What I Learned Funding Self-Employed Founders in Kenya and Nigeria

It’s hard to have an ideological vision of the future when you’re hungry. I don’t mean merely hungry in the sense that you missed breakfast and it’s about lunchtime. I’m referring to the hunger of being self-employed in a developing country in Africa, with only a few prospects for growth and a severe lack of financial capital for operational sustenance. On a trip to Kenya in 2018, I remember observing this flavor of self-employed entrepreneurial hunger, vowing to one day make a positive difference in this arena. In 2021, I had the opportunity to do just that, founding Giving Desk while completing my MBA. My dissertation was on the topic of lowering debt default rates among small businesses in Kenya using artificial intelligence, with my research serving as a launchpad for initiatives to come.

Nigerian Naira Banknotes and POS Terminal. Courtesy of Wirestock.

The Journey

Covid-19 travel restrictions made opportunities for a physical presence working with companies across Africa quite difficult. To overcome this, I called upon a network of colleagues throughout the region to help scout and vet entrepreneurs in need of some assistance. We leverage a CRM from Monday.com to track and monitor potential investment opportunities, manage contracts, and track entrepreneur journeys. I leveraged my own funds to lend and invest, via convertible notes, to micro-organizations in the sectors of financial technology, agriculture, logistics, web development, wholesale, consumer retail, automotive repair and more. When I met with most of the founders who’d been introduced over video chat, I explained how these new funding opportunities were experiments geared towards understanding their roadblocks and identifying ways to overcome small business capital access challenges. Sometimes, the tears of joy given the opportunity to sustain or grow founders’ businesses were more than enough reimbursement: loan repayment terms voided, stock options unexercised. Obviously, this form of giving isn’t a very sustainable model. The goal was to develop a model that could be based on these experiments.

Here’s What I Learned

• Limited access to debit cards from Visa and Mastercard across unsalaried employees in Africa makes it incredibly difficult for small businesses to use cloud platforms that are essential to modern small businesses. Platforms like Wix, Squarespace, Google Ads, and more are virtually inaccessible. In Kenya, most consumers and businesses transact with M-Pesa. However, this M-Pesa payment method is not accepted on most popular global platforms that outperform local cloud solutions suppliers by miles.
• When a self-employed founder is seeking funding for an ad campaign or inventory acquisition, it’s usually better to make the asset acquisition on their behalf. It can be incredibly difficult for founders to decide between allocating financial resources they’ve received toward the tools their businesses need and taking care of short-term personal/family support obligations.
• It’s generally a good practice to have a third-party point of contact in the form of a representative from a company’s supplier. This helps to achieve updates when a founder is having a rough time with the business, and as a natural result, becomes largely unresponsive to investor communications.
• If possible, create as many incentives for longer-term financing opportunities. This ensures a less short-term mindset, especially among founders that have chronically near-term personal needs.
• Credit bureaus and ratings can be difficult to secure and often can be unreliable in many of these regions from my experience. While collateral is useful, it can often be negligible or equally difficult to secure against financing. To address this, beginning a financing relationship on a small trade financing basis can be extremely useful in contributing towards an internal rating. This requires additional overhead, but the tail risk of larger abscondence lowers.
• The importance of proper bookkeeping and accounting practices on both sides of the equation is of vital importance. Many of the founders I worked with did not have professional accounting and bookkeeping practices and policies in place. This is incredibly normal for startups in any region of the world, but it is incredibly pervasive among small businesses in emerging markets. Benefits abound when these tools and internal training for portfolio companies and internal sales teams are available and encouraged. The quality of this training and corresponding workflows/tools cannot be understated.
• Small businesses in Kenya and Nigeria that are in the agricultural sectors are generally more reliable regarding mutually beneficial longterm partnerships. This is partially due to the more straightforward natures of these businesses and typical prior experience with lending, trade financing and equity partnership relations, I’ve found. When just getting started or focusing on a more risk-averse strategy, this would be the sector of choice in emerging economies in Africa in my opinion.

Solutions: Academic Research vs. Reality

My 2022 MBA dissertation concluded that lowering default rates among small businesses in Kenya was largely dependent on loan officer training and context-specific corporate practices by lenders. It further went on to recommend newer types of financing models to address small business-specific needs, such as incorporating relevant educational programs that could unlock funding and evolve by leveraging the right types of machine learning tools to better allocate financial resources to companies.

However, from my personal experience and based on reflection on these experiences, it can be incredibly difficult to bring about these types of recommended changes and internal processes at lenders. This is not only because of corporate bureaucracies, but also due to various regulations and industry norms that firmly sit between existing practices and practically anything new.

One of the most interesting things I found throughout my experiences financing African startups came by way of a web development founder we were working with. He was struggling a bit in securing web development contracts, while some of our companies were in need of financing to assist with website development costs. Meanwhile, I’d funded a food delivery application in Nigeria that relied on regular automotive maintenance for its drivers. Concurrently, there was an automotive repair operation we’d funded in a nearby neighborhood. None of these companies or founders knew of each other. The network-effect model was beginning to take shape. We had a trade financing company in Kenya that needed more customers and a mint farm in a nearby region that needed more trade financing capabilities for its customers to secure sales at harvest. As the network of investments grew, so did the opportunities to connect these businesses we had experiences working with. By beginning to connect their human resource, sales, and other resource capacities with one another, economies of scale could begin to provide these companies with competitive advantages. In my opinion, the future of growing and improving financing opportunities, as well as overall small business growth metrics, in developing nations is both financing and connecting good businesses with one another. Once critical mass is reached, these new supply chain networks and resource-sharing entities become more than the sum of their parts.