Institutional avoidance strategies

We found that as a result of the institutional barriers such as the lack of reporting

standards, inadequate supportive industries and regulatory uncertainties, many VC

firms turn their investments to foreign founded ventures. It is perceived that foreign

founded ventures are not as heavily affected by the institutional barriers and are thus

better structured in terms of governance and formal reporting and hold an overall

better preparedness in terms of professionalizing and scaling startups. As such, foreign

networks are crucial to take part in in order to cope with institutional barriers. Such

networks were perceived as particularly important during the screening and deal

sourcing stage of the VC firm. Interviewee 2 from VC 3 explains that “Primarily we will

get them [the deals] through our networks, because we have extremely strong networks

between the three of us [...]. We have really, really strong networks.” He therefore

emphasizes the need for networks in the Kenyan VC industry. Leveraging networks to

overcome the issue of inadequate information was particularly highlighted in relation to

screening and deal sourcing. The interviewee from VC 1 states that “You have so many

other related venture capital funds who have done due diligence and they have shared this

information with co-investors and so details of this particular sector in different countries

is known." Describing how their screening and deal sourcing process is facilitated largely

through the information they get from their network belonging. This notion was

additionally highlighted by the interviewee 2 from VC 3, who explains, “Networks are

fundamental. I mean, you can't find deals without a network. To look at ourselves, we're a

generalist fund, we are sector agnostic, so we have to build a network. It would have been pointless to be a generalist fund and not have a network of people across sectors.” As such, it is emphasized that the need for networks to overcome the information gaps is particularly important for industry agnostic firms. The interviewee from VC 5 explains that their own due diligence process is heavily reliant on their networks for trustworthy information, stating in relation to the issue of lack of corporate governance and reporting that “Yeah. It does affect due diligence, and that's why probably before we do the due diligence, we really have to look at a number of sources of information from the experts point of view, (..) which is why we try to gather as much as possible through our network.” He emphasizes the importance of networks and the information they may provide in order to overcome the challenges related to faulty reporting and information on the ventures performance.

Apart from providing information, networks are also described as direct sources for

discovering deals. If one investor is approached by a VC but may not have the possibility

to invest at that particular time, he/she may refer the venture to another VC within their

network. The interviewee from VC 4 highlights that connections and relations to other

investors is the most useful method for screening and deal-sourcing, “Referral comes in

handy, investor conferences, subsector marketing, you map out and identify some of the

companies operating in a particular sector and then, you know, you pay a visit. The fact

that we've been in the industry for more than 15 years, also gives us an edge when it comes

to sourcing deals. I mean, we've created a good name, within the networks.” As such, we

find the network amongst VC firms as crucial. The networks of founders were

additionally highlighted as important sources for deals. The interviewee from VC 1

states that “Our approach to generating deals and originating them is basically building

this network with the founders.” Consequently, he highlights the importance of networks,

not only between the VC firms but also amongst founders. In relation to screening and

deal sourcing foreign founders networks are crucial, as most VC firms perceive these

ventures to be less affected by institutional challenges, thus avoiding these by focusing

on foreign founders. The interviewee from VC 1 states, “One way to do it is to take a

proactive approach. So you trace back, basically how these businesses are started. And you

will realize most of these businesses are actually started by foreign founders. So you can

either start by building a network of other founders who have actually already built businesses in Africa or building a very good relationship with some of the top venture capital funds in the market. And so you can always follow up on any investments or get wind of a deal from some of the founders before it blows up and is quite popular.” He thus states that as many of the ventures in Kenya are foreign founded, these networks and connections are crucial for finding investment opportunities. Getting into the networks of the successful founders is highlighted to be quite feasible, as the VC would get to know about future investment rounds directly from the founders.

The key to join such networks is perceived to include long experience in the industry.

The interviewee from VC 5 states that “Like myself, having worked in the sector for long,

I'm looking at a particular VC, which is in a certain area, I probably have a couple of guys

who I might reach out to, and try to gather information for the sector, their expertise and

all that." Thus, he stresses the need for experience within the sector. It could therefore

be a particular strategy for VC firms to recruit local staff with experience in the industry,

to gain access to these networks. Furthermore, networks were also considered as a vital

source of agency against regulatory bodies and the government. In relation to the

importance of networks in influencing the policy makers and regulation, the interviewee

from the industry association states, “Relationships are what makes the VC ecosystem

work. People invest into other people based on the relationships they hold. So If you can get

relations with the policymakers or the regulators, it is just one other measure that helps

you to do your business more effectively in terms of, you know, the right person to call to

get things done.“ Hence, the importance of connections with local government agencies

to ensure a smooth regulatory environment is emphasized. The collaboration between

these network partners extends purely information advantageous to include

cooperative efforts to spread risks. Moreover, the interviewee from the industry

association highlights the benefit of co-investing with other VCs as a strategy to spread

the risk stating that “Most of them will do club deals to spread the risk.” Hence, club deals

between two or more VCs from the networks are suggested as an appropriate way to

deal with the risky environment.