedone.Soit isactuallyaveryvaluableinstitutioninthis ecosystem. And I'd say that they're playing a very good part terms of supporting the growth ofventurecapitalandprivateequityhere.MadsRobdrup1:03:31Interesting, I see thatalsobecause this industry is rathernewestasyoubothhaveexplainedverywell.HowhasEAVCA,howhasitliveduptoitsroleorresponsibilitiesandhowhasitdevelopedintermsoftheactivitiesit'sperformingfortheventurecapitalfirms?

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BruceLule1:03:53Okay,wehaveonlybeenamemberofitforayearorso.SowhatIcansay,IcanreallyonlyspeakaboutthecontextofChandariaCapital,Ithinkit'dbegoodtointerviewafewotherplayers.ButwhatI'veseenintermsoflegislationandlobbying,they'vebeenveryactiveinensuringthatlegislationistothebenefitofthe VC ecosystem. And I know they're also quite proactive in terms of finding out details in terms oflegislationthatcouldaffectusifitwasbroughtintoplayorpullingbackinvestmentsthatwehavemade.WehavebeenveryproactiveeveninthisCOVID19scenario,intermsofproducinginformationasoftowhat'shappening ineachof thesecountries.Whataretherestrictions.Therefore,whatarethepossibleimpacts to you as a company. The have been very proactive in terms of training people to understandvariousformsofinvestmentprocedures.Soreallyfromfromourview,orfrommyview,Ithinkthatthosearethewaysthattheyarebeingproactive,whichgiventhesizeoftheteamisquiteadmirable.MadsRobdrup1:05:23Wow. Yeah. And I can say that from, from my perspective as a complete external person to this ecoecosystem.WehadaninterviewwithEva,thedirectoroftheVCAthatthesechangesintermsofcorporatetaxesorthelawaboutthemergers,they'rereallysomethingthatperhapscouldhelptheVCfundsalot.So,indeed,ititseemsthatit'sit'sbeensomethingthathasdevelopedalot.BruceLule1:06:03Theyareneeded,theyplayanimportantrole.Ithinkalotofthefundsthatareintheecosystemarenotlike us, so they're not home grown. Given that, when you come into an ecosystem and a governmentdecides to set this legislation, you know, that legislationmight not necessarily be to the benefit of theecosystem.Solocalfundlikeus,atleastwehavechannelstohaveconversationsonhighermatters.Wereas toa lotof funds thatcome into thisecosystemdon'thave thosechannels.So theEAVCAreallyhelpssuchinstitutions,togetaheadandandsetupquickly.MadsRobdrup1:07:01Yeah.All right.Thanksa lot,Bruce. Iwaswondering ifyouhaveanyanyaspectsofof these things thatHenrik has covered in previously in the interview that you thinkwe shouldperhaps lookmore into intermsofourresearch?BruceLule1:07:18I think actually, what could be quite valuable is actually back in government, on the ecosystem, reallyseeingwhatwhat initiativesaregovernment takingonandwhat levelof impactare theyhavingon theground.Ithinkthatthatwouldactuallybequitevaluabletolookinto.HamzaButt1:07:46I'mgonnaputalinkheretoaninterestingopinionpiecebyafundbasedinMorocco,weknowthemwell.Thesearenotnecessarilyourviewsentirely.But it'savery interestingread that I thinkcouldgiveyouguys a little bit of insight in terms of the space. Because it touches on in Henrics point about dealavailabilityand it touchesonourpoint in termsofearlystage investingand it touchesaboutthe futureoutlookandhowitneedstogrowandstuff.HenricHansson1:08:13ThankyousomuchMadsRobdrup1:08:44

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Yes,sure.We'realsoverygratefulforyoutakingthetimetotoparticipateintheinterviewBruce,andofcoursewewillsharewithyouboththereportandandasmallpiecethat'smoreeasilyreadable.Intermsof the interviews,wehaveso far interviewed, thePangeaaccelerator.Wehave interviewed theEAVCA,Enzacapitaandhopefullywehavesomemoreinterviewscomingupnextweek.BruceLule1:09:27Soundsgood.Soundsgood.HamzaButt1:09:30Soguys,thankyouonceagainforyourtime.HenricHansson1:09:36AndIalsojustwantedtosaythatifyoueverneedsomethinginDenmarkorSweden,orshouldinviteyouforlunchordinner,whenweactuallygettocometoKenya.Transcribedbyhttps://otter.aiEditedbyHenricHansson

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APPENDIXF. InterviewwithintervieweefromVC4TranscriptofInterview.IntervieweefromVC4,PearlCapitalInterviewer1: HenricHanssonInterviewer2: MadsRobdrupInterviewee: HiramGithuku(Analyst)Time: 1:15.43HenricHansson0:00Iwouldjustliketojumpstraightintoitandbyaskingyouifyoucoulddescribeyourfundandwhatkindofinvestmentsyou'remakingalittlebitmoreindepth?HiramGithuku0:12Currently, at Pearl Capital Partners we aremanaging a fund based in Uganda, it's called yield UgandaInvestmentFundwhichwas raised in2017.Ouranchor investor is theEU,EuropeanUnion,whohaveinvestedthroughIFAD,andwealsobroughtonboardNSSFUgandathatservedaspartoneoffundraising.SecondphasewebroughtonboardtheFCinvestmentsandOSFthroughtheSorosEconomicDevelopmentFund. Okay so they joined the fund jointly and brought on board 8million euros, each contributing 4millioneuros,andweclosedthefundwith20millioneurosasoflastyearinJune.HiramGithuku1:24We mainly invest in Ugandan agribusiness, where we are basically interested in scalable businessopportunities,SMEsoperatingwithintheagriagribusinessvaluechain.HenricHansson1:40Iunderstand.AndIsawonyourwebsitethatyoualsomadesomeinvestmentsinKenyaearlier.Ithinkthelastonewasin2014.Isthatright?HiramGithuku1:52That is through our earlier investment funds. This is our fourth Find, our first fund was Africa - thecultural capital,whichwe raised in, you know, 2005-2006. It started as a holding company. Andwhenrestructuringtheprocessortheinvestmentstructure,youknow,whereyouhavetheLPsandtheGPs,inawayofimprovingthegovernancestructure,that'swherePearlCapitalwasborn.Wehadthemanagementsectionandnowthefundasaholdingcompany.In2008weraisedoursecondfundthatisAfricans-theinvestmentcapital.Thisfundwasfocusingonseedseedbusinesses.Andweraisedatotalof$12million.Weinvestedinatotalof16companieswithinthelargerEastAfricancountries,focusingonMozambique,MalawiandoneinvestmentinBotswana,oneinvestmentinEthiopia.Thenourthirdfundweraised$25million in 2010.We invested in 8 opportunitieswith African - agricultural capital fund is Yeah, soweraised$5million.Weinvested in8opportunities inKenya,UgandaandMalawi.Sothosewerebasicallythemainfocuswithmostoftheopportunities,youknow,cominginKenyaandUganda.HenricHansson3:48Sorry.Ijustwantedtoknow,sotheKenyanfund,orsortoftheKenyaninvestments,whatwasthatpartofyourofyoursecondfund?HiramGithuku4:00Yes,secondandthird.

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HenricHansson4:04Yeah.Yeah,asMadsexplained,andI'msorryiftherearealotofquestionsaboutKenya,butthat'ssortofourresearchfocus.I'llprobablyaskalotabout,aboutKenyagoingforward.HenricHansson4:17Fantastic,IknowKenyanaswell.HenricHansson4:21Yeah.Andalso,ofcourse,it'ssuperinterestingtohearaboutthedifferencesbetweenthesecountries.Ands,butcanIjustask,whathappenedwiththeseormaybe,firstoff,whatkindofinvestmentswerethesein,ininKenya?Whatsizewasitandsortofwhichindustriesandsoforth?HiramGithuku4:44Ourfocushasbasicallybeenagribusinesssince2006.Alltheinvestmentsthatwe'vemadeinKenyaareallagribusiness, in agro processing, primary agriculture and business providing peripheral support to themain, outstream of the agricultural value chain. So that includes basically logistics services, companiesprovidingcoldchainfacilities.Sowemostlyconsideredthembecausetheykindofsupportthelarger,youknow,agriculture,mainstreambusiness.Our investmentsizewasbasically$500,000 -$2.5million.Thereasonwhywefocusedonthatisthatinthefrontmanagement,oneofthechallengesthatwefaceisthemanagementcosts,andifyouwanttohave,andmaintain,aleanteamentirely,thenyouhavetofocusonbusinesses that have huge potential for scalability and businesses that will require a huge investmentopportunity.Thatistoendupwithamanageableportfolioofcompaniesinsteadofendingupwith20-25businesseswhichyoucan'tmanageinternally.Sothat isoneof theconsiderationswearemakingwhensettinguptheparameters.HenricHansson6:42Andintermsofmanagingyousaid it'scrucial foryoutohavefewer investmentsthatyoucanfocusonratherthanhavingalotofsmallerinvestmentsthatyoucan'treallyfocuson.Doesthatalsomeanthatyousupportthefirmsoperationallyorisitmostlystrategic?HiramGithuku7:11Our support ismostly strategic. Basically oncewe invest in the company our support is at a strategicboard level.What we normally do is to support the business by improving the corporate governance,improving the internal control measures, ensuring that the internal control is robust and that thereportingsystemisimproved.Alsoweareinvolvedinsettingupateamofprofessionalsthatwillbeabletooverseethedailyoperationsofthebusiness.Sowerelyonthepromoterswhorelyonthemanagement,rely on the professionals that we set up there. So by using the controls and the input system ofgovernance,wegettohaveaninputintheoperationsofthebusiness,butwedon'tparticipateinthedaytodayrunningofthebusiness.HenricHansson8:15Okay, can I just ask,what's sortof yourbackgroundandwhat's sortof yourmain responsibility?RightnowatPearlCapital?HiramGithuku8:27Rightnowasaninvestmentanalyst.Thefirmisstructuredinsuchawaythatyougetallroundexplorationexposure,youknow,fromdealsourcingtoportfoliomanagement.So,I'mpart indeal-sourcing,pipelinegeneration,pipelinedevelopment, youknow, screeningof thepipelinebecause at times, it canhave20companiesinthepipelineandthenafterscreeningyouendupwithonlythree,oroneopportunitywhich

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iswhichisbankable.Soit'salsoatediousprocess,whichisalsoveryimportant.Then,youknow,writinginvestment memos which we present to our investment committee for approval, and then post-investmentsinvolvementintheportfoliomanagementbysupportingthecompaniesatastrategiclevel.HenricHansson9:37Yeah.Andhowbigistheteamoverall?HiramGithuku9:46Overallwehavetwooffices.OurheadquarterisinKampalaandwehaveanofficeinNairobi.Mostofmostof thestaffarenowin inKampala,since that'swhere theactive fund is.Overall the team, including theadminandthefinanceteam,weare15.HenricHansson10:10Isee.AndhowlongwasthefundoperationalinKenya?HiramGithuku10:21Thefirstfund,theinvestmentphasewas5years,upto2009.Okay.Yes,andthenwejustexited.weexitedourlastinvestmentin2018.HenricHansson10:40FromKenyaorEastAfricaingeneral?HiramGithuku10:43TheEastAfricanregionbutthelastinvestmentwasinTanzania,butitwasaregionalfund.HenricHansson10:51Okay.And,intermsoftheVCinvestmentsinKenya,arethereanysuccessstories?DidyoudoanygoodexitsininKenyaHiramGithuku11:19Yeah,wehaveacoupleofsuccessstories.FromthesecondfundwehavenotexitedbutfromthefirstfundwehaveexitedonecompanywhichwascalledRealIPM.Itwasacertificationcompanythatwasoperatinginthissphereandalsoprovidingancillarysupporttothefarmerstoimprovetheirproductivity.Ititwasfocused on supporting organic farmers rather than you know, using this type of pesticides. So farmersaimingattheorganicmarketintheEUmarket.Sotheyweresupportingthefarmerswiththecertificationprocessandalsosupportingthefarmersbyimprovingtheiractivitywithoutusingexternalchemicals.Sobasically using using organic ways of you know, preaching, waste management and pest control.Unfortunatelywemissed the opportunity becausewedidn't invest in equity,we only invested in debt.This show how the business has performed over the years and how the main promotors exited theopportunityandyouknow,howthroughexternalbuy-outstoabiggerstrategiccompany,theymade10timesthemoneyoftheinitialinvestment.Yeah.Itisoneofoursuccessstories.HenricHansson13:36AndifIcanjustask,whatdoyouthinkwasitthatmadethisventuresomuchmoresuccessfulthananyotherventures?Wasittheirunderstandingofmarket?Wasthestafforwhatwasitthatmadethatventuresoparticularlysuccessful?HiramGithuku13:56

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Numberonereasonforsuccess,Iwouldsaythepromoters[founders].Theywerecoachablepeople,theyhadthebusinessacumen,andtheyalsounderstoodthemarket,theyunderstoodthebusinessmodel.Theywerenotexperimenting.Itwasaveryearlystagebusinessbuttheyunderstoodtheirmarket.Alsothefactthat theywerewilling to,youknow,restructurethecompany, improvingthecorporategovernanceandtheinternalcontrolofthebusiness.Also,theywerewellalignedwithus,veryreceptivein,youknow,intheprocessofbringingonboardprofessionalswhocouldsupport inrunning thebusinesses.So, that isoneofthereasonswhythebusinesswassuccessful.Italwayshappensinasuccessstory,ifthepromotersarewellalignedwiththeinvestorsandwillingtolistentotheprofessionals.HenricHansson15:13So,thefounderswereKenyanaswell,orwherearetheyfrom?HiramGithuku15:29No,thefounderswerefromtheUKbuthadlivedinKenyaformorethan15years.Theyhadaverygoodunderstandingofthelocal,youknow,thelocalenvironment.HenricHansson15:45Have you seen that that's sort of crucial for the ventures that are successful, that they understand thecontext,thelocalcontext?HiramGithuku15:55Yes,it'sveryimportant.Forsomeofthesebusinessesyouhavetobeawareoftheenvironment,youhavetorelatewellwiththevaluechainwhetheryou'resourcingproductsfromthefarmers,youhavetobeabletorelatewell.Mainlybecausethefarmershavetotrustyou,theyhavetobelieveyou.Youhavetohaveexposuretothemarketinordertounderstandyourcustomersneedstoimproveyourbusinessmodel.Ifyourcustomersaredemandinghighquality,then,yougobacktoyoursuppliersandyoualsodemandthehighqualitysupplies.Ifyouhaveagoodunderstandingofyoursuppliersandyourfarmers,then,they'rereceptive,andyoucanalso implementsomeof themeasures to improve thequality like trainingandabusinesssupport.So,yeah,it'sveryimportant.HenricHansson16:51Yeah,itmakesabsolutesense.Haveyouseencasesoftheotherwayaround,wherepeoplehavenothadthatunderstanding?HiramGithuku17:03Yes,ithashappened.Okay,ofcoursewithoutdisclosingthename.OneoftheinvestmentsmadeinKenyawherewehadafounderwhowasanAmerican,whohadbeeninKenyaforaboutthreeyears.Hewantedtoventureintotheflowerbusiness,buthedidn'thaveagoodunderstandingofthelocallocalcontext,thelocal farmers,the local framework, the policies around land, policies around farming. He had goodbusiness acumen, but the lack of understanding the local market made the business drasticallyunderperform within the first few years until he brought on board professionals who had goodunderstanding of the local market. Since we are in impact management we are not only providingcommercial capital, butwe also focus on impact return. So the kind of impact are youmaking. So, thebusinesswasunderperformingonthefinancialreturnsbutalsoontheimpactendsowehadtobringonpartnerswhohadgoodunderstandingoftheflowerbusiness,partnerswhohadanunderstandingonhowtomobilizefarmers,howtodevelopagoodcorenetwork,andhowtotrainthefarmerstoprovidequalityproduct.HenricHansson18:59

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Yeah,Isee.AndcanI justaskonabitmoregeneral levelinKenyanow?WhatisyourperceptionoftheamountofinvestableventuresintheKenyanindustry?Isthereagoodfit?Wouldyousaythattherearetoofewventuresincomparisontototheinvestorsortheventurecapitalinvestors?HiramGithuku19:30Itdependswhichindustryyou'relookingat.Lookingatawholeindustry,theentire,youknow,marketasitis,wehaveopportunities.Wehavebankableopportunities.Butthenwhenyoucomebacktotheimpactpointofview,youknow,theimpactventurecapitalist,wehavealotofparametersthatwe'dhavetotakeinto consideration. This is why we end up narrowing down, and you might end up with zero, or onebankableinvestment.Youhavetostrikethebalancebetweencommercialreturnsandtheimpactreturns.So,sometimesitmightseemlike,wedon'thavebankableinvestments,itisbecauseoftheparametersthatwehavetomeet.Soabusinessismakingamilliondollarsintermsofrevenue,butithaszerogrowthinthenetwork.HiramGithuku20:47Or, it's highly automated such that it can only provide a minimum of 50 or hundred employees. Sosometimesyouhave,youhavetobediverse intermsof, lookingat it fromthe impactpointofview.So,yeah,wekindofsometimesnarrowdowntoveryfewinvestmentopportunities.Icouldgiveanexamplewith our current fund,wherewe're constrainedwith the singlemarket forecast, single sector forecast,whichmakes the investment very risky. Yeah, so, if Iwere to advise on, developingor raising of fundswithinEastAfrica,thenitwouldbeidealtohaveamultiplecountryfocus,itwouldalsobeidealtonottolimit yourself into one sector. It would make more sense in terms of the de-risk profile and alsodiversifyingyour,youknow,yourportfolio.HenricHansson22:18Yeah, I see. And I just wanted to ask you about the impact investment requirements, is that the ESGcriteriaorisimpactmostlyintermsofemployment?HiramGithuku22:33Yes, but there is also, like our previous fund,were some sort of theKPIswhich youwere supposed tomeet.Thesewere for example, revenue increaseperdollar invested, increase inhousehold investmentperdollarinvestment,increaseingrowthearningsperdollarinvestments.Soit'squite,it'squiteadvancedandsometimesit'swelldefined,butthenifyoulookattheentirespectrum,theKPIsareabitlimiting,youknow,intermsofthenumberofinvestmentyoucanpick.HenricHansson23:39Iunderstandthatthisthisaffectsyourdealsourcing,asyousaid,butareyouusinganyoftheacceleratorprograms in inKenya todiscoverviable firms for investments?Orwereyoudoing thatwhenyouwerelookingintoKenya?HenricHansson23:54Yes,wedo.Sometimeswelookataninvestmentwhereit'sscalable,butitisnotinvestorready.Thenwe'llreferthemto,youknow,totransactionadvisorsoracceleratorprograms.Atleast,youknow,tobemadeinvest ready for a period of one or two years.We even currently rely on themaswe sometimes comeacrosspotentialpipeline companieswhich seemas if theyhavehighpotential, but theydon'tmeet theminimumcriteriaforustoinvest.Soyouhavethatcase,youhavetoreferthemtoadifferentfirm,whichwouldadvisethemforaperiodofonetotwoyearsandthenthey'llbebroughtbacktouswhenthey'reready.

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HenricHansson24:59Okay.Understand,sothefirm'syouinvestedin,inKenya,wereanyofthosedirectlyfromanaccelerator?HenricHansson25:08Yes,some,likeIPMwasfromanacceleratorprogramthatwassponsoredbyathinkdefeat.HenricHansson25:23Yeah. Okay. So in general, you'd say that accelerator programs are good for bringing investableopportunitiestoyou?HiramGithuku25:35Yes,acceleratorsaregood,tosomeextent.ThereasonI'msayingtosomeextentisthatitdependsontheparameters.Yousee,whenabusinessgoes throughanaccelerationprogram, if theprogramisnotwelltailored, tomeetwhatwedemand,orwhatwerequireas the threshold to invest inacompany, then itdoesn't work. What we have come to realize is that sometimes it becomes much easier for us, as aninvestmentteam,toclosedealswhichhavecomedirectlyfromanaccelerator.Ifyoulookattheperiodoftime we spend in a particular deal. It takes less time to close a deal that has come directly from anaccelerator program. This is basically because they have information supply available, because that'sactuallyoneofthechallengesthatweencounter,especiallyduringduediligence.Theyhaveadviserswhounderstand the entire process for information providing and also guiding them through their holisticoutlookofthemarketandalsotheyareverysupportiveinourduediligenceprocess.HenricHansson27:13Andapartfromaccelerators,whatareyourotherstrategiesfordealsourcing?HiramGithuku27:26Referralcomesinhandy,Investorconferences,subsectormarketing,youknow,youmapoutandidentifysomeofthecompaniesoperatinginaparticularsectorandthen,youknow,youpayavisit.Thefactthatwe'vebeenintheindustryformorethan15years,alsogivesusanedgewhenitcomestosourcingdeals.Imean,we'vecreatedagoodname,withinthenetworks.Sometimeswealsoco-investbecausewearenotfully allowed tomarket ourselves as a commercial bank. So you have to use other avenues, you know,approachingbankssometimes,youknow,bankshavethese, theyhavethesedealswhicharehangingintheir pipeline and the reason why they're hanging is because the balance sheet is probably thinlycapitalized.So,wecomeinandprovidesomeequitytosomeextentandthenthebusinesswillextenditsworkingcapitalfacility.Sometimes,youknow,weusestructurefacilitieswhichwaspoorlystructuredtoprovide the business you have flexibility to access more sustainable capital. So those are some of thestrategiesthat,youknow,weexplorewithintheindustry.HenricHansson29:21Yeah. So it sounds like understanding where you find all these conferences, but also really building abrandnameandkeepingalotofconnectionsseemtobeimportantsortofstrategies.IsthatIsthatafairadmit?HiramGithuku29:40Yes.HenricHansson29:41Isee.Andyoutalkedalittlebitaboutbefore,thatinformationcanbealargeissue.Whatwouldyousayisthelevelofinformationavailableaboutventuresandthemarketstheyoperatein?

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HiramGithuku30:01Ona scaleof1-10,mostof theventures rarelyhavesufficient information touseso Iwouldgive5. Sowhat happens in this industry is kind of weird and also sometimes it's very funny how theseentrepreneursoperate.Youknowintegrityisverykeyespeciallywhenyouarefundraising.So,sometimesyouwill findthatyouknowafounderwhoisapproachingaventurecapitalwithafewsetsofaccounts,whichhepreparedforthefundraising,andthentheyhaveanothersetofaccountswhichtheypreparedforthetaxman,andthenathirdonewhichreflectstheactualpositionofthebusiness.Soyouhavetoearntheir trust to access the real original books of accounts, which speaks to the business performance,becausethat'stheonlywayyou'regoingtohaveaviable investmentdecision. It'soneof thechallengesthatwe'vebeenexperiencing in the industry,youknow,someoneshowsthebooks just to impressyou,butthen,youknow,ifyoudiveintothebusinessandyoumakeasimpleanalysisofthevaluechain,thenyouwillunderstand.HenricHansson31:54yeah, but it sounds like this is sort of a challenging process? Does it impact your performance of duediligenceonthefirm?HiramGithuku32:08Yes, itdoesbecausesometimeswhenyou identifysomeof thesechallenges, they'rebasically loopholes.So,thefirstthingisthatthesesortsofchallengeswilldefinitelybefair,theyaresortofembeddedintheprocess, it's basically an integrity issue. So, you approach every investment opportunity with thatskepticalmindset, anythingcanhappen,but thenwhen thishappens,youstart facing the red flags thatyou start identifying in the process. These are integrity issues. So you have to raise it with themanagement. If the company has proven to be less ethical before I invest, then I have to explore theoptionsonwhetherIwanttomoveforwardwithsomeonethatis lesstrustworthyortakethatriskandhaveaveryhostileenvironment.Sosometimestheycantakeusbackandweevenrejectsomebusinessopportunitiesbasedontheintegrityandethicalvaluesofthefoundersandsometimeswecanhaveachat.Others portray a very innocent picture, you know,was in away of, this isman'smoney to the financedepartment.Soit'sacasebycaseby.Butyes,it'salwaysabig,bigsetback.HenricHansson34:05I see. And you mentioned that for example, understanding the value chains will sort of increase thelikelihoodofyouactually,youknow,seeingthroughtheseissues,arethereanyothersortofstrategiesororwaysthatyoucansortofnavigatearoundthisissueof,oflackofinformationorwrongfulinformationorthesekindofthings?HiramGithuku34:38Yeah, basically, we rely a lot on the industry experts. Now part of the challenge we face as venturecapitalists in the entire sub-saharan region is the lack of professionally published secondary data. It'srarelyavailable,sowedon'thaveaccesstothatdata.So,partoftheprocessornormallywhatyoudoistorely a lot on the industry expertise. Either external firms that you know, individuals working withindifferent oversight bodies, government or industry bodies, or private related research that has beenconductedbytheprivatesector.HenricHansson35:43Isthatmainlywebsitesorisit?Doyouhavetohaveapersonalmeetingwithsomeone?HiramGithuku35:49

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Yes websites, but we prefer to collaborate to get the information through one on one interviews, orquestionnaires. So, it's basicallywhatwedo.Most of the informationwehave is through collaborationwithindustryexperts.HenricHansson36:20Yousaidthattheseareoneononeinterviews.Howdoyougetthoseconnections?HiramGithuku36:28Youknow,beingintheindustry.Thatisoneoftheadvantagesthatwehave,youknow,we'vebeenintheindustryforso long,sowe'vecreatedawidenetworkofprofessionals.Sosometimesyoujustrequestacourtesy call or a courtesy visit.Usually they're kind enough toprovide the time that youmayneed.Acoffee or lunch or you can have a professional meeting either in our office or their offices. Also forinstance, you know, government bodies or donor funded projects, which are ethically mandated tosupport aparticular industry, and to catalyze investment in aparticular industry. Say for instance, youknow,youwanttodoresearchinseedoilUganda.So,currentlywehaveIFAD,whohavebeenveryactivein seedoil inUganda.So I amexpecting that theywouldhaveaccess to some levelof research thatweprobablydon'thave.Sowewouldrelyontheresearchthattheyhave,sincetheyaremandatedtopromotethe seed oil industry and to catalyze the industry. So sometimes you work hand-in-hand with donorfunded projects to get expertise from those who are doing research in the local market, and thegovernmentbodiescomeinhandyaroundregulatoryframework.HenricHansson38:20To switch topic, do you have a current process for finding locally born ventures? And is that processdifferentfromthewayyoufind,youknow,othertypeofventures?HiramGithuku39:19No,wedon't.Weactuallydon'thaveapreference.Aslongastheprojectsarebankable,wetakethemall.Wedon'thaveapreference,wedon'thaveamatrixorbalancinglocalre-insuranceversusinternationalventures.Ofcoursebecauseoftheoutlook,youknow,themarketandtheindustryoutthere.Wehavetobecognizantthatwereallyneedtosupportthelocalventuresbutwealsolookathowtheseventuresaremadetosupportthelocaleconomy,andifitis,howisitsupported.Sowereallydon'thaveapreferenceaslongasit ismeetingthoseminimumparametersintermsoftheimpact, intermsofsupportingthelocaleconomy,andsupporting the localentrepreneurs,directlyor indirectly in termsofknowledge transfer.So, one of the advantages with, you know, these international founders who are coming to start theirventureshere is that theyarewell advisedyouknow,with the institutional environment, and thiswasalso that aspect of knowledge transfer. So, it's also very important becausewe leverage a lot on theirunderstandingof the internationalmarketand if theyget tomeetwith localentrepreneurswhohaveagoodunderstandingofthelocalenvironmentthenit'salwaysaveryimpactfulpartnership.HenricHansson41:14Anddoyou think that that iswhathashappened in the last10-15years?Canyouactually start seeingsomeoftheseknowledgetransfers?HiramGithuku41:25Ah, yes. In agriculture there are positive knowledge transfers, but unfortunately in technology it hasactuallybeentheotherwayaround.IfyoulookattheventurecapitalsinNairobi,mostofthemareownedbyforeigners.Ifyoulookattheinvestorstheyaremostlyforeign,andifyoulookattheventure,theyarealsoownedbyforeigners.Earlylastyear,Irealizedtherewasaveryhugedebateontheimpactoftheseforeignbasedventurecapitalsinthelocalmarket.Sopeoplewereworriedif,astheyarecoming,arethey

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comingintokillthelocalentrepreneurs?Oraretheycomingintopromotethelocalentrepreneurs?And,whataresomeofthesynergiesthatweexploitfromthe,fromtheprocess?Now,inagriculture,it'sbeenverypositive.Yougettohaveaninternationallyorientedpromoterwhocomesintosetupbusinessandendsuppromoting,youknow,thelocalentrepreneursbutintechnologyit'sbeentheotherwayaround.It'sbeenverydifficultforthelocalentrepreneurs,it'sactuallyverydifficultforthelocalstoraisecapitalforatechrelatedventureinNairobi.HenricHansson43:17Iseeyourpoint.Sohowdoyouthinkthelocalentrepreneursaredealingwiththat?Imean,yousaidthatforthem,it'smuchharder.Howaretheydealingwithfindingfundingincomparisontoforeigncountries?HiramGithuku43:42SoIthinkthereasonwhyforeignventuresaregettingmuchtractioninthelocalmarketsisbecausetheyhavewhatIwouldcallbankable,realsolutions.They'vecomein,identifyingrealproblemsontheground.Thentheyarepricingrealsolutionstosupportthelocaleconomy.Ithinkit'salsobecauseoftheexposurethattheyhave.Idon'twanttogobacktooureducationalbackgroundclaiminganything.ButIthinkthatthe exposure gives them an edge as opposed to the local entrepreneurs. So, Imean, it's been difficult.Actually, I have a couple friends who started M-kopa, you know it was a good venture. They wereprovidingenergysolutionstothefarmers.Solarenergysolutionstothefarmers.Soawhileback,Ihaveafriendofminewhowasinvolvedinthatproject.Andittookthemquitesometimetoraisecapital.WhentheycameintouchwithSafaricomwhohelpedthem,linkingthemupwith,youknow,external,firstofallwasdonor-orientedprojectand latercommercialventurecapital.But it took them fiveyears tohit theground running even, you know to even conceptualize the entire project. So, they end up finding youknow,commercialcapitalaccessingcommercialcapital,butittookthemawhile.HenricHansson46:23Doyouseethatforeignfoundedventureshavesortof,anadvantage?HiramGithuku46:41Yes,tosomeextenttheydo.Becausesomeofthelocalventures,especiallywithintechnology,strugglealotwithpackagingtheirproductsorservicesanddemonstrateittocommercialbanks.Also,theknowledgeof the fundraising process is something that might be lacking with local founders. Here, you mayencounter,youknow,averyexperiencedteamoftech-savvyindividualswhohavedevelopedaverygoodprogram but they don't have the slightest idea of how to develop or to commercialize the idea nor todevelopaproperinvestmentthesisthatcouldbepresentedtoprivateequityorventurecapital.We'renotexperts in these industries so we basically have to rely on the packaging and their proposal and alsocollaboratethisinformationwiththeindustryexpertise.Sothat'sbasicallyoneofthechallengesthattheyexperience, when they don't have the knowledge to, to package their product and that's why theseacceleratorprogramsarevery,verycrucial.HenricHansson48:45So, just what would you say are sort of the biggest differences in the ventures you find in Kenya incomparison to the ventures you find in areas that have a longer history of venture capital, like SiliconValley?HiramGithuku49:37Iwouldsaynumberoneispreparedness,thelevelofpreparedness. Inenvironmentswheretheyhavealonghistoryofventurecapital, theyhavewideaccessto industrydata,goodstructuresandpoliciesandtheregulatoryframeworkwhichwillinfluenceinvestorsconfidenceinthemarket.Sotakingforinstance,

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KenyaandEthiopia.KenyaisamoredevelopedmarketintermsofventurecapitalsandforeignorientedinvestmentsthanEthiopia,whichopenedtheireconomytoforeignersasoflastyear.Sowhenitcomestothis you have to look at the political risk which arises from institutional fragility, and probably localgovernment legitimacy,whichbasicallydiminishes that shortageof the investmentopportunities in thelocalmarket.Sopolicies,regulatoryframework,understandingofthemarketunderstanding,thesourcingframework isbasically thekey.The fact that they'vebeen in theenvironment forquitesometime, theyhaveagoodunderstandingoftheculturalenvironment.HenricHansson51:37Relatedtothattopic,howdoyouseethatthegovernmentisinfluencingtheindustry?HiramGithuku52:16Imean,someofthethingsthatwe'vebeenfocusingon,especiallywhenitcomestothepublicsector, isdevelopmentofpolicies.PolicieswhichareattractivetoVCs.Forinstance,wecouldlookatMalawi.We'vemadeacoupleofinvestmentsinMalawi,twoorthreeinvestments.WehavetolookattheexitoptionsasMalawi isoneof thecountrieswhichdoesn'tallowrepatriationof funds,especiallynot indollarsso it'sverydifficult.It'saverybureaucraticprocesswheninvestinginacompanybasedinMalawibecauseyouhave to sign a lot of declaration with the controlling and the regulatory bank. Then there is policiesregarding deployment of funds. Sometimes they charge, very high interest and, taxation rate just bydeployingthefunds.Sowe'vebeenexploringpotentialoptions.Forinstance,mostofthefundsdeployedintheentireSub-Saharanregionarelistedinthetax-havencountriesinMalaysiaandtherest.Sowehavebeenexploringtheoptionofinsteadofregisteringfundsintaxhavencountrieswhichendupincreasingtheadministrationcostofthefund,justtosetup,wehavetriedtouselocalholdingcompanies.Thenthegovernmentcanprovideconcessionalperiodson thenextor taxholidayson investments. So, thesearesomeofthepolicies,whichwe'vebeenengagingwithtotrytopopularizethegovernmentwithsuchideastoensurethatwehavelocallysetupfunds.Numbertwoistoinfluence,orrather,todrivepublicpensionfunds to focus on alternative investments. Today, most of them are only focused on the mainstreamtraditional investmentchannels. Imeanthis is investmentbondsandinvestments inthemarketcapital.Butthenyoualsohave,youknow,alternativeinvestmentvehicleslikethefundmanagementandprivateequity. In Kenya, it's been successful because we have a couple of pension funds committing theirinvestmentstoventurecapitalmanagementandfundmanagement.InUgandawithourcurrentfund,wehave NSSF Uganda who joined with 2 million euros in the Yield Uganda Fund. So it's been a gradualprocess,it'sbeengradual,butit'sslow.HenricHansson56:08Ithinkthatwasallthequestions.Ihad,Ithinktickedalltheboxeshere.Sothankyouverymuchforthat.Itwasreallyfruitfultotalktoyouandyouhadalotofreallygoodinsightsforus.Mads,doyouhaveanyquestionsthatyouthinkImissedouton?MadsRobdrup56:35Yeah, thank you, Henric. I'd also say that, pretty much what I had in mind has been covered in thisinterviewso far.Butperhaps Ican, Icanaskyou intosomeof the thingsyoumentioned.So, firstofall,whenyou're talkingabout this integrity thatyouhave tobuildupbetween the investorand the investicompany.Youmentionedthisabouttrustandgettingtoknowthefoundersintermsofgettingaccessortheirwillingnesstoshareperhapstherealfinancialsituation,anddocumentsofthecompany.Howdoyoucreatethisintegrity?Howdoyoubuildupthistrustandperhapsyoucanelaborateabitonthat?HiramGithuku57:41

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Mostofthesepromotershavedifferentsetsofdocumentationbecausetheyaremoreorlessusedtotheconventional commercial lending system with a bank, the commercial banks. Now, what they don'tunderstandiswedon'tonlyfocusonthenumbers.Yes,thenumbersareanimportantpartoftheprocess,but theyarenot thecoreof thedecision to invest in thebusiness.Thenumbersmightbegood,butwemightnotlovethebusinessmodelorthebusinessmodelistoocomplicatedforus.Sohowyougettoearntheirtrustisbymakingthemunderstandourinvestmentprocess.Thenumbersareimportanttous,butwe'reaboutyourbusinessmodel.Andwhenyoudiveintotheirconversationtounderstandtheirbusinessmodel,thentheywillopenup.Thentheyendupprovidinginformationthatyoudidn'tevenexpect,theycaneventellyouhowtheirbedroomlookslikeyouknow.It'sjustaboutmakingthemunderstandthatweare not commercial lenders. We are not only focused on giving you the money, but we also focus onimprovinghowyourbusinessoperates.Howwedoitiswhenweareaddressingabusinesswealsobringonboardatierfacilitywhichisbasicallyfocusedonthebusinessservices.Thisincludesthesoftissueslikeimproving the governance system by bringing on board experts who have knowledge in productionsystemsorprocessingsystems,whoknowhowtodevelopasustainablegrowthmodel.Sowhenyougettoexplain your benefit to them versus what they would get if they were to approach a traditionalcommercial lender, then they'll stop seing you as a money lender and start really viewing you as aninvestor.Yeah,sobasicallysellingyourvalue to themandmaking themunderstandyour input into thebusiness.It'salwaysalwaysakeypoint.MadsRobdrup1:00:44Yeah.Andyoualso saidbefore thatperhaps thatwas someof thedifferencesbetweenpromoters fromKenya,localpromoters,andthenthosepromotersfromdevelopedVCIndustries?HiramGithuku1:00:59Yes.MadsRobdrup1:01:01Okay, Ihadanotherquestionwhich isabout this investmentcriteria thatyoumentioned.These impactrequirementsinPearlCapitalareperhapsmoreimportanttoyouthantheyaretootherVCfirms.So,doyoufinditmoredifficult?OrhowdoyouperceiveyourchancesoffindinginvestableventuresinrelationtootherVCfirms?HiramGithuku1:01:49Numberone,eventhoughtheentireindustryiscurrentlyverysaturatedwithVCscomingfromallover,wedon'tnecessarilyviewthemascompetitorsorfeelthecommercialbanksascompetitors.Wejustviewourselves as investorswhoarebringing local solutions to the local enterprises. So, basically oneof thereasonswhyweseeourselvesascompetitiveandthatwehaveanedgeisbecauseourteamislocal.Weunderstand the local environment,weunderstand the local challenges of these entrepreneurs.We alsohaveapoolofdata.Wehaveadatabasewherewecanalwaysgobackandrefer to the lessons learnedfrompreviousinvestmentsandweexplorewaysofimprovingoursubsequentinvestments.SoIwouldsayit'snot alwaysdifficult forusbut sometimesweactuallypartnerwith these international internationalbusinesses.For instance,wehavea coupleof fundswhicharebased in theNetherlandsand theydon'thave localrepresentation.Sowhatwenormallydoistoco-investalongsidethem.Sincetheydon'thavelocal reputation, they rely on our local expertise and representation in the business to manage andmonitortheportfolioonbehalfofthem.Sothatactuallygivesusanedge,thefactthatweunderstandthelocalenvironment.Weknowwhotogoto.MadsRobdrup1:04:23

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Yeah, I thinkmaybeanotherquestion inthatregardaboutthisperceptionabout theventureandsoon.There'sa lotoftalk inthe literatureaboutthis,youknow,findingtheunicornsandthesehighpotentialgrowthventuresandisalsosomethingthatimpactsyourinvestmentcriteria.Perhapsyou'relookingforaunicornorareyoulookingforventureswithlowergrowthrates.HiramGithuku1:05:04Wedon'tnecessarily lookatunicorns.Sometimesweeven invest in ideas,basicallystartups.As longasthereisevidenceofpotentialtogrow,iftheideainitselfisscalable,thenweinvestinthem.Alsoforthepurposeofportfolioportfoliomanagement and riskdiversification.Wewant tobalanceyouknow, theportfoliobalancing.Wecan'tinvestinstartupsall-through,ifyouhaveinvestedin2-3startupsthenyouhavetoinvestinmaturebusinesseswhichyouknowhavehighpotentialreturns.Basicallywhatyoudoistostructureandwhenyou'restructuringtheinvestment,therisk-profileoverparticularinvestmentshastoreflectthepotentialreturn.Soit'sbasicallyacasebycaseandthensometimesthesestart-upshaveagoodstory.Theycantellabetterstorythaninvestinginmaturebusinesses.SothisactuallyconformstoourinvestmentcriteriawithinthemandatewehavebeenprovideditMadsRobdrup1:06:50Okey,soyoumentionedsomethingsbeforeaboutstructuringthefundregardinowwouldyoudividetheresources and how what kind of secto focus you would have and so on. And so far we havebeeninterestedinthisfinancegapofventurescomingoutofoftheacceleratorprogramsandperhapstheroleofbusinessangelsinthatregard.EspeciallywhetherthebusinessAngelssufficientlycanfilloutthatfinancegap,orwhether,infact,inperhapsyouridealperceptioncouldbesomeotherfundorVCfundoranother type of financial institution that could come inwithwith capital at that point. This is just youknow,thoughtexperimentbecauseit'smorehypothetical,butmaybeyoucanelaborateabitonthat.HiramGithuku1:08:09Yeah, sowhen setting up a fund itwould be ideal to focus onmultiple countries. Now, Iwouldn't say,focusing on the entire Sub Saharan Africa because then that will mean spiking up your youradministration costs.But, if youhavea fund focusingon thegreatEastern-African regionwhich is alsofocusing onmultiple industries, the agribusiness industry and focusing on how to integrate the energywithagribusiness, supporting the two industries as longas the impact.Because the challengehasbeenthatyoufindaveryattractiveventurebutthenintermsofthemetricevaluation,it'sbelowthresholdsoyouenduppassingonit.Now,ifyouhadbroaderimpactevaluationmetrics,thensomeoftheseventureswouldcomeonboard.WhenyouincorporatecleanenergyinagribusinessthatinitselfisimpactfromtheESGpointofview,thatinitselfisanimpactwhetheryouprovideaccesstomarkettosmallholderfarmersor not. Then in terms of the other formof capital,when investing in startups,most of them are thinlycapitalized.Theywillneedalotofbusinessinterventionsandasmuchaswebringalongourtierfacilitywhichisintheformofagranttosupportthebusinessoperations,it'snotsufficient.Thehumancapitalisveryimportant.So,wehaveorganizationslikePUMfromtheNetherlands,wehaveSESfromGermany,wehave partner solutions from the USA. So, these are some of the organizationswhich come in handy intermsofbringingin internationalexpertise.This isthehumancapital, theknowledgethatwelack, theycome in to preach the knowledge gap within the industry. They are involved a lot in the process ofsupporting the improvementofourproduct-andsourcing standards. In theprocess,weaccelerate thisaccess to external certification, ISO certification and concepts certification and extra access to the localcertification to access the retailmarket. So, these are some of the organizationswhich come in handy.Thentheotheroneisorganisationswhichwouldbringinconcessionalcapital.Capitalwhichcomesinasdiscounted, or blended finance. So in the past, we've invested alongside DFI-funded projects like theUNCDF.Theycomeonboardandprovideaguaranteeonourinvestmentasasecurityontopofbeingfirstspringisespeciallytode-riskbusinesses,especiallystartups.Sotheycomeinhandy.

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MadsRobdrup1:12:42Okay,that'sinteresting.Yeah.Andthat'ssomethingthatyou'reactuallyexperiencingbothintheKenyanandtheUgandanmarket?HiramGithuku1:12:53yes,bothKenyanandUgandanmarket.MadsRobdrup1:12:55Okay.Yeah.Sodotheygoinandinvestspecifically,thisextrariskcapitalinthefundorisforaparticularventure?HiramGithuku1:13:10Mostlyforventureenterprises.Theycanprovideeitherconcessionalcapital,especiallytoCAPEX.Sayforinstanceaninvestmentinanoff-gridsolarmanagementsystemwhichisfocusingonaremoteregionlikeinKenya.SoifyoulookataNorthCreekfacility,becauseofthekindoftheclienteleorthemarketaccess,itnormallyservesthelocalandtheunderservedmarketwhodon'thaveaccesstocleanenergy.Theydon'thavedisposablerevenuebecausetheseareFarmers.Farmerswhorelyon,theirfarminanddon'thaveareliablesourceof income.So,even theaveragerevenueperuserof thatelectivtiy isalso low.So, ifyouweretocomparethehighcapitalinvestmentandtherevenuegeneratedfromthatcapitalinvested,thenyouwouldn't go for that business. But, becausewe have partners like UNCDFwho comes on board toprovidecapitalortoprovideadditionalsecurity,whichactuallybacksupthecompany'sbalancesheettounlockmorecapital.Thenitmakessomeoftheseinvestmentsmorebankable.Okay,sothesearesomeofthetrendsthatwenowseeintheindustry.MadsRobdrup1:15:01Okay,that'salsosomeinterestingdevelopments.Yeah.Yeah,Ithinkthatwasalsoallfrommyside.Again,thankyouverymuch forparticipating in thesequestions thatwehaveprepared foryou.Are thereanythingsthatwehavenotcoveredsofarthatyouthinkwouldbeinterestingtomention?HenricHansson1:15:40Ithinkwe'regood.We'vecoveredmoreorlesstheindustryperformanceandtheexpectations.Okay.Transcribedbyhttps://otter.aiEditedbyHenricHansson

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APPENDIXG. InterviewwithintervieweefromVC5TranscriptofInterview.IntervieweefromVC5,GoodwellCapitalInterviewer1: HenricHanssonInterviewer2: MadsRobdrupInterviewee: JoelWanjohi(AssociatePartner)Time: 51:15HenricHansson0:00Iinterruptedyoutherebutyoujusttoldalotofinterestingthings.SoIjustwantedto,tomakesurethatwe get that down for the tape aswell. But sorry, youwere saying that your fund is currentlymakinginvestmentsallovereasternAfricaor?JoelWanjohi0:24Yes,togivealittlebitofarapaboutthefundGoodwellInvestments.Ofcourse,thisisourfourthfund,weare managing the first three funds, or the first two funds were deployed in India, in microfinanceinstitutions,startupsorventurecapital.Thatwaswayback in2008to2010.Thenwehada third fund,whichwasdeployedacrossWestAfricainSouthAfrica.Andrightnowwehavethefourthfund,whichisdeployedbetweenSouthAfrica,WestAfricaandEastAfrica.ForthisofficeinNairobi,weareinchargeoflooking at the investment opportunities, and also portfolio management in Kenya, Tanzania, Uganda,RwandaandpotentiallyEthiopia.Sothat'showthefundisdividedintermsofgeographicreach.Intermsof the sectors we are looking at, unlike the first, second and third fund, where we are predominantlylookingat financial inclusion typeof investment, for thisone the theme isanaccess fund.Sowhat thatbasicallymeansisofferingaccesstobasicgoodsandservicestothebottomofthepyramid.SoanysectorwhichcanreallyhelpusIntermsofreachingthatgoal,wecanpotentiallylookatit.Butjusttoshownow,the key priority sectors are still financial inclusion, agribusiness, mobility, transport, retail anddistribution,and,finally,wecanpotentiallylookattherenewableenergysector.HenricHansson2:26AndcanIjustask,becauseIwasincontactwithyourcolleagueintheNetherlands,Wim.SohowdoesitworkwiththelimitedpartnerswhoareintheNetherlandsor?JoelWanjohi2:47Justtogiveagoodoverviewoftheirentirefirm,wehavethreeoperationsoffices.That'stheNairobioffice,whichfocusesinEastAfrica,theofficeinLagos,Nigeria,whichismoreofapartnership.SothestaffthereisnotGoodwellstaff.SowehaveapartnershipintermsofmanagingtheinvestmentinGhanaandNigeria.TheninCapeTown,wehaveourownstafftomanagetheinvestmentinthesouthernpartofAfrica.ThennowwealsohavetheheadofficewhichisbasedinAmsterdam,whichismainlyinvolvedinfurtherbuildand in fundraising. To answer your question, Wim and who else that sits in Amsterdam are generalpartners.SotheyarenotLPs.MuchofourLPsarealsoscatteredthroughEurope.ManyofthemareintheNetherlands,inItaly,inGermany.Theyaremainlyfamilyofficesandprivateequityinvestors.HenricHansson3:51Okay.Isee.ThanksforgivingthatoverviewoverGoodwellandandyoutoldmeyouhadabackgroundinfinance?JoelWanjohi4:02

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Yes,umintermsofmyundergraduateIdidaBachelorofCommerceinaccounting.Mymaster's, IdidaMasters of Science in finance investment. I am also a certified public accountant. I'm still a student ofcertainfinancialanalystCFAbutImanagetocompletesoI'msupposedtobesittingleveltwo.SohopingI'll be able to complete that on time. In terms of the work experience, my career started in a financedepartment in 2004, as an accountant, and I worked for five years in the finance department mainlyreportingontheinvestmentandalsohopingvaluationontheinvestmentsinthebooks.ThenImovedtoinvestments.Andthiswasastate-owneddevelopment finance institution inKenyacalled ICDC,where Ispentalmost10years,maybefouryearswasinfinancedepartmentandaboutsixyearsin investments.Then I moved out of the state Development Financial Institution back in 2015, and joined voxeragribusiness, which was a private equity fund, focusing on investment in agribusiness in East Africaregion. And the LPSweremainly based in Norway, Oslo. Sowhen the firm did successfully raised thesecondfundandthat'swhenIjoinedGoodWellin2017.HenricHansson5:57that's really interesting.You'veyou'vedonea lotCould I could I justaskwhatsowhatareyoursortofmainresponsibilitiesatGoodwell?JoelWanjohi6:07Great.So,asImentioned,IheadthestaffoftheregionalofficeinNairobi.Basically,whatthatmeansisthatImanagepeopleof courseand Ihave two investmentassociates.Wework togethermainly in termsofinvestment,whereourmajorresponsibilityissourcingovertheinvestment,appraisingtheinvestments,negotiatingandstructuringthese investments,carryingouttheduediligenceonthese investments,andpitchingthesetotheInvestmentCommitteeforapproval.Whenwegetapproval,wearealsomandatedtodovalueaddition to thesecompanies throughportfoliomanagement, andalsomandated todoexitsontheseinvestmentsaswell.Soitcutsacrosstheinvestfromsourcingallthewaytotheexit.HenricHansson7:06Okay,Iseeandwhatkindofwhatkindofventuresisitthatyou'reyou'remainlylookingfor?JoelWanjohi7:13Whatdoyoumeanbyventures?sectorial.HenricHansson7:17Sokindof,isitearlystagestartups?OrisitmorelaterstageorJoelWanjohi7:22Itisearlystagecompanies.Because,whatwegiveisgrowthcapitalfortheearlystage.Wearelookingforcompanieswhichhavealreadyproved the tractionsand thathavealready registered some revenue. Sothey have to be post-revenue, but they don't have to be profitable. Mainlywe do invest in companieswhich have a history of about two years to three years. In terms of monetary terms, that could besomewherebetweenhalfamillionto2milliondollarsrevenue.AsIsay,theydon'thavetobeprofitable,buttheyneedtoshowgoodsignsofbecomingprofitableandalsotobescalable.HenricHansson8:10Andhowbigarethoseticketsizesusually?JoelWanjohi8:15intermsasafundallyoulookatintermsoftheticketsizesbetween1millionUSDto5millionUSD.Rightnowontheportfoliowehavetheaverageticketsizeabout1.5millionUSDtoabout2millionUSD.Howto

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doitisthatwestartlow,thenwekeepfollowinguptheseinvestment,Iwouldcallthiskindofmilestonetypeofinvestment,youknow,gettingintoinvestingtheentireamount,likewithinonetrack,sowekeeponfollowing.So, thefirst investmentcouldbebetween1.5-2million,andthiscangrowupto5millionovertheyears.HenricHansson9:05Yes.Okay.SothatwouldbesomewherebetweenroundaandroundBorwherewouldyoupositionstheseinvestments?JoelWanjohi9:13SothatwouldberoundAandpre-roundA?HenricHansson9:16RoundAandpreroundA.Okay.AndIjustwantedtoknow,maybeyousaidthisbefore,buthowlonghasitactuallybeenoperatingininKenya?HowlonghaveyouactuallybeenoperatinginKenya?YousaidthatyoualsoinvestedinIndia.ButhowlonghasitbeeninKenya?Asgood?Well,yeah,exactly.JoelWanjohi9:46Ahforfrom2017.Sothat'sthreeyearsalmost.Okay.HenricHansson9:51Okay.Andare thereany like, success stories that that youwant to share, likeanyventures that you'veYou'vedoneverywellwithJoelWanjohi10:03Well,it'sstillabitearlytosay,butIthinkourportfoliosaredoingwell.InEastAfrica,rightnow,wehavethreeportfoliocompanies.One isbasically inmobilecommerce,whatwecallE-commerce, fortheruralareas,andthey'retryingtogiveaccesstobasicproductsandservicestotheruralpopulation.Theotherone isbasicallyadeliveryplatformconnecting the truckownersandmotorbikeownerswith thegoodsowners, so that they can carry their goods. And the third one is market shrinkage for the small scalefarmers in Tanzania, where the company is helping small scale farmers to approach the urban areasthroughadistribution channel.All our three companies so far are success stories,definitely.Of course,there'salongwaytogo,becausewhenwedoinvest,welookatwhatisourlowintermsofvalueaddition.Because we are not only capital, we also try to look at what other areas we can help the companiesimproveonareassuchascorporategovernance,streamlinetheprocess,andstrengthenthemanagementteam. And also, trying to expose the company to our network in terms of trying to get them financeassistance, probably through debt from some of the peersweworkwith. So far so good, for the threecompanies,intermsofmeetingthekeyperformanceindicators.ButasIsay,thereisstillalongwaytogo,becauseourinvestmentcycleliesbetweenfivetosevenyearsandalloftheseinvestmentsarestillundertwoyears.Soyoucanseewehavealongwaytogo.HenricHansson12:15Yeah.Andintermsofindustriesthatyouinvestin,areyousortofindustryagnosticor?JoelWanjohi12:26All right. Yeah, well, good question. I think as I said, we are not really industry agnostic, but we canpotentially lookatanysectoror industry,whichhelpsyouknow, in termsofachievingourmandateofaccessing thebasicgoodsandservices to thebottomof thepyramid,but Ihave tomention thatwearequite good in financial inclusion, since our first ones are mainly investments in financial inclusion.

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Personally,allalongmyinvestmenthasbeeninagribusiness.Sowedoconsiderourexpertisemostlyintermsof financial inclusion and services and also in agribusiness. Potentiallywe can also look at othersectors,butforthosesectorswherewedon'thavegoodexposure,wetrytoco-investwithsomeonewhohasexperienceinthatarea.HenricHansson13:28Inderstandandwouldyousay that thereareanyspecificchallenges thatyousee forventures thatarequitetypicalforKenya?JoelWanjohi13:40Definitelychallengesoccurinthatway.Iwillgothroughsomeofthesechallenges.Whatweseewhenwelookattheentrepreneurs,orthepeoplebehindtheseventures, it ismainlyWesternpeople.Wearenotseeing localpeopledrivingbusinesses,somuchof thebusinesshere inKenya,orthestartups inKenya,they are being founded and run by people fromEurope or America. It's a challenge in oneway or theother.Becausesometimeswhentheseforeignerscomein,theytrytocomeupwithsolutions,whichareWestern,buttheproblemsarehere,andtheydon'tteachthosesolutions.Sometimesmanyofthesefail,becausetheylackthatlocalnuanceintermsoftryingtomakethesolutionabitshorter.Sothat's,that'sabig problem in Kenya when you look at most of the startups that are attracting capital from venturecapitalists.Therearemanyoftheseforeign.Yeah.Ithinksometimestheymiss,youknow,seeingwhatcanwork.JoelWanjohi15:17Andtheotheraspectis intermsofKenya,andalsotherestofEastAfrica, isthatforthefewbusinesseswhere you come across, you know, typical entrepreneurs then the big challenge is always in theircorporategovernance. In termsof thesebeing familybusinesses,peoplearenotaccountable, theyhavesomeintegrityissueshereandthere,whichisabigproblemforlocalbusinesses.ThissometimesexplainswhytheVCstryto lookatbusinessesthathassomepeoplewhoareexposedtotheWesternworldandbecauseofthataspectofcorporategovernance.HenricHansson16:06Andtheseproblemsthatthey'refacingare,areyousteppinginassortofanoperationalactorthere?Orareyoumoreasastrategic?JoelWanjohi16:18sortofmorestrategicpointofinterference,helpingtocomeupwithaproperstrategicplan.Sowedon'thavethecapacitytobeparticipatingfromoperationalperspective,butwhatIwanttomakereallyactiveinvestors, so even ifwe try to look at it from a strategic point of view, get these ventures almost on aweeklybasis,andwherewe'dbemoremeetingandbrainstormingonthebestway.HenricHansson16:54Sojusttogiveyoualittlebitofbackgroundforour,ourthesis.Basicallywhatwe'relookingatissomeofthechallenges thatarequitespecific forKenya,considering that theVCand thestartupenvironment isratheryounginKenya,incomparisonto,forexample,SiliconValleywhereit'sbeenaroundformaybe30years.Sowe'rebasicallytryingtolookatififitispossibletosortof,orwhichspecificchallengesthattheKenyanVCsectororindustryatlargeareactuallyfacing.Soinrelationtothat,Ijustwantedtoask,Whatisyourperceptionof theamountof investableventures in theKenyan industry? Is thereagood fit?Orwouldyousaythattherearetoofewventuresinrelationtotheinvestors?JoelWanjohi17:59

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Greatquestion.IthinktherearetoofewopportunitiesinKenyainrelationtoanumberofinvestmentsintheregion.AndasIsay,thisismainlybecauseofthequalityofentrepreneursavailableinthecountry.IthinkalsothatwhatIhaven'tseenisacompleteinvestmentcycle.Asyou'reawareinKenyaandtherestofEastAfrica,privateequityandventurecapitalisrelativelyyoungandwehaven'tseenmuchofanexits.Sointermsofkeepingconfidencefortheinvestorsintheregion,thatwouldbesomekindofachallenge,because people are not sure about how the sector will shape up over the years. I will say that theopportunitiesarefewcomparedtotheavailablecapital.HenricHansson18:53Andare thereany strategiesyoucan take to still find theseventures,howareyouatGoodwelldealingwiththat?JoelWanjohi19:04So,what we have seen is the point of accelerators and incubators, which try to bring together theentrepreneursandkindoftrytocoachandmentorthem,andtrytoidentifytheseopportunitiesasearlyaspossible, and try toget themwherewecan invest in them.Thishasbeenworkingwell, inKenya, inparticular, as there are a number of accelerators and incubators trying to bring these entrepreneurstogetherandtryingtomentorthem.Sothatisonewaytoaddresstheseproblemsandtoensurethatthesectorissustainableinthefuture.HenricHansson19:49Yeah. And are you at Goodwell if you look at your portfolio of your investments, are you using theacceleratorprogramsinKenyaorNairobitodiscovertheseviablefirmsforinvestment?JoelWanjohi20:07No.Likethethreethatarementioned,wedidinvestprobablyinseriesA,meaningtheywereabitmature.Well,ofcourse,oneofthem,Copia,camethroughanaccelerator.Butatthepointintimethatwelookedatit, they were not using the incubator program any longer. But they started from an incubator calledGrowthAfrica.Butcurrentlyinthepipeline,wedohaveanumberofstartups,whichwearemonitoringintheincubatorandacceleratorprograms.Theyarenotyetreadyforustogetin.Butwhenthey'reready,therecouldbepotentialforustolookatthem.HenricHansson20:52Hmm, understand. And so how do you usually find your ventures like what's your strategy? For dealsourcing?JoelWanjohi21:02Goodquestion,asImentioned,acceleratorsandincubatorsareonewayoflookingatit,andparticipatingin those asmuch as possible. Also in the region,wedoparticipate in a number of forums. The forumsusuallybringtogetherentrepreneursandinvestors,andoneforumiscalledSankalp.Here,youcanbeabletogettoknownetworkorpotentialinvesteecompanies,wehavegoodreferencesfromourpeersandtheco-investorswhomweworkwith in theregion.Wealsohaveanapplicationtoourwebsite.Sometimesyoudoalsohaveacodecourseyouknow,liketryingtomovetothecompany,potentiallytheycouldbelookingforfunds.Soit'sawholemyriadofapproaches,andIwouldsaythatprobablythemostsuccessfulthing is topull up these companies fromanacceleratorprogram inorder to get yourself in terms, andhavesomerelationshipoveralongerperiodoftime.HenricHansson22:11

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Yeah.Sowould itbea fairsortof,would itbe fair tosay thatacceleratorsand incubatorsaregood formonitoringandandsortofcreatingthefirstthefirstrelationshipbutthenusuallywhentheygraduatetheaccelerator does still need some time. Some growth and some some investments before they're sort ofreadyforyou.JoelWanjohi22:40Yeah,exactly.Wecallittraction,astheygetsomenumbersbeforewejumpintothem.HenricHansson22:46Yeah.Sohowdoyouseewhoinvestsinthestartupsattheacceleratorstageoratthisearlierstagebeforeyoucangoin?JoelWanjohi23:00It'smainly angel investors from Silicon Valley. So it's not like big house names. You see a lot of angelinvestorsfromSiliconValleyandalsopartsofEurope,supportingtheearlyideasforlikebeforewecomein.HenricHansson23:19Yeah.Are there anyother sourcesof funding they can receive suchas grantsor things like this, at thisearlystage?JoelWanjohi23:29Yeah, somewhohaveaccess togrants,but itdependson the sector, andwho is trying topromote thatsector.Noteveryonehasaccesstogrants.Butsomeherehaveaccesstothegrantsaswell.HenricHansson23:43And just to experiment a little bit with the thought, would you think it would be possible for venturecapitalfundstoinvestatthisearlierstage?Oraretheeconomicmechanismssimplynotthere?JoelWanjohi24:01Youknow,wehavetoriskcapitaland,youknow,it'samatteroftryingtoberiskaverseasareturn.Youknow, formuchof thesestartups, thesuccessrate isreallybelowwhatyoucouldconsideraVCto takesomeriskon.SoI'llstillbehesitantintermsofparticipatinginstartupsandratherwaitandseeatleastuntilsomeproducthasbeendevelopedandsometractionhasalreadybeendeveloped.Sosomeonecanbeabletoseeifthere'salreadyareadymarketfortheirbusiness.Youknow,thestartupsstillhavealottowork on. I will still not want to go that route, because I know the risk is a bit tight, so I would stillencourage them to source capital like grants or like angel investors. And when they have proven theconcept,nowprobablythat'swhereVCscancomeinastheriskisnotashighasfromastartuppoint.HenricHansson25:10Anddoyou think there are enough? Is it sufficient the investments that startups can get at this at thisearlystagerightnow?JoelWanjohi25:20No,Ithinktheanswerisno.Becauseone,itdependsonthenetworkoftheseentrepreneurs.Whatweareseeingisthattheentrepreneurs,whoarefromtheoriginofeitherAmericaorEurope,havegoodaccesstoangelinvestorsandsomeofthesedonors,butthelocalentrepreneurdoesnothavetheaccesstothat.Sothere'sagapforthat.

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HenricHansson25:48And just to jump to somethingelse,whatwouldyou say is the level of informationavailable about theventuresorthestartupsandthemarketstheyoperatein?Isitsufficienttoday?JoelWanjohi26:08Sorry.IfIgotyourquestioncorrect,you'reaskingwhetherthelevelofinformationavailableissufficient.ToeveryoneorjusttotheVC?HenricHansson26:24SoI'mthinkingmostlyasabackgroundformakinganinvestmentfortheVC.JoelWanjohi26:33There is still not a goodway ormechanism formodeling this information.We have seen a number ofinstitutions that create a knowledge base of venture capital, andwe have seen a couple of other guystryingtoconsolidateinformation,butthenatureoftheinformationwithinthesectorisstillaprivateone.Soit'snotlikepublicinformationandsometimesit'smorelikemarketintelligence,soIwouldsaythatthelevelofinformationisstillnotatthelevelyoumaywantit.Canyourelyonsuchinformation?AndbythisImean,whateverpieceofinformationyoucomeacross,youreallyneedtouseyourmarketintelligencetoseewhetherit'strueornot.Sowedon'treallyhaveagoodmechanismforthisinformationforthesector.HenricHansson27:30Iunderstand,andhowdoesthataffectyourcompany,doesn't,forexample,affectyourduediligence?JoelWanjohi27:40Yeah.Itdoesaffectduediligence,andthat'swhyprobablybeforewedotheduediligence,wereallyhavetolookatanumberofsourcesofinformationfromtheexpertspointofview,marketintelligence,wetrytogatherasmuchaspossiblethroughournetwork.Yeah,ofcourse,ifthisinformationwasreadilyavailable,itwouldmake theduediligence easier andprobably take a shorterperiod andbe able to validate thisinformationifwehadlikeaforumwhereallthishadbeengathered.JoelWanjohi30:07Sorry,HenrikandMatt'smyinternetwasdisconnectedforsometimebutIamback.HenricHansson30:12Noworries.Nostress.HenricHansson30:18Yeah,Iwasjustwonderingalittlebitabouttheinformation.Yousaidthereisabitofinformationgaporlackofinformation.SoIwasjustwondering,wheredoyougettheinformationfrommainlytodothissortofduediligenceonthiskindofthing?JoelWanjohi30:42No, no, as I said, it's through their experience and their connection. Likemyself, havingworked in thesectorforlong,I'mlookingataparticularVC,whichisinacertainarea,IprobablyhaveacoupleofguyswhoImightreachoutto,andtrytogatherinformationforthesector,theirexpertiseandallthat.Yeah,soit'smainlyindividualconnections.HenricHansson31:13

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So, it's a lot about the sort of social social network that you have. Exactly. Yes. And do you think thatforeignVCsorforeignventuresstrugglewiththatsortofnetwork?JoelWanjohi31:34Notexactly,becauseagain,youlookatmostoftheVCormostofthePEsInKenya,almostallofthemareforeign.Soitisactuallyeasierforthemintermsofnetworking,thanforalocalperson.Becauseyousee,they know each other for one aspect or the other. So I won't say it's a problem for them in terms ofnetworkingtheregionorgettingtheinformationintheregion.HenricHansson32:10Butwouldthatthenmeanthatmostforeignfundsalsoendupwithforexample,foreignforeignventuresor?JoelWanjohi32:21That'sachallengeintheregion.Themainreasonisnotjustbecausetheyarenetworkingtheforeignersthemselves,butbecauseofaselectionwehaveintheregion.AsImentioned,youknow,theissueofthecorporate governance,makes people fear a lot the ventureswhich are started by the locals, sowe seepeople thatare justbeing interestedwith theventureswhicharestartedby the foreigners,because it'sperceivedthatthecorporategovernanceisabithigherthanthelocalstartups.HenricHansson33:02ButdoyoudoyouseethatthereareanyothersortofbarriersinbetweenforeignVCsand,andandlocallocalstartupsaretherelikeanyculturalbarriersoranythinglikethat,thatyoubelieveexists?JoelWanjohi33:18Youknow,probablyinacountrylikeEthiopia,yes,foryoutobeabletobesuccessfulintermsofgettingthebestattention.Youneedtohavealocalteam.Andthisismainlybecauseofjustovercasualaspectofit.Butit'salsobecauseofissuesoflanguagebarrier.Because,youknow,Kenya,Uganda,Rwanda,Tanzania,youknow,Englishisisamodeofcommunication.Yeah,butforEthiopia,it's,Amharic,soit'smoretodowithlanguagethanculture.HenricHansson33:59Yeah.Okay, Iunderstand.Andcan I justaskyouwhat issortofyourcurrentprocess for finding locallybornventures?Sorry,local.Yeah,forfindinglocallyfoundedventures.JoelWanjohi34:16Um, as I mentioned. What we normally do is that we have a number of incubators and acceleratorprograms which we collaborate with to spin up the companies. One of our mandates as a fund is toprovidelocalsolutionstolocalproblems.Sowhatthatmeansisthatwe'retryingtogetnewinnovationswhicharelearnedbylocals.Sowedon'treallydiscriminate,butevenifit'saforeignerwhoisrunningtheventure,wetrytoseehowexposedhe istotheregion,andhowheunderstandstheproblem.Sowedohave a checklist in terms of trying to check whether the founder is local or foreigner, does he fullyunderstandthelocalproblems,andwhetherthesolutionheisprovidingreallyisalocalsolution.SoasIsaid,thefirstandtheeasiestwayofdoingthisisalwaystoworkwiththeincubatorsandreallyjusttryingto identify these localswhoaretryingtoprovide localsolutions for the localproblemstheyarecomingacross.HenricHansson35:25Okay.Sosortofemploymentofstaffintoventureswithlocalknowledgeiscrucialforthere.

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JoelWanjohi35:32Yeah.Actually,that's,that'scrucialforafirmlikeus.Yeah.HenricHansson35:37Yeah,Iunderstandthat.Butdoyouhaveany?Haveyouseenthat,inpractice,sortofboth,bothoffailureof that of lacking local knowledge, orperhaps a goodexampleofwhen someonehas really shown thatthey'veunderstoodthelocalsortoflandscape?JoelWanjohi35:56Yes,Idon'twanttonameexampleshere,butwhatwehaveseeninanumberofotherVCsisanumberofstartup teams, because probably thesewere run by foreigners, becausemuch of these VCs don't haveconsistentpresenceinKenya,andtheyarestillremotelyfromSiliconValley.Sowehaveseenanumberofthemattractinga lotofcapital,butalso failingbecauseprobablytheproblemwasthatthesolutionwasnotalocalsolution,somethingisworkingeitherinSiliconValleyorsomewhereinEurope,whichtheyaretrying to plug intoKenya. Sowehave seenquite a number of booths beingunsuccessful.We are quitecareful on that, and that'swhyprobablywe are a local team.When you approach aswe're able to seewhethertheproblemyou'retryingtosortoutisreallythere.Andalsowhetherthesolutionyou'retryingtogiveisreallyalocalsolution.HenricHansson36:58andityousaidbeforethatyouarenotworkingoperationallyinthecompaniesyouinvestin,butmoreasastrategicpartner?JoelWanjohi37:08Yeah,morestrategicquestion.Soit'seitherwegetrepresentedontheboard,orwegetaboardofsatellite(observer?). As I say,we go beyond that andwe try to engagewith the entrepreneurs or the startups,eitheronbiweeklyorweeklyintermsoftryingtogettheproblemtheyarefacing,andalsointermsofcomingupwithsolution.Sowedon'tsitandwaitfortheboardmeeting,butrytoproactivelyengagewithstartups.Fromastrategicpointofview.HenricHansson37:42Yeah.Yeah.Andisthatalsodoyouthinkthatthatrequiresalotoflocalknowledgeaswell?JoelWanjohi37:52Yes,itdoes.Itdoesrequirelocalknowledgetobeabletodothat.HenricHansson38:00And you touched upon that before that, of course. Kenya is not it's not SiliconValley orNairobi is notSiliconValley.AndtheVCshavebeenaroundforalongertimeininSiliconValley.ButwhatwouldyousayisthebiggestdifferenceintheventuresyoufindinKenya,comparedtotheonesin,forexample,SiliconValleyorsomewherewhereventurecapitalhasbeenaroundforalongertime?JoelWanjohi38:27Ithink,eventhelevelofpeopleacceptingtheideaofventurecapitalinSiliconValleyisverymuchhigher,andmostentrepreneursareworkinghardtoattractVCs.InKenyapeoplearestillliketryingtopushontomake it happen. That's one of the biggest differences. Also in terms of the opportunity. Because in theSiliconValley,Ithinktheopportunitiestherearesomuchmore,comparedtoKenyabecausewehaveseenveryfewopportunities.Ithinkareasonforthisisprobablyalsotobefoundinthedevelopmentaspectof

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thecountry.Kenyabeingalmostathirdworldcountry,IthinkintermsofthespendingpowerandallthatisprobablynotashighasonewouldseeinaSiliconValleysetup.HenricHansson39:37Andinrelationtothat,howdoyouseethatthegovernmentiscurrentlyinfluencingtheindustry?JoelWanjohi39:49Ithinkwhatwe'reseeingfromtheKenyanGovernmentisthattheyarequiteprobusinessandmakeanefforttosetagoodenvironmentforeveryonetowalkin.IthinkwhatKenyaisknownforintheregionisthat thegovernmentdoesn'treally interferewiththeprivatebusiness, theyworkashardaspossibletoattract any entrepreneurs and investors,which is also provided through the tax holidays and all thoseaspects of business. So I'd say, from the government point of view, I think it's mainly through policymakingandalsomakingthebusinessenvironmentconduciveforeveryone.Ithinkthat'shelpingmeknowinvestorsintheregion.HenricHansson40:44Understand,andwouldthiswouldyousaythatthereareanybenefitstobeingalocal,locally,localVCfirminthissensethere?JoelWanjohi40:59Currently No, I don't think is the differentiator between a local VC and foreign VC, in terms of tax orwhatsoever. So I'll say that god is fair for everyone. And by local VC, Iwant to assume youmean, VCsthathavelocalLPs?HenricHansson41:25Yeah.JoelWanjohi41:27Okay.Yeah.CuzYeah.TheotherthingisthatthereareveryfewLPSintheregions.Ofnow,therearejustprobablytwoorthreepensionfundsthatdoit,becausepeopleintheregionareadon'tbelieveinputtingtheirmoneyinVC.Sopeoplearebeingseenputtingmoneyinrealestatelikeit'swheretheywillbeabletogetmoredonethanVC.SotheVCisstillquiteearlyintermsofbeingacceptedbythepeopleintheregion.Wearenotseeingalotofpeople.We'retryingtolookattheVCasanalternativeinvestmentvehicle.HenricHansson42:16Sowouldyousaythat,forexample?Yeah.Well,wespoketotheEastAfricanprivateequityandventurecapitalAssociation,andtheywerementioningalittlebitaroundsortofrelationswithlocalgovernment,theimportanceofgainingagencyandsortofliftingthevoicetowardsthegovernmenttomakesurethatthatyoursortofwishesaregranted.Doyouseethathappening?DoestheVCindustryingeneralhaveavoice?JoelWanjohi43:03Um,that'sagoodone.WhatIknowisthatthegovernmentofKenyaisquiteopen.Ifventurecapitalistsknockontheirdoorandgotothem,thegovernmentwillbeabletolistentothem.Well,Ihaven'tseenaspecific new thing being done for the VC. So it's still quite open. And the only thing probably I wouldmentionisthelocalLPsscenefortheVCsaremainlypensionfunds.Andifthegovernment,atanytimecouldkindofemphasizepensionfundsliketheyhavetoinvest10percentoftheyearineitherPEorinaVC. I thinkthat'sonewayof tryingtopromotethesector.Butagain, in termsof institutions itbecomesverydifficultbecausepensionfundsarestillshyandtheystilldon'tbelievetheycanmakemoneyfromVC.

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Andthis Iwillattribute to theaspectof theVCscenestillbeingquiteyoung in theregion.Wehavenotseen enough exits, generating enough returns. So that's probably also what is making them shy fromparticipating in the VC. In terms of lobbying through agencies, I don'twant to believe that, butmaybeEAVCAhasmoreexposuretothatthanmyself.HenricHansson44:45justalastthinghereandit'squiteopen.ArethereanyothersortofchallengesthatyouthinkarespecificforKenyathatyouasaVCarefacingrightnow?Andifso,howareyouovercomingthat?JoelWanjohi45:03Yeah,yeah.Yeah,definitely.InKenya,wearequitesensitivewiththeelectioncycles.Wheneverwehavegeneralelections,VCs tend toshyaway for thatperiod,because it'salwaysuncertainwhatwillhappenand how we are trying to overcome that is through diversified geographies. You know, having someinvestment in Kenya, Uganda, Rwanda, Tanzania, which have different election cycles. So, that's oneuncertaintyintermsoftheelectioncycles.HenricHansson45:47And sorry if I'm a bit ignorant here, but is that because some of the some of the politicians are notsupportiveoftheventurecapitalareaJoelWanjohi46:00NotexactlywhatI'veseenisthattheVCworldwhenitcomestotheelectiontimetheyarenotsurewhatwillhappenaftertheelection.I'msurethere'llbepeaceandstabilityandthebusinesswillbeasusual.Sothey want to wait and see kind of. So it's more like apprehension from the VC rather than from thepolitician.JoelWanjohi46:26Isee.Yeah.HenricHansson46:28Okay.Ithinkthatwasallthequestionsfromme.Thankyousomuchforstickingoutwiththat.Mads,doyouhaveany,anythingImissedoranythingyouwanttofillinwith?MadsRobdrup46:43Yeah,thankyou,Henrik.Andthankyoualso,Joel.AndIthinkmostofmyboxesweretickets,prettymuchallofthemyeah.ButtherewasonethingI'dliketoprobeabitinto,andyousaythatitwouldbegoodfortheindustryingeneralifthereweremoresuccessstories.AndIwonder,okay,whatreallycreatesgoodsuccessstories?Isittheexit?Andifso,howdoyoumakemoreexits?JoelWanjohi47:16Goodone, I think this one ismoreof a like, timebeing thebest healer.Whenwe look at theVC in theregion,itisbarelyeightyearsold,meaningprobablyyou'restartingtoseethefirsttypeofexitscominginfromthisyeargoingon.Becauseforyoutobeabletoexitintolandtheinvestmentperiod,whichmostVCsarebetweenfiveto10years.SoIthinkthattimewillbethebestdealIknowastimemoveson,togiveusanopportunitytohavemoreexithappeningintheregionandpeoplemakingmoneyfromtheseVCs.MadsRobdrup48:00

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Yeah,ofcourse,itmakesgoodsensethatofcourseyouneedmoretimebeforeyoucanexitthecompany.So, intermsoftheIPOs, IreadsomewherethattherehavenotbeenmanyIPOsinKenya. Is it thesamefactorsthatarehinderingmoreventurestogopublic?JoelWanjohi48:35Well,IthinkwehadafewIPOssometimebackin2015-2014.Actuallytheydidn'tgoasplanned.thinkintermsofinformationasymmetrybetweenyouknow,thelocalandthepublic.Okay,now,letmebehonest,I'llputitthisway.IthinkthequalityofthefinancialmarketinKenyaisprobablynotasyouwouldexpectittobecomparedtolikeSouthAfricaorcomparedtootherpartsofEurope,andpeopleprobablyfeeltheinformation flowiskindofsometimes interferedwith.What Imeanbythings is thateven if there isanIPO,peopleprobablydon't thinkthe information foryouknow, thepricesandall that is, is informationwhichispublic information.Peopletendtothinkthatthecorporationsandtheirpeopleissomekindofprivate informationandtheytrytomake iteasythere.Andwedidseeoneor twoIPOkindofcrashingdown fromtheprice theystartedonand it crashedalmost likeahalfprice.Sowhat thatdid. Itkindofgeneratedsomefearinthepublic.SoeveniftodaywehavesomeIPO,wearenotlikelytoseethepublicbeingattractedtotheIPO,becausetheyfeelakindofabitofinterference.Andthat'stodowiththequalityofthefinancialmarket.MadsRobdrup50:21And perhaps I assume that's also related to the, the thing you described before about the level ofinformationavailable.HenricHansson50:37Well,thankyousomuchfortakingyourtime.Joel,doyouhaveanyotherquestionsforus?Anythingyouwerewonderingabout?JoelWanjohi50:46Notexactly,buttojustwhenwillthereportbereadysoyoucanshareitwithus?HenricHansson50:51SoweshouldhavethisdoneinMay.Westillhaveacoupleofintensemonthsinfrontofus.Butbutwewillsharewithyouanabstractandreadablereportaswell.HenricHansson50:51And if you ever need anything in Sweden or in Denmark, just reach out. I'll connect with you overLinkedInandweoweyoulunchwhenwecometoKenya.JoelWanjohi50:51Great.SolookingforwardtoseeyouinKenya.MadsRobdrup50:51Yeah,thankyou.Transcribedbyhttps://otter.aiEditedbyMadsRobdrup

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APPENDIXH. Interview with interviewee from the industryassociationTranscriptofInterview.Intervieweefromtheindustryassociation,EAVCAInterviewer1: HenricHanssonInterviewer2: MadsRobdrupInterviewee: EvaWarigiaTime: 54:06MadsRobdrup0:09Ithinkit'sbecauseeverybody'sstayingathome.Sotheinternetconnectionisabitoverwhelming.Um,sountilheisbackin,I'lljustsaythatHenrikisgoingtocarryouttheinterview.Butthepartthatwe'regoingthrough is, first of all, a bit about the nature of your operations. And then afterwards, based on theliterature,wehavesomequestionsthatwe'dliketoaskyouabouttheVCfirms.EvaWarigia0:52Okay.SothenatureofVCs,whatanoverviewofwhatwedo,isthatwhatyouwanttoask?MadsRobdrup0:58yeah,that'swhatwewillstartwithButnowIcanseeHenrikisback.Sohewouldjust,hewouldcarryouttheinterviewwithyou.Okay.HenricHansson1:20I'msorryaboutthepoorinternetconnectionsometimesIthinkeveryoneisworkingfromhome.Soit'sabitofworkhere.Inanycase,Iguesswe'll justjumpstraightinto.SoIwouldjustliketoaskyou,firstofall,whatistheEastAfricanventurecapitalAssociation,whatdoyouworkwithandsortofwhatisyouryourmaingoals?EvaWarigia1:48SotheEastAfricanprivateequityandventurecapitalAssociation,that'sthecompletename,isumbrellabodyorbusinessmembershiporganizationforPrivateequityandventurecapitalfundsinvestinginEastAfrica. And our primarymandate is twofold. One is to showcase the investment opportunities of EastAfrica.SopresentingEastAfricaasaasadestinationforprivatecapital.Andthenthesecondmandateiscreatingawarenessofalotofprivatecapitalandhowitworkstothebusinessandpublicstakeholdersoftheregion.Soand Icanget to thesecondone later,butdo thisacross fivecountries inEastAfrica,andthat's Kenya and Uganda, Tanzania, Rwanda, and Ethiopia. Currently, membership is from the name,privateequity firms,venturecapital firms,andotherplayerswilldeploy furthercapitaland thiscanbethrough Foundations, in fact grants and grants providers.We usually have about 100members in themanagementwithinour industryassociation. Sowhatwedowith theenterpreneursandpublic sector,likeIsaid,istocreateawarenessofprivatecapitalandhowitworks,sothattheyworkwithusfromaninformedperspectiveandareabitmoreconfident inwhenengagingPEandVC investors.Andwe'lldothis through a few things. One is to carry out training to the communities around how private capitalworks or specific fractions of private capital like how to build a structure for due diligence. Legal duediligenceandwhatfinancialduties,informationduediligenceandtheintentionisthattheentrepreneurisbetterequippedatpositioningtheirbusinessestoattracttherightkindofpartner.Attheendoftheday,whatwehopetoshowcaseisthatwe'repartnersandnotnecessarilypeoplewhoaretheretotakeoverthebusinessasistraditionallytheperceptionofprivateequityorventurecapital.

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HenricHansson4:23Andwhen you say community here iswhat, like you said that you're trying to raise awareness to thecommunity.Isthatmainlytoentrepreneurs,orisittoothersIdon'tknoweducationalinstitutionsorwhoisthecommunityinthatsense?EvaWarigia4:40Youworkwith the different kinds of stakeholders. And sowhen I use community, these programs arenormallytailoredtosuitdifferentstakeholders.Icantalktothem.Theeasiestisthebusinesscommunity,and it can refer to anything for family business owners before production. We currently manageinternational businesses. And we like to engage them at some point, they probably have been selffinancingtheirbusinessoruseitforcommercialcapitalordebttofundthebusinessandarenowstartingto think of PE partners or VC partners. So talking to those guys. The others are up and comingentrepreneurswithbusinessideasortestedprototypesoftheirconceptsandwantstogetVCfundingorsome form of early stage funding, including grants. But just don't know how to make their businessbankable.Sothat'sonelevelofstakeholderTheotherpeoplethatweworkwitharethereststakeholdersforbusiness.Thenthere'sthedatawecallpublic, public stakeholders, governments, Ministry of Finance, and Treasury officials within thegovernment regulators such as Central banks, capital markets, apologies as people who oversee anyfinancial transactions in the region, and tax authorities. The reason we engage with this publicstakeholders is so that we can sensitize them on how their decisions in policy affect private capitaldeployment. So we've done a lot of work around tax and getting tax breaks for venture capital as itsupports and estate businesses.We've also gotten some level of exemptions from the capital marketsauthorities in terms of filing requirements. And so generally this is to allow for a favorable policyenvironmentmakingsurethatthelawsandthelegislationsofthereturndonotadverselyaffecttheeaseof capital flows into the region. So that's the column called public, and public is everything from aregulator to government. In the state of Corona are actually being asked to provide insights on howprivatecapitalcansupportgovernmentsinmitigatingsomeoftheirhealthconcernsorthehealthstrains.Sohowmuchhowmanypeoplehaveinvestedinhealthcarefacilities?Towhatextentcantheydonate,orputforthsomeoftheirhealthfacilitiesascentersforincubation,ortestingofthevirus?So,that'showwework with government. And that's the second the stakeholder called public. And then the thirdstakeholder. I don't really have a name for them. But it's people like incubation and accelerator hubs,peoplewhoknowwheretheecosystemissittingandtheyprovidesomesortofadvisorytoenterpreneurs.Andwetrytolinkupwiththemsothatwecancreatethatconnectionbetweentheownersofcapitalandtheownersofbusinessor for engagement in collaboration. So sometimesacceleratorhaveyou can sayequitydesigningprogramsonfinancingyourbusiness,andtheyaskedustosharewiththemourtrainingcurriculum. So that's howwe support them. And that's prettymuch the universe of potential that wenavigatethrough.HenricHansson8:19Yeah,that's,that'sreallyinteresting.Iwouldjustliketoaskyoumoreregardingventurecapitalandtheselikeearlystage,ormoreearlystageinvestments.HowareyoucurrentlyworkingwiththemforVCfirms?EvaWarigia8:38Sohowwe,asaEAVCA,arecurrentlyworkingwithandforVCfunds,okay,I'llsetyoufor.AndlikeIsaid,weare sortof the interfacebetweenprivate capitalownersand theecosystem thecommunity,which Ihaveexplainedearlier.Soourresponsibilityistoplan,makesurethepoliciesinplacefavourthemandtomakesure that theyhave therightconduciveenvironment fordoingbusiness.Thesecondway thatwe

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workforthemisagain,likeIsaid,makingtheconnectionbetweenthemandtheirportfoliosorpotentialportfoliosforinvestment.Oftentimesthemoneypeoplemaynotknowwherethebusinesssideissittingand the business does not know where to find the money people, and we trust that we are the linkbetweenthetwosidessothattheycangettoknoweachotherandtalktoeachotherandhopefullymeetsomebills together. So that's howwework for them.And then I thinkwhatwedo is provide industrymaterial on sectors of interest and investment activity,with the hope that thiswill drivemore capitalinflowsintotheregion.Sowetrackalltheprivateequityinvestmentsintheregiontomanagesurethatit's it helps someone in making the investment into the region. So how work with them is if they'remembers of the association, they get access to all our events on our networks and databases ofinformation.Andhopefullytheycanusethatfortheirinvestmentdecisionsortofurtherunderstandthemarket.HenricHansson10:23Understand,andandsoyousaid,apartfromthesethings,you'realsoworkingwithsortofprivateequityfundsatlarge.Arethereanyotherthingsyoualsoworkingfororwith,likebusinessangelsforthiskindofthing?EvaWarigia10:40SoImentionedimpactfunds,providers,foundationsorfamilyoffices.DonothaveaveryprevalentAngelcommunityhere.Wedonothavealotofindividualsthatareangelsonthispartofthecontinent,prettymuchmostofAfrica.So,Angelsmaynotbeasmany.Butfamilyoffices.HenricHansson11:09Okay,understand,anditwasashortone,howlonghaveyoubeenoperatinginKenya?EvaWarigia11:15TheEAVCAhasbeeninexistencesince2013.HenricHansson11:18Okay..Arethereanylikesuccessstoriesthatyouwanttoshareanyspecificeventsorthingslikethat,thatyouthinkEAVCAhavedoneverywellin.EvaWarigia11:39Success for us is measured in the ability for private capital to ease into the region with minimumdisruption. So you can deploy money with minimum progress, because of regulation, because theycproceedtogetactive.Sointhatspace,Iwanttosaymaybemostofoursuccessthenwouldbemeasuredfromapoliceperspectivetopushgovernmentstodoitrightbytheinvestors.SooneoftheexamplesIcangive is, in 2019. Last year, the competition authority, which is the overall regulator for mergers andacquisitionsintheregion,exempttheVCtransactionsfromcompetitionpilots,sotheydon'thavetogetregulatory approval to invest. Andwhat thatmeans is theVC then, peoplewho are investing less than$100,000. That's the bracket that was exempt. What that means is, they are able to deploy withoutspending more money for regulatory filings because about maybe 1000 to $10,000 depending on thetransaction. So that is an incentive for them and they can go ahead and deploy capital without theincreasedcostofdoingbusiness.Yeah.Andthat'soneofhowwemeasuresuccess,minimumbarrierstotrade.Theotheronethatwehavethat'squitenotableiswehavebeenabletomobilizesomelocalpensionfunds and insurance funds to invest in private equity as LPs. We get some aspects of local capitalsupportingthePEandVCindustry.Thisisasrecentasinthelawcameintoeffectin2016.Andbeforethatlocalinstitutionalinvestorscouldnotinvesting.Butthenwechangedalittleandthenwesincethenhadabout$300milliondeployedintotheasset.

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HenricHansson13:54Well,that'sreallyimpressive.EvaWarigia13:59Success.Basedonhowiseasytodobusinesshere,investorcandomoredealswithminimalbarriers,thenthat'showweperceiveoursuccess.HenricHansson14:12superinteresting.ThankyousomuchfordescribingEAVCA.AndnowI'lljustmoveontothesecondpart.And as perhaps you noticed a little bit sort of our, our aim is quite broad.We are looking into sort ofventure capital and early stage financing.And looking into sort of someof the external challenges thatearly stage investors are actually running into, so to speak. So I'll just like to ask you, what is yourperceptionoftheamountofinvestableventuresintheKenyanindustry?They'reingoodfit,orwouldyousay that they're too fewventures in comparison to, to venture capitalists?Orhowdoyouperceive theperceivedamountofinvestableventures?EvaWarigia15:11Iwouldn'tsaythere'stoofewofthem.Theventuresceneismeanttosupportthebusinessopportunitiesforcapitaltosupport.HenricHansson15:19Yeah,exactly.EvaWarigia15:22Sointhatsense, I feel likethis,right.(onamountof investableventures)SoAfricanshavethismyth. It'snotAfricans.It'sasignificant.Theycallitthehustlermentality.Everyonehasatleasttwojobs:yourdayjob,whichyougetpaid for.Andthenthere's thisentrepreneursidehustle thatyoudoasahobbyor tosupplementyour income, right. So there's always someonewho's innovating something to complementtheir day job and enterprise, which means it's quite a lot of up and coming businesses. available forventurecapitaliststosupport.Andthentiedtothatistheprevalenceofmobiletechnologyandespeciallymobile payments and mobile money. In fact, it's allowed people to be more bold with their techinnovation, so that everyone's creating something that canelaborateon the techplatforms, todesignaproductortoofferservicesolutions.AndthenthatalsoobviouslyattractstheVCswhoareespeciallyverytech lenient, youhave tech leading in funding. So Iwill saywedonothavea shortageofbusinesses tosupportatall.Andequallywedonothaveashortageofventurefundstosupport.IthinkKenyaisoneoftheleadingAfricandestinationsofventurecapital.HenricHansson16:58Yeah, thenThenwhat,whatsortof typesofVC firmsdoyoumainlysee in the industry?Aretheymoretechfocused?Orisitmorelikeindustryagnostic,or?Ithink,EvaWarigia17:11To be fair and honest,most of theVC funds in East Africa have that focus, especially inKenya, for thereasonsIjustgave.EveryoneistryingtotapintothatwholenarrativeoftechplatformsandmobilemoneyandwithMpesa,I'msureyouknowMpesa.SotheprevalenceofMpesa.intheregion,everyone'stryingtotapintothattoextendaproductthathasamobilewalletmobilepaymentoraFinTechhandle.Andsosubsequently, I want to say, tech as the leading VC funds in the region and leaving the other venturecapitalfundsveryfew.You'remorelikelytoseeatTechVCthanyourareyoseeasectoragnosticVCfund.

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HenricHansson18:00Okay,andareyouseeingthatmostoftheseVCsareforeignorlocal?EvaWarigia18:05Andmostofthemareforeign.Yes.Westilldon'thaveasizablemixof.Imean,whenIsayforeign,Imean,yes,mostofthem.ItturnsoutthemA)beingpartnersintheorganizationstructuresothenB,theleadingpartnerswillbeforeign,butalsointermsofthesourceofcapital.Soourinsurancefundandourpensionfunds justabout fouryearsagostarted investing inPE,which isevenmoremature thanVC.Becauseofthatalotofthefundraisingforventurecapitalintheregionwilltendtoalsocomefromthewest,themoredevelopedmarketsandtheDFIs.Andveryfewareraisingmoneyfromlocalsources.HenricHansson18:51Yeah.Doyou think that thesesortof foreign firmsare facingchallenges that the local investorsarenotfacing?EvaWarigia19:03So,IthinkforEastAfrica,Idon'tthinktheyhaveuniquechallengesthemselves.JustbecausemostoftheVCcapitalacrossthecontinenttendstocomefromthesamemarket,sowe'reallseeingthesamething,evenifit'sahistoricallyfocusedtacticVCswillstillhavefundraisedfromthedevelopedmarketsandtheyhave thesamesituationsorproblems that.Foreign investors, theyhave thesamepointofview,and itsownchallenges.Oneofthemisthattheyareoversaturated;alltheentrepreneurperceivesthemarketandhow the investor will see it. In fact, because a lot of the capital is foreign. For example, when you'rethinkingaboutifIjustusetheexampleofaretailshoporasetupthatbusinessandenternormallywantstogotothedenselypopulatedcityorcentralbusinessdistrictandaninvestorwhomayperceivethatasarelativelyunsafeplace,maybeshewillpositioningtheirbusinessthere,eventhoughit'stheplacethathasthemostdensity,andit'smorelikelytogetalotoffoodtraffic.Sothosekindsofthesortofculturalnormsthatcomewithbeingforeignbacked,again,that'sthemajorityoftheinvestmentavailableinEastAfrica,soeveryonejusthastocomplyanddealwiththat.HenricHansson20:50Well,ofcourse,andIjustliketoaskyouasyoumentionedshortlybeforethatyou'realsoworkingalittlebitwithacceleratorprograms.Andtoaskingeneral,areyouseeingthatVCfirmsorearlystageinvestors?AreyouusingtheacceleratorprogramsinKenyaorNairobitodiscoverviablefirmsforinvestment?EvaWarigia21:14TherearealotofacceleratorsandincubatorsinNairobi,butIdon'tthinkwearetheplacefortheseseedsand these sortsof fields.And I feel like that'sa challenge thatpeoplehaven'tuncoveredyet.That's theacceleratedcosttobuildthebankabilityofabusiness.ButifyouasktheVCsthisstuff,thebusinessesthatgothroughtheseprogramsarestillnotreadyforinvestment.HenricHansson21:41Okay.Andwhydoyouthinkitislikethat?EvaWarigia21:47Honestly,Iamnotsure.AndIdon'tthinktheyknow.Andtheincubatorsandaccelerators,maybethey'renotasproperlyresourced, togivethekindofguidanceandtrainingthat isneeded. It's thereallyyoungbusinesses,thepeoplewhoarealreadyestablishedmaynotneedtogothroughanacceleration.

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HenricHansson22:21Yeah. Okay. But do you see that VCs are, are using some other strategy then to find these early stageinvestments?likewheredotheyfindtheirpipeline?Howdotheyfindtheirventures?EvaWarigia22:42Howdotheyfindtheirventures?AndIthinksocialnetworksandnotsocialnetworksasinFacebookbutsocial networks as networking platforms, events or on for instanceworkshops.Word ofmouth is verystrong.Theysharealotofinformation.Mostofthemdoclubdealswheremorethanonewillinvestinasingletransaction.Sobecauseofthattheytendtotalkalottoeachother.Yeah,Iwanttosay,numberone,missionuser,fellowVCs.HenricHansson23:28Yeah.Doyouseeanydifferenceintheway?Forexample,VCswho'vebeenoperatinginKenyaforalongertime?Aretheymorepronetodotheseclubdealsorwhodoyouthinkbenefit fromthesekindofsocialnetwork?EvaWarigia23:52Mostofthemwilldoclubdealstospreadtherisk.Veryfewpeoplefullyabsorbtherisk.Especiallyifyouthinkofventurecapitalbeingaveryearlystagetriedandtestedbusinesses,andthey'reending in localcurrencyandyou'redeployinginUSdollarsoranyotherformofhardcurrency.So,tobeabletocapturethat,andthatriskandownit,yourentireportfoliocanbesignificantlyriskyforbothlocalandforeignVCs.Sotheytendtowanttosharethoseanddosmallminoritystakesbutinclubdeals.HenricHansson24:34anddotheydothat,doyouseeoftenthata localVC, forexample,ora local investorgotogetherwithaforeigninvestortodoaclubdeal?EvaWarigia24:44Andyeah,definitely foreignerswillnot touchacompany theydonothavea localbackingbecause theyassumethe localsknewmoreaboutthemarketcandosonoonewillcomefromoutsideofthecountryoutsideofthecontinentanddoadealbythemselvesbecausetheytheydonotknowhowAfricaworksjustasmuchas a local.Theywanted touse thisClub's space to also learnabouthow todobusiness in theregion.HenricHansson25:15Soingeneral,localforsorryforeignfirmsarequitereliantonlocalfirmsfortheirlike,knowledgeaboutthemarkets,thesekindsofthings.EvaWarigia25:29Yes,ahundredpercent!HenricHansson25:30Okay.Andwouldyousayit'sthesamethattheyusuallytendtoemploylocalstaffaswellwhentheyopenupiftheyopenupanofficeinKenyaEvaWarigia25:42Forthemostpart, Imean, theLPswillbe foreignbut thebootsonthegroundwilla lotof thetimesbelocals.Again,forthesameassumptionthatyouknowwheretogotogetdealsasalocalyouknow,howto

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understandhowthemarketsworkasalocal,andhowtoevaluatetheproductorserviceinthemarkettorealizethepotentialreturnsoftheinvestment.HenricHansson26:14AndIwouldjustliketoknow,becauseyousaidbeforethatsomeoftheinvestmentsarenotreallylargeenough.Orsorry,someoftheseventuresthatgothroughaccelerators,they'renotreallylargeenoughforVCsorVCsdon'tfindthemattractiveenough.Doyouthinkthere'saneedforVCstosortofchangetheirrequirements of investments or in order to actually fetch these more sort of early stage investinginvestmentopportunities?EvaWarigia26:53I don't think it would happen if they did. There's a lot more business opportunities, what you callventures.Whethertheyareconsideredthattobelessattractive,havehigherriskorareuntested.That'swherealotofthemarketis.Wherealotoftheentrepreneursslashopportunitiesare.Soitwouldenhanceifsomeonerevaluedtheirpositioninawaythattheycancaptureortapintothatnetwork,whetherit'sbylow risk metrics is on being more conscious and supportive of those young, young or early stagebusinesses. So currently, a lot of the people are investing into the latest stage startup ventures. Theytested,sheisaboutfiveyearsolder,andofVCs,yetthemarketismoreintheonetotwoyearspaceoldonetotwoyearoldventures.Sothere'sathingtobesaidaboutrefusingAAAinonestrategywhereyougointothelessthanayearoldventuresorevensupportingbackingideasandprototypes.HenricHansson28:13That's,that'sreallyinteresting.Andjusttomoveovertothisthing,again,yousaidabout,forexample,theinformation.Andyousaidthatmostforeignfirmssaytheyprobablyrequiresomesortoflocalknowledgeto get information.Would you say in general that there is orwhat is the level of information availableaboutventuresandmarketstheyoperatein?Isitsufficienttomakesortofinvestments?EvaWarigia28:44AndIwanttosayit'snotatthelevelwhereEuropeis,wherejustonyourlaptopyougettonsandtonsofvaluation or industry insights, especially for Tech spaces, whether it's biotech, or education, or evenFinTech, we are definitely not there, but through efforts like ours at EAVCA, you'd get some sort ofinformation,be100%enoughtoallowyoutodoasingletransaction,butit'sastart.Andthenfromthere,thenyoucanreallysupplementtowhatyouhaveinEurope.Butyeah,weputallthisintoourresources.HenricHansson29:33Yeah.Andit'sthere.Howdoyoudealwiththat?Forexample,isitaproblemfordoingduediligence?EvaWarigia29:44Certainly.Especially frankly,howdoyoudecide thevaluationofabusiness?That's the first time in themarket?Yeah,it'sdefinitelyaconcerninduediligenceandmoresoinvaluation.HenricHansson29:58AndhowdoyouHowdoyousortofovercomethat?HowdoyouthinkmostVCsaredoingtomaybefirstgaintheinformationandiftheydon'tgaininformation,howaretheydoing,thenproceeding?EvaWarigia30:16Ithinkyouwent.Idon'tifyou'restillthere.Yournetworkisthat.HenricHansson30:31

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Sorry.Doyouhearmenow?AmIback?EvaWarigia30:33Yes.Nowyou'reback.HenricHansson30:34Okay.Thankyou.Iwouldjustliketoaskyou,howareyousortofovercomingthelackofEnglishMadsRobdrup30:56Ithinkthere'sabitofaproblemnowwiththeconnections,Eva.EvaWarigia31:00Okay.Areyouinthesamecountry?MadsRobdrup31:04Yes,weareinthesamecountry.Henric,canyourepeatthequestiononemoretime,please?EvaWarigia31:13Icanhear.MadsRobdrup31:15YoucannotevenhearmeHenricHansson31:18Iambacknow.Okay.Sorryaboutthat.SoIwasjustwonderingabouttheinformationlikeifthereisalackofinformation,howdoyouhowdoyoudealwiththatisthebestthingtoworkwithlocal?Orhowdoyousortofovercomethelackofinformation?EvaWarigia31:42Ifeellikethat'soneofthemainreasonspeopledoclubdeals.Thisisgoingtogetatleastonepersonwhohasexperiencedinasimilardealandwhocangiveinsights.NowyoudisappearedIdon'tknowifyoucanhear…SoIwassayingthisisoneofthereasonswhypeopledoclapdealsbecausetheirassumptionisifyouhavemorethanoneinvestorinatransaction,chancesarethesecondpersonorthethirdpersonorsomeonewithin that clubwill have experience having done a similar transaction and has that kind ofinformationstill.Andthenit'stheotherreasonwhypeoplearebetter,moresoreliantonsocialorpeertopeerreferralsfortransactions,becauseit'sprobablyadealsomeonelookedatanddecidedtopassitalongtothenextperson.Andthentheyusethatkindof levelofpeertopeer lendingandsharingtogrowthelessonsthatmayhavebeenincurredbytheotherpracticeoftheotherinvestor.HenricHansson33:03That'sreallyinteresting.IthinkI'mback.Again.Sorryaboutthis.Okay,good.I'malsorecording.SoIthinkthatshouldbetobehereaswell.Butthat'ssuperinteresting.I'lljustliketoknow,sortofwhenitcomestofindinglocallybornventures.SolikelocalinvestmentofstartupsthatwerefoundedbylocalsfromKenya,whatsortofeffortshaveyouseenthatactuallyworktofindlocalbornventures?EvaWarigia33:48Ithinkthat'swheretherubbermeetstheroad.Okay,now,thisisnotreflectivefortherestofeastAfricanmatters,certainlynotforthecontinent.ButatleastforKenya.AlotofthesestartupsthathavebenefitedfromVCfundinghaveforeignbackers.SoitcouldbeaKenyanventureinthesensethatthetargetmarket

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isKenyan,or thebulkof employeesareKenyan.But the founder is a lotof the timenotaKenyan, andthere'sawholesocialdiscussionaboutthat,whetherit'stherightthingtodo,andwhetheritshouldevenbe encouraged. So, becauseof especially thenoise in the last twoyears thatVCs are facing in termsofbeingaccusedof,findingpeoplewholooklikethem,notsomuchinvestingtimeto,tosupportortofindlocally backed companies. There's a lot more effort that's going into getting all the Kenyan basedentrepreneurs.It'snoteasybutpeoplewillfindoutbybeingmoredeliberate.Sotheywillsay,wehaveatargettoclosefivedealsthisyear,andhalfofthoseshouldbeKenyan,whichmeanstheywillspendalittlemore time than theynormallywould thatdeal just tobeable to find thatperson to fix that. It'sastart.We'renotthereyetintermsoftheidealsituation,butit'sastart.HenricHansson35:27YeahsosomeoftheVCsactuallyhavesortofaquotatotakeinofKenyanfoundedstartups.EvaWarigia35:39Yeah,yeah.AndI'mnotsureImean,Idon'tknowwhetherit'ssomethingthattheirinvestorspushuponthem.Orit'ssomethingthattheyjustdobecauseit'sanespeciallyrightthing.HenricHansson35:58Okay.ArethereanyothersortsofstrategiesthatVCscantaketotaketomakesurethattheyfindtheselocalimportantventures.EvaWarigia36:11IfeellikesomethingImentionedearlier,probablyloweringtheleveltowhichtheywillusetoengagesothatthey'renottargetingcompaniesthatareabitmoreexperiencedin, in, inthemarketor intermsofhavingbeeninexistenceforalongtime.Ithinkiftheygoupordowntotargetbusinessesthathavebeensetupprobablyinthelastoneyearorsoonetotwoyears,thenthey'llfindalotmoreKenyandeals.Mostoftheentrepreneursclosetheirbusinessesafteranaverageoftwoyears,becausetheycan'tgetfundingrightandneedmoreresourcestobeabletosustainabusinessbeyondstandardtwoyears.HenricHansson37:08Do you think that the VCs will have to lower their sort of requirements or change the requirements?Especiallylike,requiredreturnratesandthesekindofthings?Couldthatbeasolution?Ordoyouthinkit'smoretothissortofbulkfromfundingEvaWarigia37:35that you've been lowering expectations. And if you think about the venture, it's going to be any localcurrency. So youhave to be a bit flexible in your expectations for returnsbecause this returns arenotgoingtorenderyou'reinvestinginhardcurrencythereturnswillnotbegeneratedinhardcurrency.Theyareearninginlocalcurrency,andcurrencyfluctuatesallthetimefordevelopingcountrieslikeKenyawillalwaysbeatalowerpositionthanthehardcurrency.Sobeingcognizantofthattoadjustdownwardsyourreturnsmaybeoneofthestepsonecantakeinensuringthattheygetmoreofthelocalbusinessesmorethatcanfittotheirbasketandpackagedeals.HenricHansson38:35Youmentionedquicklybefore that someof theVCsarearesortofemploying theirownstaff incertainstartups.YouseethatmostVCsarealsoworkingoperationallyinthecompaniestheyinvestin,likebothforeignandlocal.EvaWarigia38:58

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Idon'tknowaboutthat.TheassumptionisasaVC,youdoalotofworkinthestartup.AndIdon'tthinkthat'suniquetoAfrica.Actually,it'swherethenatureofaVCandwheretheyinvestintheirinvestinginyoungbusinesses thatneeda lotofguidance.So theycanknowa lotmorehandson.Does thatansweryourquestion?HenricHansson39:23Yeah.Yeah,ofcourse.Thankyousomuch.AndIinthebeginningoftheconversation,youtalkedalittlebitabout that you're working with authority and government authorities. You mentioned that you areworkingwiththemtoprovideinformationabouthealthcompaniesrightnow.HowdoyouotherwiseseethegovernmentiscurrentlyinfluencingtheVCindustry?EvaWarigia40:02(How the government influences the venture capital) For themost part, they don't, they just steal thedairy.HenricHansson40:18Right?AndarethereanyImean,pensionfundsbeingabletoinvestinprivateequityfirmsaretheydoinganyothersortofsimilarmeasurestosortofsupportgrowingprivateequitybutalsomaybemoreventurecapitalintheearlystage.EvaWarigia40:44Theyrarelyinvestinventurecapitalbecausetheperceivedunderlyingassetsholdersinventurecapital.SotheywillbewillingtosupportprivateequityfirmsandtobuyoutsomeoftheassetsheldbyPEfirms.Andtheycanestablishthebank.ButIrarelyreallyseeafundinvestinginVC,becausetheassumptionisthe underlying company is more risky because it's an early stage business. And federal funds have aresponsibilitytothat.Whatfollowsbecausethat'speople'ssavings.HenricHansson41:27And then when it comes to more, maybe like legal frameworks, are there any specific other legalframeworks that you think are very supportive of the private equity and venture capital industry ingeneral?Oraretheresomethatareperhapsabitmoreconstraining?EvaWarigia41:47So for themostpartKenya isveryprogressive, in termsof the legalstructuressupporting thebusinessenvironment,oneoftheonesImentionedearlier,lastyear,acompetitionauthorityofKenya,whichistheregulatormandatedtoapproveallmothersinallM&Aactivityinthecountrycentercreatedanexemptionforfilingrequirementsforventurecapitalfirms.Sothebackgroundiseverymergerthathappensinthiscountry,whetherit'sbetweentwocompaniesorwhetherit'saninvestmentgettingintoourcompany,ithas to be reported to the competition authority. And they have to review the transaction. They havecertainmatrices,butIwon'tgetintowhattheylookatandifacompanymeetsalltheirobligationsoralltheirexpectations,thenthey'regiventhegoaheadtotransactinthemerger.AmergerherealsoincludesaPEandVCtransaction.Andallof thistransaction, thesefilingswiththeregulatorhaveacostandeverytimeyoudoatransaction,youhavetopaythatcost.Solastyear,theycreatedanewrulethatexemptedVCsfromapplying,incurringcosts.Andit'saprogressivethingbecauseitallows,it'soneexpensethattheVChastodealwith.Andsowhenyoutalkaboutothermeasuresthatthegovernmentisputtinginplace,ormaybetheregulationisputtingincase,it'ssuchwheretheylookatwherearethepingpointsfordoingbusinessforaVC,theyrealizeit'sinthefilingcostandthentheyexemptedthose.AndthentheoutcomeisthetimeittakesfortheVCdealisshortenedbecauseyoudon'thavetowaitforaregulatortogiveyouthe“Goahead”.Andthesecondthingisthemonetarycostattachedtodoingmetals.Thisisoneregulatorless

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thatyouhavetodealwith.SowhatyouaregoingtolookforthenisthecompetitionauthorityofKenyaandthenlookatmergersrules2019.HenricHansson44:30Definitely.Thankyousomuch.Itwasareallyniceconversation.AndIdon'tknow,Matt,doyouhaveanyotherquestions?Anythingyou'vebeenbeenwonderingabout?Andwe'vebeentalking?MadsRobdrup44:46Yes,sure.AndI'llalsosaythankyouforparticipatingsofar.It'sbeenvery,veryinsightfulandverygettingpasttermsofgettingtoknowmoreabouttheindustryandhowyouworkintheEastAfricaprivateequityventurecapitalAssociation.IthinklikeonethingIfoundveryinterestingishowyouworkwiththepublicauthoritiesintermsofmakingamoreenablingandeffectivemarketfortheventurecapitalfirms.Andsoyoutalkedabitaboutbefore.Howyousayliketheseboththelegalframeworks,butalsohowit'saveryprogressive government at themoment.Would you say that there's some kind of benefit or perhaps aneed for forVC firms tohaveanykindof relationship to, topeoplewithin theseauthorities andpublicauthorities?EvaWarigia45:49Yeah,Imean,relationshipsarewhatmakestheVCecosystemwork.peopleinvestintootherpeoplebasedontherelationshipstheyhold.SoIfyoucangetrelationswiththepolicymakersortheregulators,itjustisoneothermeasure thathelpsyou todoyourbusinessmoreeffectively in termsofyouknow, the rightpersontocalltogetthingsdone.So,yeah,definitely.MadsRobdrup46:18Okay.SothatwouldbespecificallyforVCfirmsalsointermsofknowingpeoplewithintheseauthorities?EvaWarigia46:26Yeah.Iftheycan,yes.MadsRobdrup46:32So,yeah,besidesthisruleofmergersin2019,arethereanyothermechanismsthatthepublicauthoritieshavemadetotomakeamoreeffectivemarketEvaWarigia46:52Peoplearenottakingthemupyet.Soforinstance,ifaVCisregisteredinKenyaitisexemptfrompayingtaxes,corporatetax,buttheydonothaveanyVCexemptedandregisteredinKenya,whichmeansnoneofthemhastopickonthatincentive.MadsRobdrup47:19CanyouelaboratewhatwhatdoesitmeantoberegisteredinKenyaforaVCfirm?EvaWarigia47:25SoIdon'tknowifyouknowhowfundsstructuresworkfundisapoolofassets,differentplayersputintothis basket that becomes a fund. Normally those funds will be operating as LLC's limited liabilitycompanies.Andforthemtooperatethatstructure,itmeansyouhavetoasmuchaspossibleprotecttheunderlyingshareholdersfromanylegalrepercussions.Sotheytendtolookforjurisdictionsthatfavorthiskindoffundstructuresorbusinessstructureswheretheunderlyingshareholdersareasmuchaspossibleprotected.NowthisjurisdictionsarelikeLuxembourg.AndyouknowthatjerseygoestoEurope,andthenforAfrica,it'sMauritius.FortheAmericas,itwillprobablybetheislands,BritishVirginIslands,Cayman

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Islands. So, and it's because all this jurisdictions have in place all laws that protect underlyingshareholders.Andwhatyouwantasa fundmanager is toprotectasmuchaspossibleyourunderlyingshareholder. So in Kenya,we do not have those kinds of policies. But the regulator is trying to attractpeopleintoregisteringtheirfundsintothismarket,eventhoughwedonothavethosepolicies.Andonewaytoincentivizepeopletoregisterhereisbygivingthemtaxbreaks.Youcangivethemtaxbreaks,butiftheunderlyingshareholderisisnotprotected,notmanypeoplewillbewillingtotakethatrisk.Andthat'swhat Imeanbyregistration,whereyousetupyour fundmattersbecause it'sdependentonthe lawsofthatplacefortheprotectionoftheunderlyingshareholders.MadsRobdrup49:18Yeah,okay.SoevenforlocalKenyanventurecapitalfirms,therewillbeanincentivetotosetupthefundinanothercountry.EvaWarigia49:28Yes,becauseattheendoftheday,you'reprotectingtheirshareholders.MadsRobdrup49:32Okay,IwaswonderingperhapsyoucouldhelpusbymentioningsomeofthelocalVCfirmsinKenyaEvaWarigia49:44Thereisquiteanumberandmostofthemhaveapan-AfricanmandatesotheystealfromthelargetechbasedbaysPatrickventuresfromAfricanbasedinFrance.AbaseGivemeonesecond,youcanpullupawholelist.Okay?NowIcan'tthinkofanybodyMadsRobdrup50:16becauseforexamplebybygooglingontheinternetIstumbleduponsomethingcalledSavannahfund,forexample.AndEvaWarigia50:25yeah,SavannahFundtoo.MadsRobdrup50:30them, but, but some of those that I foundwould seem to be local VC firms. They also hadmuch fewerventures in their portfolios. Andmaybe theywere not as transparent as someof the larger foreignVCfirms.EvaWarigia50:47That'strue,butthere'salsonotmanylocalfunds.SoSavannahwillprobablybeoneoftheveryfewlocalsactuallydon'tfaceanyotherHmm.MadsRobdrup50:59SoForexample,there'sthisaChandariaCapital.IYeah,Iwasgonnacategorizethem?EvaWarigia51:06They're local too. Yeah. They are also local. It's a local family backed VC $1 million assets undermanagement.Yeah,it's,it'sownedbyonefamily.Whichothernamesdidyoufind?MadsRobdrup51:29

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IthinkthatwastheonlyonesthatIrememberasasasKenyan.Yeah.But,soyouearlieryouweretalkingaboutthisbenefitof,of,ofco-investingwithsomeKenyanVCs,suchasakindofsecurityfortheforeignVCfirm.Toknow that.Yeah, sortofForanassurance that it's agood investmentandso itwouldoftenbeeitheroneofthesetwoor?EvaWarigia52:08No, so at that levelwhat itmeans is a personwho does not have an office here even though they areinternational can partnerwith an international or pan-African VC that has offices here. So you do notnecessarily have to invest is just Savannah or Chandaria or there's another one called Grey ElephantVentures.Itmeansyoucaninvestinoneofthelargerones,aslongastheyhaveanofficeherebecauseyouassumetheIneedtochargemylaptopsoonsecondI forgot tochargesoVCs, there is4DXCapital it'sSouthAfricanbuttheyhave investedhere,ChanDariacapital,EnergyAccessVentures,it'sDutchbackesbuttheyhavetheirheadquartersinNairobi.Canyoustillhearme?MadsRobdrup53:15Yes.Okay.EvaWarigia53:19Sothesenoenergyaccessventuresordxcapital.MadsRobdrup53:25Okay.Soeventhisforexample,theenergyaxisventures,eventhoughthereareDutchbackandyouwillstillcategorizethemasalocalventurefirm,venturecapitalfirm?EvaWarigia53:39Yeah,becausetheysithere.Oh,mylaptophasgoneoff...MadsRobdrup53:55Yeah,yo,therewelostEva.HenricHansson54:06YeahyeahTranscribedbyhttps://otter.aiEditedbyMadsRobdrup

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APPENDIXI. InterviewwithintervieweefromtheacceleratorTranscriptofInterview.Intervieweefromtheaccelerator,PangeaAcceleratorInterviewer1:HenricHanssonInterviewer2:MadsRobdrupInterviewee:AnneLawiTime:58.43hMadsRobdrup0:01Yeah, and of course, we will make you anonymous. The purpose of this paper is only to be used inuniversityrelatedaspects,andit'snotgoingtobepublishedinanyjournalormagazine.AnneLawi0:29Allright,that'sfine.Um,Idon'tmindbeingquoted.That'sfinealso.Um,yeah,butthenthatmaybeyourswillbemyviewsanddoesn'trepresentmycompaniesorthecompanythatIworkfor.It'dbemypersonalview.MadsRobdrup0:46Okay.Thankyou.Andthenjustfornow,I'lljustsaythat,Henrik,he'sgoingtotakeoverforconductingtheinterview. The rest of this hour you will you will be spending with And I will be taking some notesMeanwhile,AnneLawi1:03That'sfine.HenricHansson1:07Thankyouverymuchfortheintroduction,Mads.thankyouverymuchfortakingyourtimeAnna.Sothewaywehavesortofdividedthisinterviewisbasicallyintwoparts.Sothefirstpart,we'lljustbasicallyrunthroughwhatkindofoperationPangeais,I'lljustaskyoualittlebitaboutthat.AndthenthesecondonewillrefermoretosomeofthechallengesthatwehavefoundarepresentintheliteratureintermsoftheVCindustry inKenyainNairobi.Sowithoutfurtherdue, Iwould just liketoaskyouifyoucandescribeyouroperationsandwhatkindofservicesyou'reprovidingtoVCsandstartupsatPangea?AnneLawi1:55Okay. Um, so Pangea is a business accelerator. It's a Norwegian business accelerator, supporting,providingtechnicalsupporttostart-upsbutalsorunsaninvestmentplatformwherewe'reabletolinkupandinvest,provideriskyinvestmenttothebusinessorstartupthatwesupport.Sointermsofoperations,wehadtowork.Weprovidetechnicalsupport,investorreadiness,supporttothebusinessesthatwetakethroughtheaccelerator,butalsoatthesametimewedoinvestininvestmentprogramsfortheinvestorsthatweworkwith.Reasonbeing isbecauseasyoualreadyknow, there isamissingmiddle in termsofthemfundingourbusiness,techstartups.Andwhathappensisbecausethere'salotofunknownandalotof high risk associatedwith this kind of business. Sowhatwe do is to provide information and createknowledge,adisseminationmechanismtotheinvestorsforthemtounderstandwhytheyneedtoinvestasearly,asthebusinessstarts,butalsoassurethemthatwewillprovidethesupportingsystemintermsofmakingsurethatwedothefirstlevelofduediligenceandwealsoinvolvetheminbeingpartofthatduediligence.What thatdoes is improve the confidenceof the investors to come inquite earlyonbut also

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provide a de-riskingmechanism because they are not investing alone. They invest in these businesseswithus.HenricHansson3:57Okay,andWhatisthesortofyourbusinessmodelhere?Doyoutakestakesinthecompanies?Ordoyouhaveanyotherreturnsforfees?AnneLawi4:09No,wehaveabusinessmodelwedo.So,maybejusttocreateabitofclarity,intermsofinvestment,weusedifferenttools.Themostused,themostutilizedskills,toolsareconvertiblenotes,inthesensethatthenexttwoyears,thenextfiveyearsorso,orthreeyears,whentheconvertiblenotesmature,itcaneitherconverttoequityordebt.Sowedothatbecausesomeofthecompaniesthatwearemostofthecompaniesthatweworkwithorsupportarequiteearlyonandwearenotabletohaveverycorrectvaluationatthatpoint.Sobeobviouseithertothe investorortoustoall tothestartuptostartdoingvaluation.Now, intermsofhowwemakemoneyorhowwesustainourselves.Whenweworkwithpartnerswhoareabletotakecareoftheinvestorreadinessprogram.Whatthatmeansisthatthecostincurredwithgettingthisbusinessreallyistakencareofbyapartner.Inmostcaseswhathappensis,ourfocusareaasabusinesshasbeenbeneficial,addressingchallengesandprovidingorchallengingorstimulatinginnovationgenerationthatareaddressingmajorchallengeswhenitcomestourbanization.Itcanbewaterandsanitation,itcanbeaffordablehousing,itcanbemobility,itcanbe transportand logisticscanbeanything thatalsohaverippleeffects toseveralareas.Now,whenyouworkinthatarea,therearesomanyotherinterestedparties,thegovernmentbeingoneofthem,andothermajor,majordevelopmentagencies,buttheircoremandateisnotgenerationofinnovationsotheyseevaluebeingpart of ourprocess.You'll find that they take careofday today, take careof expensesincurred tobuildbusinesses that canbe able to grow the right solutions that they comeplugging in toaddresssomeproblematicaspectoftheir,ortheircoremandateasurbanization.HenricHansson7:11Okay,okay.Isee.Sointermsofindustriesthatyou'remainlytargeting,yousaidurbanization,thatsortofyourmainfocusingeneral.Okay.Okay.Andyoualsosaidquicklybeforethatyouprovideyourstartupswith some technical support. Yeah. Could you describe a little bit how that works like what kind ofsupportthecompaniesinyourprogramreceiveAnneLawi7:52Itdiffersfromfromprogramtoprogram,dependingonthestageofgrowthofthebusinessesthatwearesupporting, and this is informed by a diagnostic need analysis that we do at the beginning of everyprogram.Soit'snotwhatyouthinkit'sfitforthebusiness.It'swhatthebusinessisrequired.Andalso,it'snotwhat they think they require, becausewhen they also joining theprogram, they think they require123.Sowhenwedothatdiagnosticit'sjustdiggingdeepandunderstandingifthisiswhereyouare,andthisiswhatyouneedtobeatthisistheneedthatyou'resolving.Whatdoyourequiretogrowandachievethisgrowthmilestone in thenext sixmonths?Andbasedon that,weagreeon theGrandMasterNo, inmostcasesisrolloutSoNo,no,it'sokay.I'mjusttryingtoputitintoperspective.It'sagoodmarketstrategy,refiningbusinessmodels to fit newmarket segments. Youmight have piloted businessmodel, a product that was for acertainmarketsegmentwhenit'smoreabitwhenit'smanageablenumbers,butwhenyouexpandthenyourequireadifferentbusinessmodeloradifferentapproachintermsofhowyouscalethatalsodigital

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marketingandmarketingingeneral,andactuallythecoreofitishowdoyouhire,howdoyoubuildtherightteamtobuildyourbusinessandalso,growthstrategiesinintermsofjustbeingaonetownbusinesstobeinganational-wideregional-widebusiness,howdoyougrowtothatmagnitude?Andwhatwhat isexpectedofyou inallangleasabusiness?Alsodistributionchannels,anddistributesstrategicpartnershipsandstrategic,b2bnetworks.HenricHansson10:28Isthisalldoneinternally.Soit'sallfromyourstaff.AnneLawi10:34Yeah,yes.Ifdoneinternallyalsothemissingkeyistheday,obviouslyfinancing.HenricHansson10:45And is thereanyparticular likesuccessstorythatyouwanttoshare?Is thereonecompanythatyou'vebeenparticularlyproudwithintheinthelastcohortorsomethinglikethat?AnneLawi10:55Yeah,wehaveacouplewehaveinvestedin10businesses.Wehavebeenexistingforthreeyearsnow,wehaveoneofthecompanythatcameinformyfirstcohortcalledwaki.Theyprovidebreedingfinancetoortheyprovidefinancingandstructurefor informalemploymentorganizationthathaveahugenumberofemployees that work in informal sectors. So, for example, there are companies that provide securityservicesandoneofthekeychallengesforthehighhumantrafficorganizationismonitoringandtrackingofthehoursworkedversushowmuchyoupaythem.Andtheywereabletocreateasolutionuponthat,that can be critical. Even in the government can be replicated in any logistic business that have highnumber of human traffic. And what they have done, they have been very successful. They have beengrowingmonthtomonth.AndrecentlytheyjustgotadmittedinaYCombinatorinSiliconValley.HenricHansson12:28Oh,nice.Itsoundslikeyouhavealotgoingon.That'sveryinteresting.Thankyouforthat.Sothesecondpart now,we have of course, done a lot of readings on venture capital in general and venture capital,specificallyineasternAfrica,specificallyinKenya.Andbasedonthat,wehaveacoupleofquestions.Andthesearemoreof course,perhapsyouropiniononandhow theThe sortof venture capital industry isevolvingatlarge.Sowithoutfurtherado,I'lljustjumpintothem.Iwould just like toknow,what is yourperceptionof theamountof investableventures in theKenyanstartupindustry?Wouldyousaythattherearetoofewventuresorwouldyousaythattherearetoomanyventurescomparedtoinvestmentfirmsthatcouldinvestintheseventures?AnneLawi14:03There are very few venture funds, very few angel investors, but a considerable number in terms ofinvestments.HenricHansson14:21Andwhatwouldyousayabout theventures themselves?So the startups,wouldyousay that thereareenough startups in relation to the actual capital that exists or is it too few ventures in relation to thecapitalthatexists?AnneLawi14:41

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Now, the dynamics when you talk about ventures, you can categorize those into three. Firstly, goodinvestable businesses, which there are very few of. Second, foreign founded business which there arequiteanumberof.Thirdly,localgoodinvestablebusinesseswhichthereareveryfewof.HenricHansson15:06Iunderstand.WouldyousaythatthereareanyparticularstrategiesthatyouasanacceleratororthatVCscanadopttostillfindtheinvestableopportunities?AnneLawi15:30Soouracceleratorisfocusingon3thingstofindinvestableopportunities.Firstly,wefocusonimprovingtheinvestorreadinessofthebusinesseswhichweseehavepotentialforreceivinginvestments.Andthat'swhy we do technical support. Secondly, we aim to increase attractiveness of the investors, not onlyventurescapitalfunds,butincreasethenumberofangelinvestorstobeconnectedtothecohorts.Thirdly,wedode-riskingbyinvestingtogether.Wealsodoaninvestmentprogramwherewesupportinvestorsintrying to provide asmuch information as possible to help themmake informeddecisions.Bydoing so,they can be part of the process, they can be part of the due diligence early on. We do this asinvestorsmakeinformeddecisiontoinvestinaventurearena,inastartupbasedonhowtheyunderstandthemarket or based on how they understand the business andwhat they're doing, and howwell youunderstandtheirfounderandwhatdrivesthem.That'swhywearedointheseprograms.HenricHansson17:01Okay, interesting. And this is a bit broader again, but how do you actually see the role of acceleratorprogramsinKenya?AndhowaretheygenerallyusedbytheVCfirmstoday?AnneLawi17:21Pipelinecreationanddealflowstructuring.Sopipelinecreationforinvestmentsanddealflow.HenricHansson17:34Do you see that VC firms are actively using this i'm not talking just about Pangaea but perhaps on abroaderscopeaswell?AnneLawi17:44Ithinkyouhavetolookatitfromhowfaralongwehavecomeasanecosystem.We'veseenthewayitwasfive years ago.Hello! It has grown somuch.Havewe seen it grow and having an impact? Yes! Areweanywherenearthenumbersthatweareproudof?No,notatall.So,it'saworkinprogress.It'sgrowinggraduallyandwecandobetter.HenricHansson18:26AndarethereothertypesofinvestorsalsoleveragingtheacceleratorprogramssuchasbusinessangelsorlargerPEfunds?AnneLawi18:40I thinktheyareexploringthatmoreandmoreandweseeaneffort frombothacceleratorsandventurefunds.WehavealsoseenexplorationbyPE funds,wanting toknowwhat ishappening in this industry.Howcan theycollaboratebetter to createabetterpipeline forus in this industry fromearlyon. Sowehavestartedhavingthoseconversations.Ibelieveinthenextyearsorso,there'llbemuchcomingoutofthecollaborationorthecompositionthatarehappeningnow.HenricHansson19:30

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Andwhatdoyouthinkis,isthekeyfactorthatmakesanacceleratorattractiveforVCfirms?AnneLawi19:40I thinkhavingawellstructuredoffering,understandingyour focusarea,beinga thought-leader inyourfocusarea,andhavingcapacitytoattractandgrowahighqualitypipeline.HenricHansson20:07Andarethereanystrategiesthatyoucanadoptinordertocreateapipelinelikethis?AnneLawi20:21JusttoaddontosomethingIdidn'tsaybutalsoco-investingtogetherwithVCs.I'mhoweverabithesitanttouseVCsbecausewehaveaverysmallornon-existingcommunityofVCswhichwouldworktoinvestinpre-seed.Andyouwillfindthatacceleratorsworkwithpre-seedand,andeventhestagebeforepre-seedatastagewhereyourequireabitoffundingforyoutobeabletogrowintopre-seedandthenseed.Andyou'llfindmostoftheVCswilldoaticketsizeof500,000USDto1millionor250,000to500,000.Sothereyou'llfinditispost-seed.Thatisquiteadvancedintheprocessofwheretheacceleratorsareintermsofthegrowth,growthpatternsofthebusiness.HenricHansson21:40So,wouldyousaythatVCsarenotingeneralusingacceleratorprogramstofindinvestableventures?AnneLawi21:50Theyarebutthere isahugehugegapbetweenthebusinessesthatarebeingsupportedbyacceleratorsandwhatVCsarelookingat.Thisisintermsoftheirstructuresdoingticketsizeof50,000and100,000.Sometimes, thisdoesn'thaveROI in the long term for themas theyare looking for ticket sizebetween250,000 and above where you'll find these businesses don't have capacity at what level to be able toabsorbthat.Sohowdowecreateafundingmechanismthatisabletohelpthesebusinessesleapfrogfroma ticket sizeof50,000up to150,000.That'swherewehave,wehaveahugegap.And that'swhere theAngelinvestorscomein.Anduntilweareabletofigureouthowthattransitionwilllooklike,itwillstillbeafarfetchedconversation,butI'mnotsayingthatVCsarenotreachingout.IcansayI'vehadlikefiveconversation with different VCs who see value in starting to have conversation, and starting to haveinteractionandgettingtoknowthebusinessesthatwearesupporting.Reasonbeingthatourticketsizecanbebetween50,000USDto200,000USD,andtheyseeopportunityforthosebusinessesbeingabletoraisethenextroundwiththeirstructure.butyouseenow,veryfewacceleratorsareabletodothatkindof funding. And then your accelerator dealingwith the businesses that are looking at 50,000USD as aticketsize.Sohowdowehelpthisbusiness?Howdoyousupportthesebusinessestobeabletotoqualifyorbeabletoabsorbticketsizeof250,000USD?HenricHansson23:52That's, that's very interesting. So there's clearly a gap between the accelerators and the VC firms. Butwhen you've had these conversations with the VC firms, how are they finding their their investableventuresrightnow,ifnotthroughplatformslikeaccelerators?AnneLawi24:14Sotheyhavetheirownmechanism.Theyhavetheirownapplicationsandthey,youknow,theydohaead-hunting,andwiththeeraofinternet,itiseasytofindsomeofthisinformationandbeabletoknowwhoisdoingwhat.Becausesomeof thesebusinessesare,youknow,growing theirbrandand they'reutilizingdigitalplatforms toamplifywhat they'redoing so so theyhave theirown internal system.They'realsoreaching out to accelerators to see how they can start engaging more and you know, exploring the

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businesses that are being supported by accelerators. And start having conversationswith them to seewhethertheycanbepotentialinvesteeinthecomingmonths.Butit'snot.It'snotaveryclosed,it'snotaveryshorttimeconversation.It'salongtermconversationwheretheywillsay,maybewe'llhavealookatthebusinessinthenextyearorsotoseewherethey'llbe.Sothatmeansthatbythan,thebusinesscanbebad. Or you know, if they don'tmake somuch progress, if they are not able to close funding thatwillenablethemtogrow,andsustaintheirbusinessforthenextoneyearbeforetheyhaveconversationwithaVC.Butalsotoaddontothat,foryoutobeatalevelwheretheVCwillseeandevaluateifyouarewithintheirparameterofinvestments,youmusthavecapitaloryoumusthaveinvestment,investmentinyourbusiness.Sohowdoyougrowtothat?So,yeah,thosearethethingswearestillgrapplingwith.HenricHansson26:14Andperhaps inrelation to that,howwouldyousay thatyouracceleratormodel isdifferent fromotheracceleratorsoperatinginKenya?AnneLawi26:30Ourfocusareaisveryuniquetothisregion.Veryfewacceleratorsarefocusingonurbanizationofanarea.Secondly, having an investment program as part of the accelerator, not a standalone but part of theaccelerator. Also by providing de-risking mechanisms and creating deal flow structures. This is veryattractivetoinvestorsasweareabletonotonlyincreasetheconfidencebutalsobeintheprocesswiththem.Thatisattractivetotheinvestorsthatweworkwith.HenricHansson27:18It's super interesting. And can you just tellme how shortwe are and how these investment programswork? I read shortly on your website that you have. You have these cohorts of $13,000 split over 30investors.AnneLawi27:40I am not the right person to talk to about investment. My mandate is the accelerator program andconsolidating the investments to thestartups.Myunderstanding is that there isaminimuminvestmentamountthatyoucommitwhenyoujointheprogram.Sowedorecruitmentofinvestors,andwe'llhaveacohortofinvestorsfrome.gGazprom,andwewillalsoaddlocalinvestorstothatcohort.Whatwedoisthat theywill payout five investors to oneonone startuporbusiness inKenyaduring the acceleratorprogram.Atthesametime,theinvestorswillbetaskedtocollectinformationbasedonthetoolsthatwehave. And then they vary by eachwe,we buried by it concurrently, separately, so during the investorprogram,thedirectthecompaniesandwhatthey'redoing,andthentheywillhavesectionswherethey'reable to ask specific questions based on where the business is in line with what we are doing as anacceleratorprogram.Whatthatdoesisitprovidesabetterunderstandingofthesebusinesses,theirareasofweaknessesandhowtheycansupportthemasinvestors.Theyalsoprovideusinsightasanacceleratoronareasthatweneedtosupport thesebusinesses.So in termsof theamountone, I'mnotsosurehowmuchthatiscommittedbytheinvestor.Iknowthereisaminimumof50,000USDtoformagroupoffiveinvestors, not very sure but the number so don't put that as a base of how the investment group isconstituted. And then we evaluate the business to be invested in and then the investment is put in aspecial purpose vehicle at the Pangaea.When the tools are done for the investment, the investment isdispersedtothebusinessesthathavebeenselectedattheendoftheprogramandisdoneonTrackbasedontheroadmapwhichisagreeduponduringtheacceleratorprogram.HenricHansson30:07Okay,andisthisawayforyoutosortoffillthisgapthatyouweretalkingaboutbefore?

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AnneLawi30:15Yeah,becauselikeIsaidthisallowsustodoupto50,000to200,000USD.Sothatmeansthatthenweareabletohelpthesebusinessesleapfrogfrom50,000to250.000meansit'seasyforthemtoattractthenextlevelfunding.HenricHansson30:36Isthisacommonmodeltodo?Arethereanyotheracceleratorsthataredoingsimilarthings?.AnneLawi30:54Exactly.Idon'tknowofanyotherthatisdoingthisinAfrica.Ifyoucomeacrossanother,letmebutIdon'tknowofanyotherthatisdoingthismodelinAfrica.HenricHansson31:06Well,it'ssuperinteresting.Okay. I justwanted to askyoua littlebitmore about the information.You touchedupon it before.Butwouldyousaythatthereiscurrentlyanissuearoundthelevelofinformationavailableabouttheventuresandthemarketstheyoperatein?.AnneLawi31:27Yes,yes.Andthishappensifyou'redealingwithdiasporainvestors,becausetheyarenotinthismarket.Theymayhavethebusinessknow-howandtheymayunderstandtheprinciplesofbuildingabusiness,buttheycan'tcontextualizethedynamicofthismarket.Theywillnotunderstandwhyit'seasytobuildmobilebased payment platforms in Kenya compared to Denmark, because of the business climate here andadaptabilityof,ofmobilepaymentsinKenyawhichisveryhighandeasy.Soforexample,rightnowifyouwanttobuildthatyouwillreallystrugglebecauseyoudon'tunderstandthelocaldynamicsandhowthatworks.And if you are anew investor youwill landonhowwe evenmakemoney.But if you're a localinvestor,andyou'reguidedbysomeonewhounderstandsthemarket,thenyou'reabletoseethebusinessopportunity,you'reabletoclearlyseethatbusinessmodelandhowtheycansustainthemselvesandhowtheycanscaletoothermarkets.Sothereisthataspect,buttheycomeinhandyintermsofotherbusinessmodelprinciplesbecausetheyarestandardacrosstheglobe.Doesn'tmatterwhereyoucomefrom.Sooneoftheotherthingsthatweareverykeenoniscalledastrategicoptionsworkshopwhichwehaveeverythreemonths.Duringthesewe'lldostrategyworkshopswiththeotherinvestorsthathaveinvestedinaparticularbusinesstojustgothroughwheretheyareandhelpthemthinkthroughhowtheycanimprovein areas that they have struggledwith, or areas that they experience challenges as they grow. That issuper important because youwant toworkwith investorswhodon't only comewithmoneybut comewithothersupport,butalsoifyouarestrugglingtheywillunderstandandtheywillnotonlypushyoutoprovidereturnontheirinvestment.HenricHansson34:05Intermsofchallengesforthebusinesses,wouldyousaythat,forexample,duediligenceorwheredoyouseethatthisismostsortofpainfulforbusinesses,thisinformationgap?AnneLawi34:37Intermsofmakingadecisiononwhethertoinvest,whetherit'sagoodbusinesstoinvestinornot.Thebasisofmakingthatdecisionisinformedbytheabilityofthatbusinesstogrowandskill.Soifyou'renotabletodecide,andbreakthatinformationdownbasedonlocalmarketsandyouinsteadusewhatyou'reused to, maybe a broad way of doing things, you will be misinformed. And that's what we're able toprovideasanaccelerator.

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HenricHansson35:25Okay.Sothat'sbasicallythewaythatyouarehelpinginvestorstoovercometheseissuesof informationgap?AnneLawi35:36Exactly, but also we are very intentional in making sure that whatever works elsewhere, it doesn'tnecessarilysucceed.It'snotacutandpaste.Justbecauseotherthings,otherinvestortools,andthewayofdoingthingsworkinEuropeorinSiliconValleydoesn'tmeanitwillworkinKenya,orinAfrica.Wehaveverydifferentmarketsegments,anddifferentnuancesandyouhavetoadaptinandputinconsiderationthosemarketsandnuancesthatcomewiththismarket.HenricHansson36:18It'sreallyinteresting.So,inrelationtothat,whatisyourcurrentprocessforfindinglocallybornventures?AnneLawi36:28Ahtherearenotsomany,thatIcantellyouforsure.Becausethereweareverywired.Here,youworksohardtogetyouknow,alittlebitoffinancesthatyoucanputaside,andthelastthingyouwanttodoistogamble in high risk investing in startup. It's very high risk and the last thing youwant to do is to putmoney in a venturewhich is considered very high risk. Butwe have to educate it,we have to provideinformation that ifwewant togrowourentrepreneursand ifwewant togrow theSMEsandcontinuebeingthefrontrunnerswhenitcomestoinnovationandtechnologyinthissideoftheworld,thenwemusttakearisk.Itstartswithme,andeveryone,andalsoincreatingsystemorstructureswhere,forexamplelikePangeawhereIcanchoosetobeaninvestorandputitinapoolandwith500USDIcanbecomeaninvestor.Thatensuresandencouragesthatanyonewithalittlebitofsomefundscanbecomeaninvestor.Also,justachangeofmindsetIwouldsaybecauseinKenyaandin,inEastAfrica,whenyouhavealittlebitoffinancestospare,IwanttobuyanassetIwanttobuyland.Becausethatisasecuritynotonlyformebut also formy children, in case of anything I can sell it. That's how culturallywe arewired to be ourfathersaredoingthesameandwearedoingthesame.Thatisthesecurityforme.Butweneedtochangeourmindset and show that therewill be a timewhere you can't buy anything,where landwill not beavailable.Youwillnotbeabletoaffordit.Sowhatcanyouinvestinthatwillgiveyoureturns?Anotherareathatishelpingtoinspiremindsetalsois investingGovernmentbonds.Wherewithaslittleas$3to$10,youcaninvestindifferentgovernmentbonds.Whenthatkindofinvestmentopenedupthenpeoplestartedseeinginvestmentfromaverydifferentperspective.Andthatisfacilitatedbymobilepayments.Soyoudon'tevenhavetofillpapers,youjustneedtouseyourphone,doacertaincodeandthenyou'reableto enroll. So I think a different way of doing things are being adopted also by the government andavailabilityofinformationonline.It'shelpingpeopleseethingsinadifferentway.Now,whatdowedoasanorganizationwearecreatingaveryclosecollaborationwithinvestors'networks,they'renotsomany.Theyareveryfew.Currentlywehavetwoofthemaspartofourinvestors.Buttheotherthingswehaveseenassuccessfulis,forexample,whenweweredoingaprograminaffordablehousing,weworkedwithpartners who are already doing things, or have been doing things in the sector. And when youdemonstrate and show value of them, not only providing alternative services or solution for for thehousingsector,butalsotheycanbeinvolvedintermsofinvestmentandgrowingbusinesses,innovativebusinessesthatareprovidinginnovativebusinesscases,theyseevalueinit.Sowealsocreatingthatkindofconversation.Butit'lltaketimebecauseyouknow,it'shumanbehaviorthattakestime.HenricHansson41:02Butwouldyousaythatthereanydifferenceinthewayyouworkwithlocallybornventuresincomparisontotootherventuresingeneral?

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AnneLawi41:38I'd say in terms of our approach and our support mechanism, is unique to us. Also our opportunityoffering tostartups thatweareworking in. It'svery focusedonparticular themes, like Isaid,beforeustherewaswasnoprogramorinvestmentforurbanization,foraffordablehousing.Sothatisuniquetousasofnowandweareabletoprovidevaluetothosebusinessesthatwearesupportinginthoseareas.HenricHansson42:23Yeah.And,ifwelookatthebroaderpictureingeneral,arethereanydifferencesinthewaylocallygrownstartupsfindinvestorscomparedtothosewithforeignfounders?AnneLawi42:47Yes, huge differences in the sense that thewhite founded businesses are easily able to get investmentbecauseoftheiradvantageofwherethewhitefoundercomesfrom.InEuropeorintheUS, it'seasyforyoutomobilizeandgetcapitalfromdifferentcapitalfunds,venturefundsorangelinvestorsordifferentfundingmechanisms thatexist,whichdon'texist in this sideof theworld.With that inmindwhenyouhavemanyoptions toexplorecomparedtohere then,whenyou lookat the fundingprocess isthatyoustartwith family, friends,and foolsand thenyou'll go to thenextwhich is thepre-seed.Wedon'thavefamily, friends and fool group of where you can get investment because of the country, or thisdemographic,economicstatus.Soyouwillfindthatit'seasytoraisemoneyfromtherestofthefamilyandfriendsbecausetheymayhavesomefansoryessomedisposable incomethattheycanbeabletosharewithyou,which is verydifferent fromhere.Alsobeinghonest familiarity attracts familiarity andwhiteVCsfinditeasiertogivemoneywhitefounders.Andthat'showitisthatisthenatureofhumanbeing.Soyouwill find they find it easier to invest inwhite founders. But also I guess is howwhite are able toarticulateandspeaktowhatwhiteinvestorswanttohear.IfIhaven'tunderstood,forexample,thecultureinDenmarkorinNetherlands,Iknowthey'reverydirect.Sometimestheywouldsaythingswhichtousisveryoffensiveandyoudon'taskstraightforwardandyoudon'tsaythingsthisway,butifyouunderstandthosenuances,thenyouwillfindthattheinvestorswillbemoreforwardleaningyouwillfeellikethisistheirown,theycantrusttheseones.Butcomparedtotheotherculturaldynamic,it'snotalwaysthesame.Sosomeofthosemarketnuances,wehavetodealwithandwehavetoacceptthatiswhatitis.Butalsotoadd to it, likewe keep on sayin, create investment groups and networks also in Africa to provide de-risking,andalsotomakethemcomfortablebecauseyoucan'tkeeponexpectingtherestoftheworldtosolveourproblems.HenricHansson46:30Yeah,Idohaveaninterruption.Ifyoudoneedmemorequestions.I'msorryifwe'rerunningmaybefiveminutesovertime.SoIjusthaveafewshortquestionsleft.SoIwouldjustliketoaskyou,howdoyouseethatthegovernmentiscurrentlysortofinfluencingtheVCindustry.HowdoyouseethegovernmentiscurrentlyinfluencingtheVCindustryinKenya?AnneLawi49:47Okay,Idon'tknowwhetheryou'reabletogetmylastpoint.Okay.Allright.UmI think the government does what it needs to do and I think there's goodwill. They have a lot ofentrepreneurshipprograms,intermsofensuringthisprogramareeffectiveortakeplace,that'sanotherdiscussion. But we have seen goodwill. I think there is however a lot of misconception and

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misunderstandingonwhatkindofsupporttheecosystemrequire,andhowthatcanbefacilitatedfortheecosystem.ThereasonI'msayingthisisthatthatinoneminuteyou'llhearthereisafineforthis,andforSMEsandherethereisafontforthisdataforme,andthenthenextminuteuporthereisthereisthetaxregimeof3%forincomeandSMEgenerate,likeokay,we'vegotmin.Thenextthinghere,theseareFindsupportintrapreneursandnativedigitalentrepreneursondigitalplatformordigitalentrepreneurs.Whybigthingsdigital?Thenextminute,you'llhearthattheyneedtopaytaxesforsecondyeargoingon.Soit'samixed feeling. Ican'tsay. I think theycandobetter. I thinkwehaveanobligationasanecosystemtopushthemtobeabletodeliverforus.Ithinkwehavenotbeenputtingenoughintermsofstructuringandconsolidatingandcompilingourvoicetobehiredandtodemandwhatthegovernmentcandoforus.MadsRobdrup51:43Hiagain.Andso I justwant to followuponone thingyouareyousaidearlierabout, about thegapofinvestors.Andyousaidthatthebusinessangelsaresomehowfillingthatgapofthe50,000USdollarsto200,000USdollars.ButdoyoufindthistheseBAsarefillingthatgapsufficiently?AnneLawi52:52WhatIsaidisthatthere'sanefforttoaddressit.Idon'tthinkit'saddressedatall,butthereisaleaningtowardsaddressingit,andthereisaleaningtowardsfindingasolutionorcollaboratingwithacceleratorstofindasolution.AndrecentlyIhavepersonallyhavehaddifferentconversationswithdifferentVCwhoarewillingtostartconversingandtouchingbasewiththesetupof thesupporttoseewhethertheycanformapipelinefortheinvestmentinthefuture.So,that'sagoodindicationintherightdirection.MadsRobdrup53:44AndtherewasanotherquestionIalsohadwhenwetalkedaboutthisinformationgap.Andyousaidthatthelocalinvestorstheyhaveabetterunderstandingaboutthemarketandtheventures.Suchaswhenitcomes to thesemobilePaydigital solutions, then compared to foreign investors,where and then IwascuriousaboutthenumberoflocalinvestorsthatyouworkwithbothintermsoflocalbusinessangelsandlocalVCfunds.Yeah,ifyoucanmaybeelaborateonit.AnneLawi54:20So,currentlyIknowweworkwithtwoangelinvestorsnetworks,whichhavemorethan50angelsinoneandtheotheroneI'mnotsureaboutthenumber.Therearenotsomanynetworksinthecountry,butIknow there are a couple of networks in the continent. One of the forums that is able to provideinformation in terms of the networks and investors that exists. It's called Afrirab. It's a pan-Africanumbrellabodythatbringstogetherallthehubs,acceleratorsandsupportivesystemsforentrepreneursinAfrica.Sonotsosurethekindofdatatheyhaveintermsofpan-African.ButforKenya,Ijustknowoftwo,theremightbeothersthatImaynotbeawareof,butthosearethenetworksthatIknowintermsofdata.I'mnotsosurehowmanywehaveinKenyathatareKenyan-based.MadsRobdrup55:45Okay.Thankyou.AnneLawi55:48Thankyou,sir.IguesswecometotheendofHenricHansson55:54yourface.

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IstherejustlikeaslongasthelastthingisthereAnyothersortofchallengesorstrategiesorsomethingthatyouthinkweshouldlookintomorethatwesortofmissedhere?OrdoyouthinkweAnneLawi56:11know, I'll be curious to know,what did you have any focus?Did you have a specific focus area on thestartupstartupbusinessesthatarebeingsupported?Orwasitcuttingacrossarethebusinesses?Yeah.Didyouhaveaspecificfocusareaorarethebusinessesdobetteracrossallthebusinesses?HenricHansson57:00Andourmainfocushasbeenontheexternalchallenges.SonotsomuchinternallyatatacceleratorsoratVCs,butsortofwhatexternalchallengesthatVCsandacceleratorsarefacing,orworking.AnneLawi57:16ThereasonwhyI'maskingthatisbecausewhenitcomestocertainareas,certainfocusareaslikeFinTech,financial inclusion, therehasbeenahugegrowth in termsof,of thesupportand investments thathavebeen around that.And there are somany factors contributing to that kindof interest, but alsowhen itcomes to other areas, they are quiet untracked. I've heard investors say we're looking for differentbusinesses, not anything in tech any longer. I thinkwe just want to see if anything else is interestingoutsideoftech.SoIjustwantedtohearyourviewaboutsomethingyouhavepaidattentionto.MadsRobdrup58:21Insomewayswehavebeenawareof,ofthebigfocusontechstartupsinKenya,astheyhaveevolvedasaphenomenonintheworldwideliteratureandinthemedia.Butit'salsointerestingtoseeinthispointofview,whatotherventures thatwork inotherareasandothersectors,howthey'reactuallyable togainfinance.AnneLawi58:58Yeah,okay.Thereareotherareasthatarequitepromisingedu-tech.Edu-techisalsoapromisingareaandsomanyopportunitiesbecauseitsamandatory.It'ssomethingthatneedstobefiguredoutbecauseit'samandatoryandessential serviceoffering.But I'll say itdoesn'thaveaneffectivemechanismofofferingtheseservicesoressentialservicestotheordinarycitizen.Thereisalsohealthcareandyouhavesomanydynamicsthereis.So by now you know, mobility is also an area that is highly potential. Housing also, it may be capitalintensive,butit'sanarea.Butwhatishappeningisthatifthey'renotabletogetinvestment.There'salotofgrants,whichtheycanapplyforanandutilizetoprove.Thenyoualsofindthatmostofthebusinessesdoing this grow to lack of accountability in terms of growth that is expected with any money that ispumped in thebusinessandyoubecomecomfortableandyoubecomeamachine thatapply forgrants.Nothingmuchcomesoutofwhatyou'redoing.Transcribedbyhttps://otter.aiEditedbyMadsRobdrupandHenricHansson

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APPENDIXJ. InterviewwithintervieweefromthestartupTranscription:InterviewwJohannesTraerup(FounderandCEO),SocialBitesInterviewer1: HenricHanssonInterviewer2: MadsRobdrupInterviewee: JohannesTraerupTime: 49:01HenricHansson0:00Yeah,ofcourse.Imean,it'salsointerestingtohearwhatkindofchallengesthereareintermsofgettingfundedasastart-upoperatinginKenya.JohannesTraerup0:10We'vedealtwithalotofventurefundsbutnotlandedanyofthemjustyet.HenricHansson0:27YeahIsee.Butmaybeyoucanjustrefreshourmemoriesalittlebit.WhatisSocialBites?JohannesTraerup0:37YeahSocialBitesisadairycompany.Andwesellfrozendairyproductsforthelow-incomeearners.Wedothatbyincentivizingpeopletobecomeavendor'sforuswherebytheyarebeingprovidedwiththemeanstosell.Sotheyarebeingprovidedwiththeequipment,theuniformwiththeproductsoncredit.Thentheygooutandtheyfindamarkettoselltheseproductsandthentheycomebackandwereconcilewiththem.Soweareadairycompanysellingfrozenflavoredmilktothelowincomeearners.HenricHansson1:29Yeah.AndhowlonghaveyoubeeninKenya?JohannesTraerup1:33Personally,I'vebeeninKenyaforaboutsixyears.ButIhavebeenworkingonSocialBitessinceIfoundedthecompanyin2017.Forthelastthreeyears,I'vebeenworkingonSocialBites.HenricHansson1:52AndcorrectmeifI'mwrong,butIremembersomethingthatyouwereworkingatDanonepreviously?JohannesTraerup1:59YeahwellIwasworkingatacompanycalledFanmilk,whichisatthattimewasaDanishownedcompanyinoperatinginWestAfrica.ButthatwasnowboughtupbyDANONEsomefive,sixyearsago.HenricHansson2:16Okay.Soyou'vesortofworkedinWesternAfricabeforewithinthedairy industry,Okay.Andregardingsocialbites,aretheseemployeesallthesere-seller?JohannesTraerup2:34No,sothevendorswhoselltheproductstotheconsumerinthemarket,theyarenotemployees.Theyareindependent contractors, and they make commission on every product they sell. So, they are notemployeesofthecompany.Wealsohaveagroupofemployeesobviouslybutthat'sdifferent.

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HenricHansson3:00Yeah,okay.AndyouweremainlyoperationalinEasternKenya?JohannesTraerup3:05Yes,well,wellthatiscorrect,weonlysellourproductsinMombasawhichthesecondlargestcity.HenricHansson3:17Andisthatwhereyouhaveyouryourofficeaswell?JohannesTraerup3:20No.Soactuallyweproduceourproducts inNairobi justbutwedon'tsellonthosesites.Weonlysell inMombasa.Sothere'sabitoftransportbetweenthemarketandourproduction.HenricHansson3:37Yeah.And,whichstageareyouatrightnow?Haveyoureceivedfunding?JohannesTraerup3:47Yes,we'veclosedtotworoundsoffundingfromangelinvestors.ThefirstonewasinJuly,2018.AndthenthesecondonewasinayearlaterinJuly2019.Andsowe'veclosedthe2seedround.So,youknow,nothugerounds.HenricHansson4:21Andisthatconfidential?JohannesTraerup4:24Youmeantheamounts?Yeah.HenricHansson4:32AndthoseAngelinvestors,didyoufindtheminKenya?JohannesTraerup4:40TheyareDanishinvestors.Sotherearethreegroups,selfmadeinvestorgroups,youknow,peoplecomingtogetherthinkingthiswasagoodidea.Sothreeofthosegroupsandthenthere'soneUKangelinvestorHenricHansson4:59okayandhavetheydonesimilarinvestmentsbefore?JohannesTraerup5:04Yeah,kindof.Oneofthem,theUKonehasdoneanumberofthem.AndtheDanishinvestorshavedoneinvestmentsaswell.NotsomuchinAfrica,butalittlebit.Soyeah,theyarefamiliarwiththe,youknow,howitallworkswhenyouinvest.HenricHansson5:31Andtheseinvestmentsweremadetosortofscaleupthebusinessorwasitmoretotestthevalidityoftheservices?JohannesTraerup5:42

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yeah, Imean they all have invested differently, obviously, it's quite a number of them, but the largestinvestor thenUK investor is investingatearlystagecompanies.Companies thatwillbeatourstage.Ormaybeabitabitfurther.HenricHansson6:10Okay, I see.And just in termsofSocialBites, Imean,youhadsomeexperience from thedairy industrybefore, are there any challenges that you've run into that you didn't expect? Or has everything beensmoothsailing?JohannesTraerup6:32Um,well,it'sdefinitelynotbeensmoothsailing.There'sbeenalotofchallenges.ButwhenIwasinWestAfrica, we worked with a similar concept, the frozen dairy and street distribution. So there's a lot oflearningsthatI'vebeenabletoget.Buteveryplacehasitsowncontextanditsownmentalityofhowtogoaboutthings.Sothere'sbeendifferentchallenges.HenricHansson7:07Yeah.Isthereanything,that'ssortofbeenamajorchallenge?JohannesTraerup7:12No, therehasn'tbeen. Iwouldn'tsaythere'sbeenanymajorchallenges. Imean, ifyouplanwell,you'reabletopredictwhatkindofchallengestheenvironmentthatyou'rein,willgiveyou.Thenyouhavetheabilitytosortofplanaroundthosechallengesthatyouthinkmightcome,right.Ithinkthat'ssomethingyoulearnwhenyou'vebeenonthesesides.Sometimesyouknow,yougetanideaofwherethingscangowrongandthenconsiderthatinyourplanning.HenricHansson8:03Andyoumentionedjustbrieflythatyou'vebeenincontactwithalotofVCfirmsandthesesortof,perhapsa littlebit larger investors.What isyourperceptionof thecompetition for fundingbetweenventures inKenya?ArethereliketoomanyventuresingeneralcompetingforthesamecapitalfromtheseVCfunds?Orisitrathertheotherwayaround?JohannesTraerup8:30Well, Iwouldsaythat ifyou'reattherightstage,withyourcompany, intermsofhavingachievedsomekindofscale,itdoesn'thavetobeahugescale,butyou'vebeenabletoprovesometraction,youhaveabusinessmodel that is proven and that seems to work. Then attracting funding from VCs that have apresenceinKenyaisnotimpossibleatall.It'squitepossible,Iwouldsay.Butthechallengeisifyoudon't,ifyouarewherewewerein2018,whereit juststarted,andyoudon'thaveanythingtoproveandnowyouneed to raisemoney.There'snota lotofventure funds in that space thatarewilling to comewithmoneywhentheriskisthathigh.There'safewbutnotalot.HenricHansson9:42Soit'skindofdependentonthesemoreearlystagepre-seedorseedkindofinvestors?JohannesTraerup9:51Yeah, I mean I ended up raising from angel investors. I mean, individuals where there's not a lot ofbureaucracy.Youknowifyouapproachaventure fund, itcantakeyouuptoprobablybetweensixandninemonthsfromwhenyouinitiateyourtalktowhenyouactuallyagreetosignthetermsheets.Sothat's

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alongprocess.Withindividuals,alotofitisrelationship-based,youknow.Itisnotasbureaucratic,wheretheduediligenceiscarriedoutinthesameway.It'sabitmoresimple,theprocess.HenricHansson10:45Yeah,andhaveyoubeenincontactwiththesenetworksinKenyaaswell?JohannesTraerup11:06Not really. The people I've been in contact with in Kenya have been the venture funds. Not so muchindividualinvestors.JohannesTraerup11:21Yeah,notnotsomuchalittlebitbutnotsomuch.HenricHansson11:25Isit?Isiteasytofindthosebusinessangels?JohannesTraerup11:34It'sprobablyabitdifficulttofindBusinessAngelsinKenya.Ialsothinkthatyoudohavetobeextremelycarefulwhenyou findyour investorsbecauseyoudon'twant toget thewrongpeople involved inyourcompanyfromtheoutset.Itisactuallyabalancingact,whenyou'reraisingmoney.Ofcourseyouneedtoexposeyourselfandexposeyourbusiness to them,because they'llhavea lotofquestions,butyoualsohave tobe careful, becauseyoudon't knowwhat theymightwant.Andmaybeyoudon'twant them tohavewhatyou'redoingnow.HenricHansson12:29yeah.Isthatsomethingyou'veseenwithotherventuresinKenya?JohannesTraerup12:38Ihaven'tseenitpersaybutI'veheardalotoffrustrationswhichcomesdowntoamalfunctioningboard,or investorgroupwherepeoplegetstuckoncertain issuesbecausetherearedisagreements.Andwhenyouhavefrustrationslikethatittakesawayalotofyourfocusfromwhatyoushouldbedoing.HenricHansson13:20Makessense.Ijustwantedtoaskyoualittlebitbecausealotoftheliteratureistalkingabout,youknow,dealsourcingandhowtheseinvestorsorVCsareactuallyfindingtheirventures,sotospeak.Onepartoftheliteratureistalkingaboutintermediaryagencies.Solikeacceleratorprograms,andsimilarprograms,haveyoubeenthroughanacceleratorprograminNairobioranywhereelse?JohannesTraerup13:53Ihavenot.HenricHansson13:59Ijustwanttoaskyou,haveyouseenany,anyaccelerators?Doyourunintothemoften?Andhowdoyouseethattheyworkinthisecosystemofstartupsandinvestors?JohannesTraerup14:14Tobehonest,Idon'thavealotofideasaboutthatbecauseIhaven'tbeenpartofthem.AndI'vebeentoobusyonmyowntrackwiththethingsthatIfeelmakemoresensetofocuson.SoIshouldbecarefulwhatIsaybutIknowthattherearemanydifferentacceleratorprograms,somearemoreprofessionallyrunthan

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others. They all target, you know, different types of companies at different stages. Butmy own sort ofperceptionaboutthatthingisthatit'sextremelytimeconsuming.Ithinkitcanstillactuallybeahelptoalot of people, a lot of entrepreneurs, but I think you also have to be careful so you don't end up in asituation where you're not spending your time in the right way, as an entrepreneur. Things have tohappenfast.HenricHansson15:24Yeah.Becauseofwhatwesortofheardwhenwetalktoalltheseotheractors,itseemslikethatmanyoftheacceleratorsareverygoodintermsoftechnicalassistancebutthatsometimeswhentheysortofexittheaccelerators, they'restillnotsortof investorready.So thissortofpurposeofcatapulting them intoinvestments,haveperhapsnotalwaysworked.SoIjustwantedtoknow,wasthatsortofastrategythatyou took? When you found funding, to target these business angels outside of Kenya, or was it justsomethingthatthatsortofnaturallyhappened?JohannesTraerup16:17I think it sort of naturally happened. So I spent probably around fourmonths chasing investors in thebeginning.IguessIthoughtIjusthadtofindalittlebitofmoney.ThenImanagedtolineupmeetingsandyouknow,whenyouhaveameetingwiththefirmorletssayaVC,youknow,iftheylikeyoubuttheycan'tinvestinyou,they'llalwaystrytoreferyoutosomeoneelse.Soit'slikeajourneywhereyouhavesomanymeetingsandyou'rebeingreferredtopeopleallthetime.Then,oneortwoofthesepeoplesortofagreeand then then then itworksout. So I think Ididn'thavea clear strategywhen I startedout, Iwas justtrying to, tomeetasmany investorsofanykind in thebeginning.Thenwhen Isensedsome interest inwitha fewof them, theystartedguidingme in termsof,youknow,you'resayingyouneedtoraise thismoney,butactuallyyoumightneedtoraisefourtimesasmuchmoney.Thenoneinvestorwillsay,"okay,Iwillagreeto invest,butonthebasisthatweraisefourtimesasmuchmoneythatyouwanted,andthatyoufindatleasttwoothersinvestorswhocancomewithatleastthesameamountasme"somethinglikethat.Soit'slikethat,they'llneversayyesfromtheoutset,there'salwayscriterias.HenricHansson16:17Yeah,Ithinkandatthisstagewhereyou'realreadyoperatinginKenya?JohannesTraerup18:22weactuallyweren'tbutwhenIraisedthemoney,orwhenIgotcommitmentfromthefirstinvestors,wehadn'tyetlaunched,wewerejustabouttolaunch.Soweactuallyhadn'tsoldaproductatthatpoint.Wehaddoneall theother things,wehadyouknow,gottenall thepermits,wehaddeveloped theproductsrecipe,wehadgottenapartnershipwithadairyplant,wehaddonetrials,wehavealltheseotherthings.Sothatwasthestagethatwewereat.HenricHansson19:03Soallofthosesortofthingsthatyouhadalreadyputinplace.Youwereabletodothosebecauseyouhadbeenoperatingwithintheindustryandyouknewwhatwasrequired?JohannesTraerup19:16I think that that's why the investors felt like, okay, there's risk involved, because he hasn't put theproductsoutonthestreetyet,butatleasthe'striedthisbefore.HenricHansson19:26

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Yeah. And what were some of the main challenges you faced in terms of the requirements from theinvestors?Was it challenges relating to reporting, or providing information orwas itmore challengesrelatingtoscalabilityorwhatweretheymosthesitantabout,sotospeak?JohannesTraerup19:53Well,IwouldsayprobablythefactthatIwasthesolefounder.Investorsliketoseeafoundingteamandnotjustasolefounder.Ithinkthatwasoneoftheworriestheyhad.Andwell,Iguesstheteam,foralongperiodof time Iwasalone. It tookmeawhilebefore I gotamanagement team inplace. So, thatwasaworryaswellforthemthattheymighthavethought,ishedoingeverything?Canhecopewithit?Whatifsomethinghappenstohim?Istherenooneelsetotakeoverandstufflikethat?HenricHansson20:38Yeah,there'salotofeggsinonebasket.Yeah.Thatmustbeamusthavebeenalotofpressureaswell.JohannesTraerup20:47Yeah,itwas,butI'veenjoyeditalot.BecauseI,IlikewhatIdo,sothathasdrivenmeyouknow,totogetthingsdoneandyouknow,makethingsmove.HenricHansson21:00Yeah,yeah,Imean,it'sreallyimpressiveproductandjourneyanditseemslikeareallyfunthingtoworkwith. I justwanted toknow,youspokea littlebitabout thestruggleof settingupamanagement team.Howdidyouendupdoingthat?JohannesTraerup21:21So I knew that the right way is not to hire a management team from day one. We have to grow theorganizationorganicallysoit'sbetterifyoufindthequalifiedpeople.Thenyoutrainthemandyouspendtimewiththem,andyoumakethemowntheculture,andthenyoupromotethem.Thathasbeenmysortofthingfromthebeginning.Thatmeansthatittookawhilebeforeweactuallywereabletosaythatwehave amanagement team.Now,we have a salesmanager,we have an operationsmanager,we have afinancemanager.Incaseofthesalesmanager,forexample,wepromotedhertotheroleofsalesmanager,I'dsayprobablyayearintooperation.Uptothatpoint,Ihadsortofbeeninvolvedinalotof,youknow,salesmanagement tasks.And thesamewith finance, Ihadbeen the financemanager. Soyou'realwayslookingfortalent,you'realwaysscoutingandgettingmeetingswithpeoplethathavebeenreferred.That'ssomethingthat'salwaysthereinthebackgroundevennow.WhenIfeltthetimewasrightwaswhenweactuallyhiredthesepeople.HenricHansson23:08Wasastrategyforyoutogetpeoplewithsortofknowledgeaboutthelocalsettingsandthelocalcontext?JohannesTraerup23:19Soforoperations,wenowhaveaguy,hewasoneofoneofthefirstemployeesactuallyandhe'sbeenaproductionmanager inother companies soheknowsabout that, andall theoperational things.Hehasthat specific knowledge and skills. Of course for finance, we found a lady who also has experience infinance,butI'dsayonethingthathastobecommonandoneofthethingsI lookat istheirabilitytobeorganizedandtobeabletoplan. I thinkthat'ssomethingyoucanveryquicklysensewithpeoplewhenyoumeet them, andmyexperience is that if youhaveanaccountingbackground, that's somethingyounormallygoto.Sowe'veactuallyendeduprecruitingquiteanumberofyoungaccounting,ladies.Becausethey'reyoung,theyareeagertolearn,thentheyhavethatstructuredmindbecausetheyareusedtodoing

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accounting.Someofthemhaveproventohavealotoftalent.Andsothenwe'rejust,youknow,trainingthemandspendingtimewiththem.AndsoIreallylikeaccountants.HenricHansson24:46yeah.Haveyouseenotherstartupsthathavenotsucceededwithfindingtherightstaff?JohannesTraerup25:08Sowhathappensisthatmanyofthesestartupsthatmanagedtoraisealotofmoneybecausethere'squiteanumberoftheminKenya.Inordertofulfilltheirscaleupplansandtheirambitiousplanstheyhireveryfastandpeoplebelowthemarealsohiredinveryfastandlargenumbers.Andthatmeansthatthatthere'snostructuresinplace,thereisnoprocessesinplacethatregardinghowthingsshouldbecarriedout.Thatmeansthatyougetpeoplewhoarenotempowered.Becausetheydon'tknowexactlyifthewaytheyaredoing things is the right way. I think that's the danger, when you hire too fast, especially in thisenvironment here where you cannot undermine the importance of training. I think that's what'shappening to a lot of the big companies, that they don't have a strong culture where people in thecompanyfeelalotofownershipandalotofempowerment.Thatrolloutplanhasjustbeentooambitiousandthey'vespenttoomuchmoneytotryandmakethingshappentoofast.Sothefoundationissimplynotstrongenough.Butit'salwaysdifficultbecauseallofasuddenyouhaveinvestorswhowanttoseethingsdevelopveryfast.Now,ontheotherhand,youareinneedofamanagerandyourorganizationneedstobeabletokeepup.Soyoufindyourselfinthatsortofabitofspace.HenricHansson27:05Iguessit'sabitofatradeoffbetweenthisinsanescaleupandalsoorganicgrowth.JohannesTraerup27:11Correct.Correct.HenricHansson27:15Thisisperhapsalittlebitofasensitivetopic,butthere'salotofliteratureon,youknow,foreignforeignentrepreneurs enteringKenya or and local entrepreneurs, locally born ventures perhaps.Do you see adifferenceinthewaytheyhandlethisprocess?Likedoyouseethatthatforeignfirmsstrugglemorewiththescaleupprocessortheyhaveanyparticularchallenges?JohannesTraerup27:47I think foreign firms probablymanage to raisemoremoney than the firm's that are founded by localpeople.That'ssad,butIamquitesurethat'safact.HenricHansson28:10Andyouthinkthat'sbecausetheygetthefundingfromtheirhomecountries?JohannesTraerup28:16Ithinkthatpartofthereasonisthattheygetfundingfromtheirhomecountries.ButIalsothinkthatitmayalsocomedowntoskillset.Imean,ifyouhaveaEuropeaneducation,youknow,you'veworkedinEurope,youhavetheupperhandcomparedtosomeonewhotooktheKenyaneducation.Andofcourse,now,whenyoumeetaventurefirm,they'relookingatyouasafounder,andevaluatetheskillsyouhaveand,andwhatyoucandooutofthis.HenricHansson28:49

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And,butintermsofthelikebusinessoperationsand,andtheirabilitytoactuallydistribute.Doyouthinkthatforeignfoundersarefacingotherchallenges?Haveyouseenthatinreality?JohannesTraerup29:05Well,Ithink,ofcourse,Ithinkthere'salwaysthatthingofunderstandingthemarketandtheconsumer.EspeciallyifyouaredoingFMCGyouhavetounderstandthecontextthatyouoperatein.Igetthatthatisanobviouschallenge that foreign founderswouldhave,understanding the local context.Understandingthelocalcontext.Definitely.HenricHansson29:35And,andsoyousaidlocallybornventureshaveadifferencebetweenthewaytheyfindfunding.Haveyouseenthatpanout,haveyouseenlocallybornventuresandthewaythattheyfindfunding?JohannesTraerup29:57I think therearemany levels in local companies.So I'msuremany local companiescando thesameassome foreignfoundedcompaniesrightand,andthere'salsosomeEuropeanfundedcompaniesthat failbigtime.Ithinkthere'sKenyanfoundedcompaniesthathavearealhardtimeraisingtheinitialmoneytogetstarted.JohannesTraerup30:46SoIthinkifyoulookatthecompaniesinKenyathathaveraisedafewmilliondollarsintotal.Startupssetup over the last say three years, you will not find a whole lot of companies. I mean, you know, theyprobablycouldfitintoarelativelysmallgroup.Thatisfounderswho'venowraisedmoneyfromaventurefund.Thenthere'sawholelotofothercompaniesthathaveabusinessideaandtheydon'tneedawholelotofmoneytodosomethingverysmallscaleandthat'swhattheydo,butIdon'tknowifthat'spartofyourscopeofwhatyou'relookinginto.HenricHansson32:01Yeah,it'sareallyinterestingpointanditseemslikeeveryonewe'vetalkedtohavemoreorlessthesameideaaboutthat.Ididn'tknowthatitwasthatwidespread,butit'sinterestingthatpeopleha'veseenthatsort of development happen. I just wanted to know, within social bites, are investors workingoperationallyinthecompanyoraretheyintheboardorhowaretheyactive?JohannesTraerup32:37Sowehaveaboardwhich ismadeupofmyselfandtwoof the investors.Andthenthere'sanumberofinvestors thatarenoton theboard.So theystillget themonthlyreport, so they'restillgettingupdatedabouttheprogressandtheystillreceivethefinancialsforeverymonthbuttheydon'tsitontheboard.Sowehaveaverysmallboardofthreepeople.MadsRobdrup33:35I think he's, he's trying to reconnect. But talking about the point you said before about these smallventuresthatperhapsdonothavethegrowthstrategytoattractVCfunding,whatotheropportunitiesarethereinordertoreceivecapital?JohannesTraerup33:55Well,maybe there's the accelerator programs.Maybe they offer some kind of assistance to help to getreadyforinvestors.Icanimaginethat'sprobablywheretheyfitin,theacceleratorstoalargeextent.HenricHansson34:17

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IthinkI'mback.YeahsowouldyousaythatyourinvestorsaresortoflikestrategicsparringpartnersdoyourightnowhowaretheysortofsupportingSocialBites?JohannesTraerup34:50It'smoreonastrategiclevel.Youknow,whenwehaveboardmeetingsthere'salwaysafewsortofhighleveltopicsthatneedtobeaddressed.Theycomewiththeirviews,theyareveryexperienced.Theyhavealotofprivatesectorexperiencesotheyactuallyaddalotofvaluetoourstrategyandourcompany.HenricHansson35:25Doyouthinktheycandosobecausethey'vehadthisexperienceofinvestinginventuresinAfricabeforeorinsimilarcontextsbefore?JohannesTraerup35:36Yeah.AndIwillsayalotofitisnotAfricaspecific.ThesamewouldberelevantifthecompanywasruninDenmark.HenricHansson35:50Andthen just to jumptoacompletelydifferent topic.Howdoyousee that thegovernment iscurrentlyimplementingsortoftheVCandearlystagefinancingforStar-upsinKenyarightnow?JohannesTraerup36:07Imay not be the right person to ask about that. Imean, if you askedme, I'd say I haven't seen it, butsomethingmightbehappeningthatIjustdon'tknowof.HenricHansson36:17Yeah.And in general, like,Are there any? I don't know, how is the regulatory framework sort of effectaffectingthewayyoudothebusinessatSocialBites?JohannesTraerup36:35Well,tobehonest,wedon'tgetsomuchsupport.Thesystemthat'sinplaceismoretomakesurethatweliveuptocertainstandardssothatismonitoringanddoinginspections.Theycometodoinspectionsonpremises,andsoon.Wedon'tsortofgetsupport.Idon'tknowwhatsupportthatwouldbeexcellent.Butweareonourowninthatsense.HenricHansson37:10Yeah. I see. Yeah. I think thatwe ticked allmy boxes here.Mad's I'm sure you have a couple of otherquestions.MadsRobdrup37:25Inrelationto this lastpoint, I readsomewherethat theNationalBankofKenya is loweringthe interestrate which maybe affects the private banks also, which should make it easier for firms to get capitalthroughdebtinthebanks.IsitsomethingthatyoufeelhasanimpactonsocialBites?Well,JohannesTraerup37:56No,notreally.Imean,loanswillstillbeextremelyexpensivecomparedtowhatyouwouldbeabletogetinDenmark. Imean, itwouldneverbeattractive forustogetabank loan inKenya.A lotof theseventurefirmsarealsoofferingloans.Notofferingbut,theyalsoprovidethatasafinancialinstrumentinsteadofequity to the companies that they decide tomove onwith, and I think those terms are probablymore

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attractivethangoingtothebank.Ifwewillgotothebanktogetaloan,Iwouldn'tknowexactly,butitw,itwouldnotbelessthananinterestrateofsay,9%.MadsRobdrup39:03Perhapsmuchhigheractually.JohannesTraerup39:06Okay,well,thenmaybe,youknow,yeah.MadsRobdrup39:08NotNotexactly.No,becauseIhavenotbeenintalkwithanybankseither.Butmyperceptionis15%orabove.JohannesTraerup39:20Oh,yeahprobably.Idon'tknow,tobehonest,butit'swaytooexpensive.MadsRobdrup39:26So,sothekindofcapitalthatyou'relookingforinKenyawouldalwaysbeequityfromoutsideinvestors.Isthatcorrect?JohannesTraerup39:36Well,Ithinkloancapitalisveryriskywhenyouareastartupinthisenvironment.Maybeeveryonewouldnot agreewithme,but that'smyview. So Iwould rather take equity and then try andnegotiate again.valuation,asopposedtogoingoutatthispointandtryingtoobtainloans.Maybethatthatwillbedifferentthreeyearsdownthelinewhenwearemakingprofitsand,andthingsarelookingverygood.Ortwoyearsdownthelineorwhateverbutatthispoint,Idon'tthinkit'sveryadvisableforveryearlystagecompaniestotakeloans.Ithinkit'squitereasonable.MadsRobdrup40:30Yeah.Ithinkyouhadsomeveryinterestingpointsaboutthenetworkingwiththeangelinvestorsaswellasventurecapital firms.Alsoconcerning the typeofventureorstartupthatyouwereat thatpointandwhether itmakessensetogo intoanacceleratororactuallymakingthe firminvestableandgrowingasyousaid,youhadmorefocusonoperatingSocialBitesthanparticipatinginaccelerators.Iwonderifyoustillperceivethatasagoodstrategy?Andinthatcase,whatwouldreallymakeitpossibleforyoutomeetthesebusinessangelsorinvestors?Wouldtherebesomenetworks?Anythingthatyouhaveheardof?Orthatyoucouldimaginebeingagoodideaiftheyexistedintermsofyouaccessingtheseinvestors?JohannesTraerup41:35Soyoumeanwhat Iwouldadviseothercompaniestodo?Ortipsonhowto findthese investors?Whatexactlydidyoumean?MadsRobdrup41:48I'mratheraskingintowhatyouperceiveas,asagoodstrategy.Wherewouldyougofromnowonintermsoffindinginvestorsnowthatyouhavespentallthesemonthspreviouslyonfindingcapital.SoIassumethatit'ssortoftoolateforSocialBitestogointoanaccelerator,wouldtherebesomenetworksthatyoucouldlookinto?JohannesTraerup42:16

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Well,Ithinkpeoplegointoacceleratorsfordifferentreasons,Isuppose.AndIthinkforalotofpeopleitdoesmakesensetodo.Especiallyiftheacceleratorcanprovideyouwiththeskillsandupgradeyourskillsandmakeyouinvestready.SoI'mnotsayingthatit'sawasteoftimeforeveryone.Idon'tthinkitis.AndIthinkitdependsonwhereyouareasacompanyandwhereyouwanttogo. Ialsothinkit'sdifficult forcompaniestogostraighttoVCsafterfoundingthecompany,right.Imean,mostVCs,theydon'twanttoinvestintocompaniesthathavejuststartedup,theywanttoseesometraction.SowhataboutwhatmypointisthatIthinkgettingthatinvestorbaserightisveryimportant.Sonotjustacceptingwhoeverwantsto invest into thebusiness,butactuallybeingverycriticalaboutwhoyou let in,and that that'sdifficultbecauseyouneedthemoneybutatthesametime,youdon'twantanykindofmoney.Sospendingtimeon that, actually taking our time to make it into a journey, that whole fundraise, where you do itthoroughlyyoureallytryandgettomeetasmanypeopleaspossible.Ithinkthatmakessense.Becauseyou learn a lot in the process, and it's a way of rehearsing your own pitch. Because they ask a lot ofquestions,it'sactuallyquiteafunjourneybutit'stimeconsuming.HenricHansson42:16Butyeah, thankyousomuch for takingyour time.How is it going forSocialBites?Nowyou'reback inDenmarkareyou?Areyougoingback?JohannesTraerup45:13I'mbackinDenmarkandit'snotgoingsowelllikeforanyoneelseatthemoment.Well,we'lljusthavetowaittoseehowthingsdevelopsowe'vehadtoscaledownquiteabit.Andwe'llseehowitgoesbutKenyaisprettymuchlikeDenmark.OfcourseyouhavetheslumsandthehighlypopulatedareasinNairobi.Theguyswholivetherewillcontinuewiththedailylife,moreorless,butinotherpartsofNairobistreetsareempty.Peoplearestayingindoors,peopleareafraid.Soit'schangedalottobehonest.MadsRobdrup46:01SohowaboutyourvendorsinMombasa?Aretheyabletogoaround?JohannesTraerup46:05Notreally.Imeanthere'sbeenalotofrestrictionscomingoutthelastfewdaysingovernmentsowe'vehadtoscaledownandgetafewofourdepotsactivatedandsendalotofourstaffhomeand,youknow,closedownproductiontemporarilyandallthosethings.Soit'sactuallyabitofamesstobehonest.Buteveryoneisinthesameboathere.ExceptinKenya,wedon'tgetgovernmentsupport.Transcribedbyhttps://otter.aiEditedbyHenricHansson

venture capital and the finance gap in emerging markets

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