A report by the Central Bank of Kenya showed that banks turned away 28% of all SMEs that came knocking for credit in 2020. Microfinance institutions reported even a higher percentage.
Even local startups have faced the same challenges. While there has been a lot of funding for startups in Kenya, Kenyans don’t seem to be getting the capital. Out of 17 startups that raised more than $1 million in Kenya in 2019, only one is ran by local founders.
Why does this problem exist, and what could be a likely solution?
One fact is that capital is usually a result of relationships, and this is why family and friends come on handy when starting a business. They are very likely to fund your project. This is also replicated with other financiers.
While banks will do their vetting and ascertain if it is worth offering a credit facility, there is another factor that determine whether one will get money from a lender or not.
Often, people will tell you that you need to have a relationship with a bank for you to get a loan. While the relationship refers to your banking records, knowing someone in a bank gives you an added advantage. If you know your branch manager in person, chances are high that you can get a loan for a business, if you have the right model. The bank is made of people, and these people make decision and take risks based on who they are.
This is also the case in venture capital where people who have greater networks in their circles are more likely to get funds. Those who have been funded before are more likely to be funded again, and expatriates seem to be winning the funding game.
In the Kenyan context, SMEs need to build these relationships that can help them get capital.
Lack of Capital Could be a Warning Sign
A disclaimer though, it is not all about relationship. One needs to have a viable business model.
"One fact is that capital is usually a result of relationships, and this is why family and friends come on handy when starting a business. They are very likely to fund your project." - Jacob Mugendi ( Tweet this | Share on WhatsApp )
Lack of funding does not necessary mean that the right people are not spotting your business or you do not have the right relationships. It could also mean that they do not have confidence in your business, or your business model. It is the reason why it is said the first source of capital is usually family, friends, and fools. Fools because there is so much risk associated in seed venture, and most people who jump into it do not see the risks involved. Those who see and know the risk will keep off.
If no one is interested, perhaps you should reconsider. The idea could be great, or even ahead of time, but if people cannot see how you are going to make a sale, then maybe even potential customers don’t see how your product will help them. It does not necessarily mean that you are wrong; twenty years ago, some people would not have imagined that there would be a huge market for phones with cameras.
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