By Paul Omondi, freelance writer
Villgro Africa is a Nairobi-based business incubator and early-stage investor focusing on health and life sciences. Dr Robert Karanja, the incubator’s Chief Innovation Officer and co-founder, explains how Villgro Africa is working to transform Africa’s innovation landscape and helping startups take their ideas to market.
Tell us how you came to start Villgro Africa?
We took inspiration from Villgro India, one of the world’s first social enterprise incubators. In 2015, we started as a franchisee of that model, which we have internalized and customized for Africa. Since then, we have incubated more than 40 companies and invested about USD 1.2 million in grants and equity or quasi equity instruments. This has led to around USD 18 million in foreign direct investment in Kenya and the east African economy, creating jobs and local value chains. We started as Villgro Kenya, but in 2020, we rebranded and became Villgro Africa.
Tell us about your programs.
Our flagship incubation program, which runs mainly in Kenya and east Africa, lasts for up for up to three years. We also engage startups in other parts of Africa in shorter programs that run from three to 12 months. For example, our artificial intelligence (AI) for Development program, which focuses on social enterprise-oriented digital innovations, targets entrepreneurs in west and southern Africa. We also partner with mission-aligned organizations like BioInnovate on a bio-economy program for scientists with a focus on social entrepreneurship. We help these innovators build appropriate business models for their solutions so they can commercialize them.
Why the health and biotech sector?
Africa makes up 17 percent of the global population, but bears around 25 percent of the global disease burden. But as a market, we are totally underserved, making up around four percent of the global pharmaceutical market. A price-sensitive market like Africa with low purchasing power is not attractive for big pharma and biopharma investors. They don’t see Africa as a viable market to invest in health innovations and solutions. The vaccine inequity we saw with COVID demonstrates this.
Our market research showed that despite its high potential [for social and economic impact] the health sector in Africa is underserved in terms of incubators and accelerators, compared to the ICT and agriculture sectors. For example, in 2014, before we began operating, there were no incubators in this sector. By late 2015, we were one of just three.
In Africa, we must start appreciating the importance of homegrown innovations to solve our unique health problems.
How can Villgro help?
In Africa, we must start appreciating the importance of homegrown innovations to solve our unique health problems. There has been a lot of investment in research and development (R&D) by institutions like the University of Nairobi, Kenya Medical Research Institute and Kenya Agricultural and Livestock Research Organization. Over the years, they have built up biotech infrastructure and a critical mass of expertise in the field. But Kenya still suffers from food insecurity and dismal health statistics because we have not been able to translate the knowledge from research into impact. That requires business processes and the know-how to commoditize new knowledge, create new value chains and markets. That’s where Villgro comes in, by offering technical and financial support.
Do you encourage your startups to focus on specific areas?
We are part of a value chain that is shaped by the way funding flows to R&D and innovation. Some areas attract more funding, for example, the Millennium Development Goals, which emphasize maternal and neonatal mortality, maternal-child and reproductive health, AIDS, tuberculosis and malaria. This creates an R&D and innovation pipeline that guarantees long-term buy-in. It’s the same with the Sustainable Development Goals. Our role is to work with other stakeholders and help them build infrastructure for the delivery of health technologies to our populations.
Our portfolio of startups largely comprises those with digital innovations like the Internet of Things (IoT), big data, AI and machine learning. These innovations are the future. Supporting them means we don’t have to play catch up with the rest of the world.
What are the risks of working with startups?
The risks are very high because we’re early-stage investors. They include the risk inherent in the developing any new technology, as well as the business risk associated with commercializing innovation. Typically, we only engage startups with a technical proof of concept. A lot of work then goes into building the actual product and getting regulatory approvals before finally taking it to market. Health sector innovations pose higher risks because many (technologies) can fail even when well advanced. We can even get something to market and discover inefficiencies that necessitate a recall.
The technology risk is borne by the entrepreneur and the investor. The commercial risk is all about business. It’s one thing to develop a product, and quite another to generate demand for it and get it adopted at scale. Then there are the administrative and financial challenges that innovators must confront.
What is success for Villgro?
Our measurement of success stops at an early stage as we may not be with the companies when they scale to become pan-African or global corporations. If we’re able to raise series A funding, typically around USD 1 million ─ at that point, the venture capitalist will take a seat on the board, bring in the suits, stabilize the ship and drive accelerated growth ─ we generally exit and focus on the next crop of startups.
What needs to be done to boost Africa’s innovation performance?
Kenya tends to rank highly in innovation performance compared to other development indexes. But there’s still a gap between innovations and their deployment to solve our national developmental problems. For example, in biotech, Kenya is second to South Africa in Sub-Sahara Africa, but we remain dependent on imports for food and health technologies. So, the question is: what infrastructure have we built to exploit research outputs to create wealth?
The problem is the assumption that by investing more money into R&D, we will create greater impact in the areas we are researching, when in reality, we get diminishing returns. Our academics are publishing research in reputable scientific journals, but that knowledge rarely yields an impact that changes lives by offering solutions in the marketplace. We need to invest in translating research outputs into creating wealth and in building the infrastructure for businesses to thrive. Villgro is part of that ecosystem.
There are many expectations around youth and their ability to drive innovation and entrepreneurship. What are your views on this?
We are putting pressure on first-degree graduates to be innovative entrepreneurs. This is expecting too much of them and asking the impossible. Even if these young graduates were to start businesses, they are likely to be hand-to-mouth subsistence enterprises. These youth lack domain expertise and don’t have industry exposure, which means they can’t understand the problems that need solving to maximize impact, create the scope for scale, and make good business cases as entrepreneurs to warrant investment from venture capitalists and other financiers.
Oversimplifying innovation and entrepreneurship reduces impact, especially if we decide to associate innovation almost exclusively with the youth. That’s not even the case in the West. When young innovators like Elon Musk (PayPal) and Bill Gates (Microsoft) started out they had seasoned co-founders and/or angel investors who worked with them.
Innovation is fundamentally about creativity. In fact, the average age globally for successful entrepreneurship is 42; a lot of data demonstrates this. We can’t expect 22-year-olds to become successful entrepreneurs overnight. Our youth need to graduate into jobs where they can learn. Encouraging them to develop their own hand-to-mouth businesses is, at best, a stopgap; it is not the foundation of a solid development strategy for any country.
Most African economies depend on extractive industries. How do accelerators like Villgro fit into this landscape?
The global economy is now a knowledge-driven economy and favors nations that are able to generate knowledge, monetize it and create value chains from knowledge-intensive startups capable of exporting solutions based on that knowledge.
In a knowledge-intensive global economy, IP is very important for innovators and entrepreneurs. Knowledge gives competitive advantage. That’s why it needs to be protected. The obvious ways for startups to protect this knowledge is with patents and/or trade secrets. Regardless of how you enter the knowledge economy, the key issue is to understand the importance of the knowledge and the market intelligence in your possession and how to leverage it to serve your customers better.
Why should health and biotech-focused startups take IP seriously?
The capital expenditure for R&D, product development and commercialization in the biotech sector is very high. That’s why these startups need to protect their inventions, especially with patents. But for these patents to make economic sense, there needs to be a market that is big enough for startups to recoup R&D and product development costs, as well as regulatory and other ancillary expenses. If you’re focusing on a market like Kenya with a population of less than 50 million, there’s no way you can recoup your costs. Even the East African market of around 120 million is barely big enough. Biotech startups need to focus on markets at least the size of the COMESA or SADC.
Entrepreneurs need to understand how the patenting system works. They need to know that the minute they apply for a patent, they have a short time frame to patent their inventions in multiple countries before that window closes forever. That means they shouldn’t just patent their inventions in Kenya, for example, as this will be spilling the beans for the rest of the world to compete with them. They will essentially be revealing their secret sauce, which competitors can use to lock them out of other markets in Africa. No investor will back an idea if it can be appropriated in other markets. So, when it comes to patenting, startups really need to think their strategy through carefully.
Does this mean patenting can work against biotech startups?
No. The problem is the oversimplification IP rights, particularly patents. It’s a complex issue, which requires a business model that integrates what these innovators are doing locally into the broader national and global knowledge economy. If we ignore how capital flows, all our efforts will go to waste.
Our startups need training on IP rights so they don’t lose their IP by focusing on small markets. At Villgro, we help them understand this. At the same time, we reach out to policy-makers to facilitate the protection of our country’s innovations.
How can African governments better support startups?
Government intervention tends to be about microfinance rather than funding innovation. You can’t expect a startup to solve an SDG challenge at scale with just USD 500; innovation-based startups need funding equivalent to academic research grants, which range between USD 20,000 and USD 500,000.
Second, traditional funding sources, such as banks, don’t to facilitate the growth of startups, which are small outfits that have no collateral or revenues. Even if you give banks a guarantee fund to de-risk these revenues, the reality is that a startup will need around five years to develop and commercialize its product and is unlikely to have capital or revenue before then. Debt is not the way to finance innovation. Startups need equity not loans.
In a knowledge intensive global economy, IP is very important for innovators and entrepreneurs. Knowledge gives competitive advantage. That’s why it needs to be protected.
Is venture capital a better alternative?
Yes, but venture capitalists don’t consider anything below USD 1 million as a worthy investment. Such engagement is unsustainable because the cost of structuring such a deal and carrying out due diligence, is the same as for a USD 10 million deal. This is why governments need to create policies that encourage angel investors to cover the gap for financing up to USD 1 million and work with incubators.
The potential for venture capital funding in Africa is huge. In 2021, Africa hit a record USD 4.1 billion in venture capital investment in startups, up from USD 2 billion in 2020. This is expected to rise to USD 10 billion by 2025. Kenya is one of the leading innovation hubs and venture capital investment destinations in Africa. We need to work out how to position ourselves as an economy for this anticipated investment windfall. This year, Kenya absorbed just USD 350 million or so of the USD 4.1 billion available. That means we are not competitive even though the opportunities for startups are limitless.
What are Villgro’s plans for the future?
We are spreading our wings beyond Kenya to cover the entire continent. We have a role in increasing global venture capital investment in startups and in building a robust knowledge economy. That means issues like IP have to be addressed properly. We want to bring about a paradigm shift in the startup investment space, push for legislation to support startups and build more innovation hubs and incubators.