Kenyan start-up founders learned how to prepare for due diligence and attract funding from investment professionals at an event in Nairobi.
Due diligence is the detailed examination of a company and its financial records before becoming involved in a business arrangement in order to analyse and mitigate risk from a business or investment decision.
It involves examining a company’s numbers and comparing them over time, and benchmarking them against competitors.
Zaina Otieno, an investment associate principal at CrossBoundary Energy, which invests in renewable energy projects in Africa, told ventures to organise their materials and financial documents to give potential investors a seamless experience in the due diligence process.
“Look investable; having clear documents and a financial model makes sense for investors looking to invest in your company. It is also advisable to collect as much information as you can; save the material from your engagements with former potential investors so the others you engage with in the future can rely on them as well,” she said.
Otieno was speaking in a panel discussion alongside Eric Muli, the founder and CEO of the Kenyan tech credit start-up Lipa Later, and Eugene Gikonyo, an investment associate at the Global Innovation Fund, which provides grants, loans, and equity for social innovations targeted at improving the lives of poor people.
Muli, whose buy now, pay later (BNPL) platform acquired the Danish e-commerce start-up Sky Garden at the close of 2022, noted that proper organisation of a venture’s documents makes it easy for investors who have a wide range of companies to choose from and add to their investment portfolio.
“As much as some investors are thorough and the due diligence process can take months, think of them as people without too much time to spend when you organise your documents. Make it easy for them to find what they are looking for,” he said.
Gikonyo advised start-ups to be transparent and honest about their strengths and weaknesses and to avoid exaggerating their numbers or hiding their challenges.
“Don’t oversell yourself; be realistic about your projections and assumptions. Investors will appreciate your honesty and trustworthiness more than your inflated figures. Also, don’t be afraid to share your challenges; investors can help you overcome them or connect you with other resources,” he said.
Muli advised start-ups to organise their materials in a way that makes it easy for investors to find the information they need, without wasting too much time.
“Some investors are thorough and the due diligence process can take months, but think of them as busy people who have many options. Don’t make them dig too deep for information,” he said.
Gikonyo stressed the importance of understanding the cost structure of the company and being realistic and accurate about the numbers.
“Investors rely on how precise the information you present to them is. We have seen cases of early-stage start-ups that have costs that are not accounted for properly or do not match up with profit margins, and that scares away investors,” he said.
The professionals also encouraged start-ups to conduct due diligence on potential investors, to save time and find the best fit for their companies.
Otieno suggested checking their investment portfolio, their track record, and their impact.
“Do a background check on them. Do they improve companies or slow them down? This will help you evaluate which investors are likely to say yes or no, depending on their history,” she said.
Muli shared his experience of facing many rejections from investors and urged start-ups to be resilient and learn from feedback.
“Ninety-five per cent of investors have said no to us, so we have learned to be strong and cast our net as far as we can. If it is not working, it could be a sign there is something you are doing wrong,” he said.
Gikonyo also advised founders to have a long-term view when engaging with a partner, and evaluate what value they bring to the company, beyond money.
“Look at the additionality they bring, such as whether they are more focused on environmental, social, and governance (ESG) aspects or impact,” he said.
The event was co-hosted by Founders Factory Africa (FFA), an early-stage investor in African tech start-ups in sectors such as health, energy, fintech, and education, and A&A Collective, a global community of mid-level professionals in the African tech and investment space.
FFA has invested in Kenyan start-ups such as BuuPass, an online ticket-booking platform that raised Ksh.163 million ($1.3 million) in pre-seed funding this year, and Zuri Health, a digital healthcare provider that raised Ksh.131 million ($1.3 million) in pre-seed funding in 2022.
In 2022, 63 Kenyan start-ups raised funding, with the country’s running total for the year standing at US$506,686,000. This is approaching double the US$291,983,000 raised by Kenyan start-ups in 2021 and represents a record annual total for the ecosystem.
There are currently more than 300 tech start-ups in Kenya. The average Seed Round in Kenya is worth $175,00 and the average Series A is worth $1.9 Million.