Wednesday November 29 2017

Funding troubles of Uganda’s tech start-ups

Funding troubles Uganda tech start ups Innovators incubator hub

Innovators converge in an incubator hub in Kampala. The government of Uganda has put aside Shs15b to support incubation of innovation. PHOTO BY RACHEL MABALA 

By Eronie Kamukama

Uganda has been ranked as the world’s most entrepreneurial country by Global Entrepreneurship Monitor (GEM), recording the highest youth entrepreneurs with 55.6 per cent of the youth population involved in new or established businesses. In the explanation, some analysts have said Ugandans are opportunists by nature. In other cases, it is because of a high unemployment rate.
While that could be true, Mr David Gonahasa, 32, the Innovative Achiever of the Year according to MTN’s 2017 Innovation Awards, was not looking for a job. After working in the mobile payments and banking sector as the commercial manager of MobiCash Africa, he realised there was a lot he could do in the financial domain.
He could not go to that space because it was very crowded. Other e-commerce businesses that seemed ideal at the time did not make sense.
Then he realised, the travel space was uncluttered.
“If you look at numbers in Uganda, you have 1.5m people in the middle class and then you have 350,000 people traveling. This means that there are 1.15m people who can afford to travel but are not doing so,” he says.
The African travel space also beamed with potential.
“I realised it is possible to begin a company here and take it to Africa as the most scalable space. There is so much untapped tourism potential, untapped travel potential; you have airlines which are empty and others folding constantly,” he says.
In February 2013, he quit his Shs7m job, sold his land worth Shs40m, and set up Roundbob.com, an online travel booking platform which helps people find places they want to travel to and save for that journey.
In reality, he walked into the company with Shs7m after paying off some debts. His house at the time cost shs950,000 so he cut back on that cost to fund his new business. With two months’ office rent in Bugolobi, a team, three computers and basic Internet, he started out. Three months later, a friend offered a $20,000 (Shs50m) loan.
This enabled the indebted company to cover hosting, platform development and developer consultancy costs.
Trials and tribulations
The Shs50m gave foundation for business as Mr Gonahasa managed to hire a team, complete the platform and take it to the market. The team then scrambled to test the platform in the market with a travel product. It left them at a loss.
“As a starting company, selling Shs15m makes you believe you have cracked it. When we got out there, it rained and it was a huge disaster. We had to give refunds. But that shows you the experiences we were learning and how best to handle our market,” he says.
In January 2014, they launched a platform that crushed on the same day, prompting the startup to quickly upgrade the server from $100 (Shs364,000) a year to $50 (Shs182,000) a month. This was money the business hardly had.
One week into the launch, the business got a deal from Airtel to provide travel packages to take 15 people to Cape Town to watch the CHAN tournament. It was a good start but efforts to earn a return were watered down by Airtel’s 45-day payment period.
“We had to borrow money from a loan shark at 10 per cent to finance this deal. Airtel paid 10 days late because of some issues; the Shilling had weakened against the dollar, our client booked late. We were supposed to make a profit but we lost about Shs6m and we were in a hole again,” he says.
Fundraising drive
By March 2014, all Mr Gonahasa had, was a good platform and a good pitch deck (business model, investment kit and projection).
The team went out fundraising heavily, looking for money from local angel investors (affluent individuals who provide capital for a business start-ups, usually in exchange for convertible debt or ownership equity) since Roundbob.com lacked a track of a financial record.
While trying to raise Shs360m in May, Mr Gonahasa met two brothers that agreed to push the company forward. But the challenge was they would get the money in bits to manage risks.
“There are no examples of success stories in the tech market. For them agreeing to give us that money was amazing,” he says.
Expos were done to get content partners but even as their investors fed the business with more money, there were no results.
“It is like they were throwing money in a hole. We had periods when we went completely dark; we were out of money. The office closed for months,” he says.
Luckily, the company started getting partners, something they had initially failed at because of being “African.”
“No one takes African startups seriously. That is the unfortunate truth,” he says about funders.
“Sometimes very many of us (the entrepreneurs) are not very serious about our businesses and sometimes we are competition entrepreneurs, going from Hackathon to Hackathon or event to event instead of building traction for the business.”
As Roundbob.com began to get more traction given its technology capacity, investors became confident. Unfortunately, they suffered from a problem faced by many startups. One of their weakest points was that they were building a product and not generating any revenue.
“We were stuck at just building and for you to make money, and raise money in Africa where there is not a lot of NGO financing, venture capital is very risk averse. So the challenge is you have to show that with this money, you need to give me more money,” he says.
A decision to recruit an experienced travel general manager (GM) was made; after all they were just a group of brainy people without experience in the travel industry. As soon as the GM set up a travel agency, the cash inflow started to finance the startup.
“We realised the best way to finance the business was through revenue as opposed to fundraising,” he says.
But the challenge was that the business was not keeping good books. And later, the team found itself in a dilemma after the revenue started piling. Technology development stagnated, forcing them to refocus their energies.
Today, Roundbob.com is starting to change its balance sheet thanks to an Arab investor with travel experience from Dubai. Early this year, he offered Roundbob.com a deal of Shs450m (a mix of cash and technical assistance). The startup now sees far more beyond the cash and is riding on the experience on board.
“From that point, we had some cash. We were running better financial structures as got finance people to run the business. In one month, our numbers went up from Shs54m to Shs108m in sales in March this year, which we did not have before because we were focusing on getting the platform right,” Mr Gonahasa says.
Over the years, Roundbob.com has built experience, strong team, re-engineered the product but is yet to show revenue. Mr Gonahasa admits the startup is still a loss-making business and struggles to run daily operations. All he can wait for now is his big payday when the company becomes profitable.
Whereas growth of digital economies depends on creating relevant, accessible and affordable applications, access to funding remains arguably one of the biggest problems as people like Mr Gonahasa innovate around market problems. It is hard to borrow money from a bank and finding angel investors is very tough in this market.
That is why organisations are rising to back companies developing technology solutions for the market. For instance, MTN Uganda, having discovered a digital innovation industry, has just handed over Shs92.7m to nine startups out of more than 250 entries in its 2017 awards.
The government of Uganda has put aside Shs15b to support incubation of innovation.
Under The Tony Elumelu Foundation Entrepreneurship Programme, participants are now eligible for up to Shs36m seed capital to implement business plans.
So many Ugandan tech startups look up to donor funds and grants and these opportunities are no longer tied to geographical boundaries.
Companies like local online shopping site Intership UG have gone as far as Switzerland to compete for Shs3.6b in equity investment.
“A lot of Ugandan startups are companies that run on free money,” Mr James Makumbi, the chairman ICT Association of Uganda, said last year during the Seedstars World competition for business startups.
“But we are looking for people who can sustain themselves and keep attracting that funding, that can remain sustainable.”
The search for grants is partly why the Ugandan landscape suffers from building an app just to win an award yet investors are now looking at business models that are sustainable.
“We want you to be here six years down the road and not to just win this award because we have had teams that submit a fancy application and we thought they would survive yet all they were looking for was the Shs10m,” founder Raintree farms, Mr Teddy Ruge says.
But it will take more than the efforts of these organisations as grant money is only a drop in the ocean. Experts say it is up to entrepreneurs to champion profitability in their companies.
Mr Ruge says from a business perspective, profits are the indicators of sustainability of a business and that the roadmap to creating a profitable company has to include talent - the team behind the innovation understanding where the product is going.

FUTURE

The future is bright, but for those building for future market opportunities, Mr Ruge says.
“78 per cent of the country is under 30. How many of those have money to spend on your app? However, look at five years down the road and that demographic will have shifted with more smart phones in the market, a larger middle class to buy your product and the market will be the whole East African region,” he says.
Stanbic Bank head of business banking Mr Wayne Cook says there is potential for improvement among innovations as long as there is more access to capital.
“Startups would succeed but more particularly if people are helped to access them in a responsible manner,” he says.
From lessons learnt, Mr Gonahasa says what it takes to build a business is “grit and step-up.”
“It is one thing to say government should give us money but the first thing is changing mentalities,” he says.
He says there are structures to fundraise from non-governmental organisations, banks and more risk taking investors since it is unfortunate that the economics of this market are different and there is hardly any “patient capital.”
Mr Olivier Prentout, MTN’s chief marketing officer, says the global digital economy is estimated to account for 5 to 20 per cent of global Gross Domestic Product. But Ugandan investors are willing to put money in enterprises like real estate where returns are guaranteed.
“You have to be able to show a valid business case and then start to raise money,” Mr Gonahasa says, adding: “Opportunity cost of investing in tech startups is very high. We are very risk averse as a market but if that changes, we should be able to see a lot more happen.”

Expert’s view

Simon Kaheru, lead analyst at Media Analyst, says many startups finance themselves or use angel investors (that include family members). There are some that seek funding from projects and venture capitalists, hence the participation in an increasing number of awards and competitions.
He says investors are interested in innovations and a crop of young people that show capability and whose energies can be applied elsewhere as well.
“They invest in people, not just ideas,” he says.
On whether Ugandan tech startups have reached their big payday, he says, not yet.
“This is mostly because not all of them can possibly do so, but also because we still have too few funders in this field, in Uganda.”

Getting that funding
Mr Gonahasa says tech startups that normally work in the market are those solving problems. He thinks business plans make no sense because to get your pitch right with investors, you have to be able to articulate the solution very well because if you do not, chances are slim that you can build a product that solves the problem. Then, define the market and break it down to the addressable and obtainable market.
Investors will look at your revenue model, so have clarity around it. You then need to look at your competition.
Lastly, be clear on what you want from the investor in terms of how much you need and how you will market.
“Focus on day one on the revenue, raise small amounts of money, document each stage and as you do that, you will raise big money,” he says.

On the continent
According to a report by Disrupt Africa, non-African founders are more likely to get funding. This is why experts from venture capital firm TLcom are advising investors to focus on startups that have seen strong revenue growth over a sustained period. TLcom thinks that African startups selling to local markets have less opportunities and less money right now, but believes good ideas will get funded. For those that have found the funding, Mr Kaheru says, “When one gets funding, they must make sure they get the right mentors and professionalism as quickly as possible - legal, financial, marketing and all the bells and whistles have to be considered.”

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