Making an impact with hardware is all about CAPITAL.
But improving access to capital in poor countries requires a lot more than just founders and funders.
A dominant conversation in impact investing these days — perhaps THE dominant conversation — is how to get more capital into the hands of more diverse entrepreneurs. To many investors, it’s a problem of pipeline. “Investment ready” entrepreneurs in poor countries are simply few, far between, and hard to find — there’s no deal flow.
To many entrepreneurs, it’s a problem of bias. Local investors are risk averse, preferring safe foreign markets or high-yield assets like real estate, leaving international funding as their only option. But international investors make decisions too quickly, from too far away, and look for shortcuts — does the founder look, sound, and act like the founders I’m used to investing in.
In Nairobi, they’re probably both right. The average funding need for new ventures in Kenya is <$100k, meaning an investor with $10M to deploy (a small fund) would have to find ~100 companies that fit their thesis to invest it all. Instead, they look for larger deals that check all the right boxes. In the three years to 2017, one report found that over 70% of startup investment in Sub-Saharan Africa went to just four firms, all led by expats.
The solutions being footed to get investors writing more and smaller checks to a wider pool of entrepreneurs include increasing the use of grants, blended capital, and more patient capital, but few seem to approach the question of capital from beyond the “founders + funders” formula.
Just as hardware is about more than gadgets, capital is about more than just money.
Human, Social, Physical…
Financial capital — money — is fuel in the tank, and without it, your business isn’t going anywhere. It is a necessary component of entrepreneurship, but it is far from sufficient by itself. Access to human, social, and physical capital — the people, skills, networks, tools, and space that will allow you to make and sell your product — can vary greatly between entrepreneurs of different backgrounds.
Human capital is the single most important input for a budding entrepreneur. It can be hard to find the right people to hire if you didn’t go to a top university, or if there are no local firms that already make products similar to yours, or if you’ve never worked in the industry you’re trying to break into before.
Given that the median age in Kenya is just under 20 years old, most didn’t go to university at all, and that more than 80% are employed in the informal sector, using simple tools to make simple products (see Kenya’s National Bureau of Statistics for current data and Steve Daniels’ excellent book Making Do for a highly readable description of informal manufacturing in Kenya), if the business you’re trying to build is bringing a new hardware product to market, you’re going to have a hard time finding experienced and creative design and engineering talent. One Kenyan entrepreneur I know who makes industrial manufacturing equipment is resigned to training all of his employees from scratch, having struggled for years to find experienced engineers with both practical knowledge and relevant skills like CAD/CAM.
At the same time that finding skilled employees is a challenge, many young Kenyans struggle to build the networks of customers, suppliers, and funders that make a hardware business possible. “Social capital”, though not always a useful concept at the macro level, does succinctly capture problems of race, class, gender, and power at the scale of the individual entrepreneur. Those without strong social connections to resources are at an obvious disadvantage when it comes to finding funding, and the benefits of a well-resourced group identity extend beyond just access to finance.
Somewhere north of 63% of firms in Kenya are owned, at least in part, by non-Africans (current data can be hard to find given varying definitions of foreign ownership and Kenya’s large informal sector). Within formal manufacturing, growth in value-added production is dominated by family-owned firms of Asian descent. In the early 1900’s, the British colonial administration recruited thousands of Indians to build a railroad from the port in Mombasa to Uganda. The new immigrants were also hired for most administrative positions within the East Africa Protectorate. Though largely prevented from owning land, they were allowed to reside within Nairobi (predominantly a white settler town), and put down roots as businessmen, merchants, and manufacturers. Until independence in 1963, black African Kenyans found few opportunities for work other than as second-class laborers. To this day, the Indian diaspora in Kenya relies extensively on networks abroad for funding, technology, and talent. Chinese, American, and European entrepreneurs in Kenya do the same.
One of the more surprising ways I saw this discrepancy manifest over the last few years was during a workshop we hosted at Gearbox Kenya with the University of Edinburgh. A group of product design students from the UK had come to Kenya for a week to investigate the environmental sustainability of the solar home systems made popular by mobile money and “pay as you go” purchasing models. We paired them with a group of Kenyan engineering students and Gearbox members. They spent several days interviewing solar retailers, suppliers, and customers around Nairobi, documenting what they learned, and brainstorming ideas for how to build a more sustainable solar powered lighting system.
The British students predictably learned a lot (most had never been to an African country before), but I was surprised by some of the Kenyan students’ takeaways. None of them had ever been taught that customer research was part of designing and making products (their education had focused exclusively on mechanical or electrical design, mostly in books). Almost all thought that if they went to these same retailers, suppliers, and customers on their own (not accompanied by representatives of a foreign university), that they would be viewed with suspicion and that their questions wouldn’t be answered. Every one of them thought that these foreign students were more likely to be trusted and welcomed in a business environment than they would be as Kenyans. In this scenario, their position as privileged outsiders gave the British students better access to local networks than the locals.
Access to physical space varies across Nairobi as well. The wealthier parts of the city feature gleaming office towers and leafy residential neighborhoods modeled on converted colonial villas. The poorer neighborhoods range from tin-shack slums to cheap cinderblock apartments. Conspicuously absent throughout the city, if it’s what you’re looking for, is mixed-use light industrial space. Apart from the outdoor premises of “jua kali” artisans (the name “jua kali” itself means those who work under the hot sun), the business of making things is largely relegated to one part of town, aptly named the Industrial Area. It is a case study in dysfunctional urban development.
Originally designed to connect Kenya’s manufacturing sector with the railroad, the infrastructure in Industrial Area has failed to keep up with both population and productivity growth. The streets and pipes are clogged. Electricity is unreliable. The buildings are mostly large, cinderblock warehouses. Despite the fact that most are crumbling with age, occupancy rates average 90% and rents are rising at 8–10% per year. Flexible leases for less than six year terms are nearly impossible to come by, and a “goodwill” payment of two to three times the rent is often required to be allowed to sign a lease at all.
The result is that many young Kenyan hardware entrepreneurs are setting up shop in kitchens and living rooms (most Kenyans don’t have garages). If they have enough cash to hire a small team, they might rent a house on the far side of town and convert the backyard into a production line (I visited one such team making cookstoves in the garden). It can work in a pinch, but it can also mean a four hour trek each time they need to venture into Industrial Area for materials thanks to Nairobi’s legendary traffic jams.
It’s hard to appreciate the difficulties the inaccessibility of space creates for Kenyan entrepreneurs without contrasting it to somewhere else. We did a project a few years ago at Gearbox Kenya — before we had built our first space or acquired any equipment — that required us to build some wooden signs. They were self-supported, three-sided triangles, about 4 feet wide to a side and 8 feet tall. A simple frame with 3mm plywood faces. I used to occasionally make signs at my shop in Brooklyn and had made this exact design before. If I had built this project in Brooklyn — starting from scratch with no space, equipment, or materials — I could have acquired everything I needed (including temporary workspace that only billed for the days I needed it) within 24 hours and finished the project within 48. In Nairobi, it took us just under two weeks. Half that time was spent finding space to work in, and the rest was locating, ordering, and moving tools and materials across the city. Multiply that delay factor across five or six projects, and suddenly something that should have taken weeks is taking months. What is a minor annoyance for a simple sign building project is a major cost for a small manufacturer who could easily burn through $5,000/month or more.
The quality and availability of space in rich-world cities is something many of us take for granted. That statement might inspire outraged gasps from anyone who has struggled to find workspace in cities like London, Boston, New York, or San Francisco, but in these relatively old cities, what is now the city center used to be the industrial edge of town. You can find appropriate space for light manufacturing in almost every neighborhood, and there are community development organizations like LISC or BARCO working to make it affordable. Many of the old warehouses in these cities have been converted to trendy lofts and open-floor plan offices, but a lot of them also support the creative industries, artisans, local manufacturers, and startups.
Nairobi has no equivalent. You can either pay through the nose for an overly large, crumbling old warehouse in Industrial Area, or set up shop in your kitchen. In a city that is only about 100 years old, there never was an industrial center of town, and new construction in industrial parks and export processing zones caters to established firms on the extreme edges of town, designed to provide easy access to the ports.
None of the challenges I’ve described here can be solved with financial capital alone. Putting more money in the hands of Kenyan hardware entrepreneurs will not increase the number of skilled, local designers and engineers available for them to hire. It won’t automatically connect them to closed off networks of buyers, suppliers, or funders. And it won’t help them find the right kind of space if no appropriate spaces for low-volume manufacturing are available on the market.
That’s certainly not to say that financial capital isn’t needed, but those that want to increase access to capital in emerging markets would do well to think about capital in all its dimensions. Hubs for hardware entrepreneurs — incubators, accelerators, coworking spaces, makerspaces, and fab labs — play a vital role in increasing access to the human, social, and physical capital required to get a new manufacturing business off the ground. As focal points for financial capital, they also serve as the “wide end of the funnel”, attracting large numbers of early and idea stage entrepreneurs and filtering the best to the top.
For funders looking to solve the problem of low deal flow in poor countries, investing in ecosystems can be a great way to put more capital in the hands of entrepreneurs who are not yet “investment ready”.
Our next post will dive into some of the new tools we’re developing at the Gearbox International Foundation to leverage commercial capital to finance nonprofit ecosystem partners like Gearbox Kenya.
