Business Archives

Why do Highly Funded Startups Fail?

August 28, 2023September 11, 2023 4 min read

After almost ten years in operation, one of the most funded startups in Kenya – Sendy – recently closed shop. This comes after Sendy ran out of funds. Sounds weird? Yes, the company that was valued at over KShs 10 billion late last year ran out of money to pay salaries, rent, watchman… etc.

This seems to surprise many people who assume that a highly funded startup ought not to fail. Sendy had so far received almost KShs 4 billion from investors and as of mid-2023, it had spent all that money and was not making enough profits to survive without the need for external funding. How and why did this happen? How can a business burn through KShs 4 billion and still not make money?

Sendy is not the first highly funded startup in Kenya (and in the world) to fail. Kune Foods, Notify Logistics, WeFarm, and BRCK are some of the many that have recently met their demise in the rough waters of the Kenyan economy. To understand why all these startups fail, there is one misconception that people need to get rid of; that the death of a business is something strange or unexpected.

Death is Written

One thing is certain in business: death. It can come from natural causes (like Covid) or human causes (like mismanagement), but it will come sooner or later. It’s just a question of when. Death is more certain than taxes because some clever business people can avoid paying taxes. But death. Death is inevitable, and the average business today only lasts 17 years. In 1958, it was 61 years.

If you don’t believe me, try to name three famous companies that have reached their 200th anniversary.

This is especially true for startups, which tend to die faster than other businesses. Worse if they are tech startups. Tech startups have a short and flashy life, like Simon Makonde. They sprout up like mushrooms and in no time, they are worth more than many solid companies (Uber has a bigger market cap than Honda). And then, before the management can take their seats, tech companies disappear and leave no trail. Thus, it should not shock anybody that a tech startup closed shop.

Big Money, Short Life

Nevertheless, we would at least expect that highly funded startups would be better at escaping death. After all, money can cure a lot of things. Why then does a startup that has received KShs 4 billion end up not taking off? Are you saying that all that funding could not translate to a profit?

To answer this question, we need to understand what funding and valuation mean.

What determines the worth of a startup? It depends on market size and potential, and that is valid if the startup will be able to execute its vision. But even the potential of a startup is very subjective. At the end of the day, if a startup can tell its story very well and convince potential investors, money will rain. Whether that translates to profit is a different story altogether.

Funding is essentially a vote of confidence in the future of a startup, not the current state. Investors make a (calculated) bet and hope that their investment will pay off. When you hear that a startup is valued at x amount of money, it does not tell you how profitable the business is. The simplest deduction you can make is that some people believe that the future of the startup is big. Remember that those investors can (and often) get it wrong. In other cases, investment in startups works like a pyramid scheme where initial investors make their money and exit, and the last person will be left with a dead body in their hands. Only time can validate a bet made by investors.

The investors also know that they are making a gamble. Usually, the strategy is to identify several high-value startups and invest in them. Most will fail, but a few will succeed and earn you more than enough to cover your losses from the failed ones.

Back to Sendy

Sendy had a big dream. Imagine a Kenya where every delivery was done by Sendy. Online shopping, parcel delivery, retail goods, construction materials… that is a big market and if Sendy could hack it, they could have become an elephant (or a unicorn). Imagine the possibility of enabling a trader from Kitui to sell curio to buyers in Kumasi, both by moving the goods and facilitating payment. What a dream!

But in the real world, all dreams are not valid. To achieve that Sendy needed a miracle. They tried, they needed more time to keep trying and make it work, but they ran out of money before the dream could be realized. They were a big plane trying to take off from a short runway, and no one was willing to give them money to extend the length of the runway they had. The only way out was to abort the take-off.

Armchair experts are full of ideas on what Sendy could have done differently, but remember, it is never that obvious.

‘DM for Prices’

April 17, 2023 3 min read

One of the most frustrating things that people come across online is someone selling goods or services online and working hard to market them but does not openly display the prices of their goods or service. Instead, one is supposed to write them a message to enquire about the prices. Usually, there is a label that one should DM for prices.

Critics argue that this is tantamount to having a supermarket with goods very well labeled but with no prices. One picks something, then goes to the cashier to confirm the price.

That would be ridiculous.

But then, why do so many online merchants (especially on social media) run this model of business? Why are they not willing to openly display their prices so that people can make a decision quickly? Wouldn’t it help if the prices were open so that one won’t waste their time inquiring about goods and services which they cannot afford?

Turns out that this is not anything awkward, and it is widely practiced.

The Price is Never Fixed

At the local market where I shop once every week. The prices are not cast in stone. There is room to haggle over prices. The prices could change based on whether you are a ‘regular’ or a ‘visitor.’ The price changes depending on the time of the day. It also changes depending on the car you drive and the shoe you are wearing. Even the weather is a factor.

This is the exact opposite of what one would expect in shopping malls or supermarkets. Prices are fixed, and very transparent.

Many markets operate this model where the prices are negotiable. If you want to buy a shoe, the seller will encourage you to try it out and see if it fits. They will delay announcing the price in the hope that once you like the shoe, and it fits, you are more likely to buy it. Once they mention their price, you go ahead and bargain until both of you agree on a price that is fair to both of you.

The model is similar to what happens even with huge purchases like cars. There is an asking price, but the actual price that the buyer pays largely depends on their negotiation skill and many other factors. Even in public transport in Kenya, one needs to ‘discuss’ the fare with the bus conductor before boarding the vehicle, because it varies depending on many factors.

Risk of Turning Away the Buyer

In such a situation where the price is not fixed, the seller needs to be careful not to quote too low when a buyer is willing to pay a higher price or quote too high until the potential buyer is disinterested in the negotiation.

To guard against this, the seller wants the buyer to test drive the car first or even fit the shirt. Once they like it, negotiation becomes easier since the buyer has already invested some time and emotion into the transaction. They are more likely to buy the product.

I find the concept interesting, and it can earn you some great offers. It is not too different from the surge pricing adopted by Uber, or trading in the stock market.

Business on Social Media

When people move their business online, they carry the same principles they used in offline businesses.

Some merchants want you to get in touch with them so that they can let you know about the prices. They know that once you have started a conversation, you are more likely to buy. You are also likely to come back for a second time, and since they have your contact and know your interests, they can share with you more offers. This is the reason why they do not state their prices.

Unfortunately, social media is not a uniform audience, and hiding the prices ends up irritating some people. There are buyers who want to make a decision quickly based on the price, and there are those who want to negotiate a favorable price. It is not possible to please the two groups at the same time.

One, therefore, needs to weigh the risks against the benefits of the ‘DM for prices’ business model before adopting one.

But at least, if you want me to send you a message to enquire about the goods that you have posted, I hope that the price is negotiable, otherwise it does not make sense for me as the buyer.

The Challenge of Turning an Idea into an Income

December 2, 2022 5 min read

Tech product engineers consider themselves to be the geniuses of the 21^st century. They have disrupted the world with both hardware and cutting-edge software, and are still working on some cool stuff that you probably have not heard about. Programmers claim that they rule the world and that the solution to every problem facing the world is just a few lines of code away. This fuels the drive to create the next tech startup with the goal of becoming a unicorn.

However, often these dreams never come to be, in some cases, leaving a very demoralized potential founder.

It always starts with a person with an idea; the next big thing. But an idea on paper does not translate into a successful venture, or as they say in Kenya, vitu kwa ground ni different (on the ground things are different). Many software developers who started a venture with a product slowly abandon their pet projects and become resellers of existing products, or go into employment. It does not take long for someone to realize that it is easier to resell a product than to build your own from scratch. Building a product is hard and painful. The worst part is that even a good engineer needs expertise in the specific niche they want to disrupt. If you are building a solution for lenders, you need to fully understand how their business runs.

What are the challenges that keep people from commercializing and making money from their products?

Your Product is not Good Enough

Not everyone can create a product, even if they are good engineers. It is as simple as reading and writing. While many people can become very knowledgeable in a language, and master all the words possible, not everyone can write a thriller story or novel. And once you have written one, marketing is the other challenge that you face. Many great books have failed to fly off the shelf because marketing was not properly done. In a different scenario, poorly written books that have little or nothing to tell can end up becoming bestsellers. Many people have invested in creating products that simply don’t work. To be fair, many products fail even great ones. However, it takes determination, skill, great talent, and sometimes chance to get a good product.

If you have a product that you want to launch, you may consider getting experienced people who can tell you whether what you are doing is nonsense or the next big idea. Mentorship is important, and people with expertise are able to identify what can work, what may work, and what will definitely never work.

Geographical Barriers

In 2012, when I was required to do a final year project, I was looking for the simplest solution that could give me an easy time and a good grade. I came up with a noise meter that could report via SMS, as well as issue alerts on excess noise depending on the set levels. After school, I tried to find a practical application for it but there was simply no market, and thus no motivation to commercialize the project. Three years later, a company was founded in the US to offer the same product. Airbnb hosts love the idea.

The problem was that the geographical location I was in did not have a market for the product. Somewhere in a different country, it would have made sense. When Google launched a Personal Safety app that detects car crashes and calls 911, I saw some people in West Africa who already had done that years earlier, but they never made news, and possibly sales.

Marketing Skills

When a friend actively sold software, he used to marvel at the great opportunity that existed in the market. He had taken time to study the market and the competition, going into detail to understand what it would take to sell. There were many competitors with inferior products to theirs, and he knew that it would be easy. It did not take long for him to realize that some of their competitors were outdoing them in sales, despite the fact that he had a superior product. Today, he still keeps up with the industry and he knows better; in some cases, the sale comes first, and the product comes second.

Marketing is key, and even if you had the cure for cancer but you cannot convince the world to use it, you are as good as without a product. Unfortunately, many people who come up with products have poor marketing skills. A partner with such skills can help.

Lack of Funds

It requires money to make money. You need to have a business idea that can bootstrap, or else you have to turn to angel investors and venture capitalists. Bootstrapping requires a product that will sell easily with minimal input so as to generate the resources that will fund further development. This is hard, and most people would require an external investment in order to push their products out there. Unfortunately, VCs and angel investors are not that easy to come by, and this is where one needs networks that can help build credibility. Most innovators find themselves limited when they start looking for funds.

It is not just the business funds that may hinder the growth of a product. One other factor to do with money is the background of the would-be entrepreneur. People who have a social safety net such as wealthy parents are able to venture into entrepreneurship more easily because there is always a fallback plan. This helps them to build a form of risk-averseness that encourages entrepreneurship, knowing that they do not risk starving to death.

Conclusion

The world is full of so many people who have great products but cannot make money out of them. It could be due to a lack of entrepreneurial skills, a lack of money to monetize their innovation or simply environmental factors such as geographical location. The best we can do for them is to provide an environment where they can try out their ideas, such as incubation hubs, and also help them to get the right partners who can help jumpstart their ventures.

The Challenge of Recruiting from a Market with a High Unemployment Rate

October 27, 2022December 2, 2022 3 min read

Ever wondered what recruitment looks like from the side of the employer, especially for small businesses?

Most people apply for jobs while assuming that the recruiting person will read through their applications in detail, and with the best intention in mind. They will fill in the blank spaces and will give the benefit of doubt where details are not clear.

Unfortunately, this is not usually the case.

Screening Challenge

I once did some recruitment and that is when I realized how hard it is to carry out recruitment in Kenya. With so many jobless or underemployed people in Kenya, a simple advert for an internship that is not very widely shared will result in hundreds of applications. There are reported cases of a hotel advertising for 15 positions and thousands turning up for the interview. This is where it becomes a nightmare.

How do you go through 100 CVs and application letters to get 3 candidates to interview and eventually hire one? If you are short on resources, as most SMEs are, the first step you do is to start eliminating the candidates. Remember that most small businesses do not have a dedicated recruitment person.

You ignore the CVs that you do not understand. You ignore those that lack essential information. You look for evidence that someone has relevant knowledge through what they mention in the CV.

For a developer, you want someone who says that they have created something, not the ones who say they know XYZ languages.

You are still not sure if the person you are hiring is a serial killer who has not yet been arrested. You cannot contact referees for entry-level jobs until the person has passed the interviews. In any case, referees are likely to tell you good things about the person, even when they know that the person has never woken up before 9 am.

This is why instead of advertising for jobs, small companies will just look for referrals. This is a common practice that means that those who do not have the networks may not get the jobs, even when they have all the skills. Those without networks and connections end up losing the game.

Job Scams

There are also many employment scams that seek to con people. People are asked to pay for job applications in nonexistent positions or to pay somebody who will help them secure a job position. Unknown to them, the job position does not even exist – just scammers whose end goal is to extract money from jobless people.

Others advertise jobs with the end goal of harvesting personal data. Want to get the phone and email contact of thousands of accountants? Just advertise for an entry-level/ junior accountant position with a very high salary. Data will fill your inbox in a short time. Nobody will ever be shortlisted for the position because the position did not exist in the first place.

Such factors make some people lose confidence in job recruitment systems and may not even apply.

Recruitment Agencies

One of the people that are filling the recruitment gap is the recruitment agencies. These agencies seek to connect job seekers with employers, and charge fees for the same.

To solve the problem of costs, some of these agencies have models where the applicant pays only if they get a job placement (from their initial salary), or the employer pays for the service. This model is becoming popular and leads to a more equal society, as opposed to one where the most connected people get all the opportunities.

In all these challenges and solutions, the one elephant in the room that must be addressed is the lack of employment opportunities in Kenya.

The Sachet Economy

May 30, 2022December 3, 2022 3 min read

Sachets dominate the retail industry in many parts of Africa. I had always imagined that Kenyans are the masters of buying goods in these miniature packaging, but Nigerians seem to be the masters of this game. This week, images of goods packed in sachets were all over social media with discussions about their costs and the impact of their packaging on the environment.

Why are so many fast-moving consumer goods (FMCG) packaged in sachets?

For those who know the industry, the answer is almost obvious. Fast-moving consumer goods are nondurable products that sell quickly at relatively low cost and account for about half of all the regular purchases made. They include products such as soft drinks, milk, detergents, cooking oil, cereals, kinds of toothpaste, and many others. They sell fast.

Small Purchases

They also sell small. One surprising piece of information that hit me this year is learning that more than 70% of all FMCG transactions that occur in Kenya involve consumer spending of less than KShs 55. This is a trend that has pushed manufacturers to package their goods in smaller units, usually targeting a specific price. If a certain product costs KShs 120 per kilogram, the manufacturer packages the products in 75 grams packages and sells each pack at KShs 10.

This is the lifeline for most people who have less than a dollar to spend every day and enables them to survive on a day-to-day basis. Take the example of informal settlements. In a place where there are many people earning casual wages, I am told that it is possible to shop for everything you need to prepare a decent meal for only KShs 50 (that was a few years ago). One would buy maize flour for KShs 10, cooking oil for KShs 5, Vegetables for KShs 5, onions and tomatoes for a similar amount, kerosene for KShs 10, Chocolate and sugar for a similar amount, and one is set to prepare a full meal. As a bonus, one could get a cracked egg for KShs 5 for a balanced diet.

With such a trend, sachets become very useful because they are cheap. Cheap for the manufacturer – not for the consumer.

Single-use Packaging

Besides targeting the poor, sachets are very useful when packaging single-use products such as the soaps used in high-end hotels. This also includes products such as sugar, tomato sauce, and shampoos. The demand for this continues to grow as the hospitality industry grows. These are sachets for the rich.

This use case may be more common in developed countries than in developing countries, but it is found everywhere in the hospitality industry.

Downside

The Cost

While this packaging helps people access goods at an incredibly low cost, the unit cost of these goods is way much higher than those bought in large quantities.

Consequently, the people who buy goods in these small quantities – the majority of whom are poor – end up paying more for goods than those who buy in huge quantities. The poor pay more than the rich for the same basic goods.

Environmental Concerns

Many of the sachets that are used today are never recycled. They end up in landfills, water bodies, and many other places, where they remain for hundreds of years. It is a curse we are living with.

How can we reverse this?

Is Kenya Becoming a Retail Deathplace?

December 15, 2020 3 min read

Kenya is quickly becoming a deathbed for giant retailers. In a period of about six years, several retailers that had a national presence have met their grave in what appears to be a national curse that befalls whoever attempts to win the retail

The state owned Uchumi Supermarket has died multiple deaths, and everyone knows that the remaining shell is just a cash cow for many corrupt stakeholders. Nakumatt followed suit, although it is not fair to call Nakumatt a supermarket, but a retailed supported money laundering platform. It was once the biggest retailer in Kenya but met its death in 2017.

Ukwala was rescued by Choppies, but this later found its death in the Kenyan Market. Shoprite also exited Kenya, although it was also exiting many other markets outside South Africa. Ebrahims closed down in 2019.

Tuskys Supermarket is on life support.

Impossible Failures

When Nakumatt shutdown, details of how the supermarket was operating shocked many. The supermarket was sustained by suppliers who supplied goods on credit and would be paid months later. Almost all the assets the company was using were leased, leading to a situation where the company was in debts worth billions of shillings but had very little assets. Disgruntled suppliers had nowhere to turn to.

This is the puzzle of the retailers that get goods on credit, sell in cash but suffer cashflow problems. What is killing them?

Bad management, fraud and outright theft are to blame.

Fraud in Family Businesses

One of the problems that have plagued major supermarkets in Kenya is that they are family ran businesses with little external oversight. There have been cases where directors and shareholder would get interest free loans from the businesses or simply get money transferred to their other companies.

In the case of Tuskys, this seems to be the cause of death. Nakumatt was also bleeding for the same reason. This could be a general pointer to how family owned enterprise are run in Kenya.

Theft in Retail

The retail sector is also a beneficiary of the rampant corruption that plagues the country. Kenyans holding political positions are extremely corrupt, but that is just a celebrity bias. Kenyans are corrupt at all levels, and any retail service provider will have to work very hard to stop their employees from stealing from them.

This is one reasons that were cited for the closure of Ebrahim supermarket, a 75-year-old retail chain in Kenya. Dishonest employees had milked it dry; never to rise again. I have personally witnessed an employee stealing from a supermarket and I have heard from a supermarket owner talking about the pain she went through as employees looted her business dry.

If you want to do retail business in Kenya, you must invest in good control mechanism.

The Future

Retails in Kenya seems to be a zero sum game. When Nakumatt died, Tuskys sprang up and grew quickly. With Tuskys on the deathbed, another giant is rising fast. Naivas now has 64 stores in Kenya, followed by Quickmart with 34 stores and Chanadarana with 20. Naivas and Quickmart have diverse ownership that includes foreign investors, and we hope that they will survive the curse that has stalked the Kenyan retail giants. Carrefour is also doing well, but they are all always doing well until the first domino moves and the whole thing crumbles.

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