The Good Business Issue
By Karen Weise December 29, 2014
Koczela in traffic on her way to a Penda clinic.
Stephanie Koczela arrived in the San Francisco Bay Area in 2010, when everyone was moving fast and breaking things. She had been working for the microlender Kiva in Nairobi, Kenya, and transferred to the company’s South of Market headquarters to build its global field operations. For an ambitious twentysomething with an interest in development issues, it seemed like a dream job. The work was engaging, but Koczela was miserable. She longed to be back in Nairobi, where expat entrepreneurs were launching startups of their own.
In Africa, “you are surrounded by people that are living a very fun, very hard life,” Koczela says. “You are working from 7 a.m. to 9 p.m. at least. Most people are working to 1 a.m. to make phone calls back to the U.S. If you text someone at 10 and say, ‘Do you know how to do this Excel calculation?’ they will call you right back.” Koczela expected that same camaraderie in San Francisco but found it had been more vibrant in Nairobi.
Koczela packed up and returned to Kenya, where she co-founded Penda Health, a chain of for-profit medical clinics. She’s one of a few hundred mzungus—foreigners—in their 20s and 30s who have come to Nairobi to build social enterprises, which are for-profit but aim to improve the lives of their customers and bring about social change. They’re selling solar panels and vegetable seeds, setting up schools, and, like Penda, opening health centers. The chain’s two main clinics each see about 1,000 people a month, making money one $6 patient visit at a time. With its facilities getting close to breaking even consistently, Penda is gearing up for a Series A round of financing next summer.
Charlene Chen, who’s worked at several local social enterprises, considered staying in the Bay Area after getting an MBA at the University of California at Berkeley. She came to Nairobi instead, believing that startups can help find solutions to profound global problems. “We may be excessively naive,” she says, “but we land here thinking that’s what we should be doing.”
Photographer: Pete Muller for Bloomberg BusinessweekKoczela at the clinic in Penda.
According to a survey by J.P. Morgan (JPM), so-called impact investors—those who fund companies they think will create financial returns and societal benefits—put $10.6 billion into almost 5,000 companies worldwide in 2013. More than half allocated money to sub-Saharan Africa, the most of any region in the world. A preliminary study by Open Capital Advisors, a Nairobi-based consulting firm, estimates that $650 million has been invested in Kenya alone, mostly in the last five years.
But Nairobi can test anyone’s patience. You have to deal with hellacious power failures and traffic, widespread corruption, and uncertain security. “There are tons of 23-year-olds from Brown, and they’ll be back in the U.S. in 18 months,” says Peter Gross, who left Atlanta to build the Africa business of MicroEnsure, which provides health and life insurance to more than 10 million people globally, the majority in Africa. “I’m not knocking that, but you’ve got to enjoy the tough stuff.”
Gross, whose wife works for Penda, has committed to Kenya for the long haul. So has Koczela, now 28, who considers Nairobi the place where she feels “really alive.” Together, these entrepreneurs are trying to prove that new kinds of businesses can do a better job of helping the country’s poor than do nonprofits or governments.
Despite its drawbacks, Nairobi’s a pretty good place for a foreigner to start a company. English and Swahili are the official languages of Kenya, and Nairobi has several excellent universities that produce sharp graduates. Kenyans take pride in their country’s entrepreneurial hustle. There are direct flights to much of Africa and Europe, making it a convenient place to expand regionally. And if your business targets people with low incomes, Kenya has plenty of potential customers.
“It’s got this Silicon Valley-like feel of innovation,” says Radhika Thakkar, who runs business development for Greenlight Planet. Her company has sold more than 3 million small solar lamps with a round, smiley design that makes it feel like a Disney sidekick. Greenlight is based in Mumbai, but Thakkar, a former consultant in Washington, D.C., chose Nairobi as a base for global expansion. “Setting up a company is so much faster than in India,” she says.
“In the next two or three years we could be a $100 million business”
Maeghan Orton, who runs the Africa operations for Medic Mobile, a medical technology provider, says she sometimes stands out as a “white girl who grew up on a farm in South Dakota.” She travels regionally as much as 80 percent of the time, working with health ministries and aid groups throughout East Africa to develop clinical apps for basic mobile phones. She advises them that, for example, an iPad, with its terrible battery life, isn’t appropriate for a clinician in a rural setting. Orton persuaded her husband to move to Nairobi as part of an “odd prenup” agreement that they live in Africa for a few years. Three months into the move, at a monthly “whiskey night” drinking duty-free booze around a campfire, he and a friend decided to develop Wi-Fi hotspots for rural areas. They recently tested the technology on a three-week road trip to South Africa.
While Nairobi is near the equator, its elevation is about the same as Denver’s, making the climate a consistent 70F year-round. There are elite hospitals where a Western woman would feel comfortable having her baby, and a national park sits within the city limits. Gross, the insurance exec, jokes that his preschool-age daughter was confused when her grandmother gave her a book about a zoo. They know where to go to find giraffes and lions roaming free.
When Chen moved to Kenya five years ago, social enterprises were just starting, so she set up a Facebook group for people to connect and now runs a monthly “women and wine” meetup. She can point to several companies that have grown into real businesses. In Nairobi, “you can really move the needle a huge chunk—I don’t mean that in the charity sense, but in solving actual business problems,” she says.
A case in point is M-Kopa, which in two years has sold more than 100,000 solar panels to people who live off-grid or have intermittent power. The panels cost $200 each; customers put $35 down and pay off the balance over a year via their mobile phone. If they don’t pay, M-Kopa shuts off the panel. Ninety-four percent of customers pay off their loans on time. “We’ve gone from zero to $2 million a month in revenue,” co-founder Jesse Moore says. “In the next two or three years we could be a $100 million business.”
One hub of Nairobi’s startup scene is the six-bedroom house run by Annie Roberts. She first rented the place in 2010, when she left Boston Consulting Group and started Open Capital Advisors, which helps entrepreneurs set up shop and raise money. So many expats came through Roberts’s house that when another place opened up across the street, she rented it, too. “I now have 11 roommates instead of five,” she says.
Photographer: Pete Muller/Prime for Bloomberg BusinessweekRoberts inside her home office in Nairobi. It was in this space that she and others founded Open Capital.
On the Thursday night a week before Thanksgiving, an out-of-town guest cooked paella for about a dozen people. Someone else made sangria in a plastic baby bathtub. Two people joined dinner straight from yoga class. A Harvard Law grad who works for Roberts arrived from the airport after a week of client meetings in Uganda. He just missed a former Bain consultant who’d dashed off to pick up her boyfriend at the airport for his first visit since she’d moved to Nairobi. Another woman joked that she’d moved from working for charity to the “dark side,” interning at a social enterprise startup.
Roberts and her co-founder at Open Capital Advisors, Andreas Zeller, have 27 employees. Their 80-plus clients have raised $45 million so far from leading impact investors, including Acumen, the Grameen Foundation, and AlphaMundi Group. Roberts, 30, says that while the world of impact investors is becoming more sophisticated, many still haven’t figured out how to finance these companies appropriately. Some bring the perspective of nonprofit donors. “Every investor says they are interested in everything,” she says. Yet when they do decide to back a startup, investors set high expectations. Roberts says many impact investors still want 15 percent to 40 percent returns, with terms tougher than you’d find in Silicon Valley. “They perceive the risk to be extremely high,” she says.
On the flip side, many businesses rely on donor grants to get off the ground, and some end up depending on them for too long, Chen says. “As long as donors can see the potential social impact, organizations will continue to receive grant funding, even if the business model is not sustainable.”
Business schools increasingly want a piece of the action. Many elite institutions have set up classes where students can do a semester-long consulting project for a social enterprise, which they then visit for a week or two. Nairobi is a popular destination. “If I wanted, I swear to you, I could have 200 business school students here next week,” Roberts says.
Having fled California, Koczela made it back to Nairobi in 2011. One night, she stayed up late talking with her former roommate, Nick Sowden, who was working for another health startup. Koczela was mourning the death from malnutrition of a Kenyan friend’s baby, and she and Sowden wondered if they could set up women’s health centers as a business, not a charity. “Having the patients be the ones who pay, we keep them as the voice in our heads instead of donors,” Koczela says.
Sowden soon quit his job to run focus groups, ultimately talking with about 1,000 women who, more than anything, said they didn’t like how they were treated at clinics. Koczela returned to the U.S. to develop the business model and try to line up seed funding. Getting the first bit of outside money is often the hardest part. “In Silicon Valley, there’s a chance an early project will become WhatsApp,” says M-Kopa’s Moore. “Nobody is going to put in that seed-stage money if there is this much risk.”
Photographer: Pete Muller for Bloomberg BusinessweekMoore in the customer care call-in center at M-Kopa headquarters in Nairobi.
Koczela raised donations from friends and family, including an uncle she describes as a “serial entrepreneur,” who later became one of Penda’s investors. In late 2011 she and Sowden were trying to project the number of patients they would see in an hour when her uncle said, “What are you guys talking about? Go open a clinic.” A few months later, on Valentine’s Day in 2012, they did, in a tiny 800-square-foot space off a main road in Kitengela, a poor Nairobi suburb.
On the second day Penda was open, the business plan went out the window. Koczela and Sowden had wanted to focus on maternal health, but a woman came in looking for care for her husband and kids. The woman said, in essence, that to serve her health needs, Penda needed to serve her family’s needs. “We were, like, ‘Ooooooh, yeah. That’s totally true,’ ” Koczela says.
Penda started accepting all patients and has continued to adapt. Koczela and Sowden bought lab equipment and an ultrasound machine. They came up with three ways to demonstrate their focus on the customer experience. First, their bathrooms would be well-stocked and spotless, because hygienic toilets in Kenya are a luxury for Kenya’s poor. Second, the clinic manager would check in with every patient three days after each visit. And finally, every kid who came to Penda would get a balloon.
It took two years for Penda’s clinic to reach 1,000 patients a month. “We didn’t need to be profitable,” Koczela says. “But we needed to know the revenue we were earning was high enough that we could one day be profitable.”
They opened a second clinic, which grew three times as fast, and added dental services. Little things make the difference between whether the clinics make or lose $1,000 a month. The blood-testing machine at one clinic was down for more than a week, so they lost lab sales. And they’re working to better track their pharmacy supplies, because they sometimes run out of drugs by the end of the month.
While Kenya now has a few social enterprises that are growing fast, with hundreds of employees and valuations approaching $80 million, no one has exited through a sale or public offering. “The sector right now is a little disappointed, because there hasn’t been any breakout standout with phenomenal returns,” says Open Capital’s Roberts. “I don’t think that’s surprising. I think that people had really unrealistic expectations.” M-Kopa’s solar panels may be on track to bring in $18 million in annual revenue after just two years, but Moore acknowledges that’s still a tiny fraction of the $1.3 billion he says Kenyans spend on kerosene and other electricity alternatives.
Most of the companies in Nairobi’s social-enterprise scene have been founded by expats. Plenty of Africans are starting companies with a mission, Koczela says, but they don’t brand themselves as such. Roberts says she speaks with lots of Kenyan entrepreneurs who have great business ideas but struggle to get funding. “Founder teams from the U.S. and Europe, almost all of them have former management consultants on their founding team, and if they don’t, they have a friend who did or know people who went to HBS,” she says. Local entrepreneurs largely don’t have that leg up.
Ernest Mureithi is an exception. A Kenyan doctor who studied in India and Minnesota, Mureithi wanted to open low-cost clinics but says he didn’t know how to position the company. A friend introduced him to Open Capital, whom he hired to develop his business plan. They ended up spending almost two years doing pricing studies and financial models, ultimately concluding that Mureithi’s clinics, called Miliki Afya, would focus on providing services in-house so patients didn’t have to travel around town for referrals.
Photographer: Pete Muller for Bloomberg BusinessweekMureithi founded Miliki Afya, a chain of for-profit health clinics.
Mureithi first looked for funding locally. “The few investors I had spoken with were, like, ‘Noooo way, and if you want money, we want 90 percent of your company,’ ” he says. Open Capital suggested he look at social investors. They brought Mureithi’s business to Acumen, an early impact investor that’s put more than $30 million into startups in East Africa. The fund eventually committed as much as $600,000 to open four more clinics. Mureithi has three clinics at present that together see about 150 patients a day, and he says the company has broken even. Aside from his contact with Acumen and Open Capital, Mureithi says he doesn’t interact with other social entrepreneurs much. “I wish there was a forum to bring them all together,” he says.
For their part, expats say they’re hiring local staff but lament the difficulty of finding middle managers and executives who want to take the risk of joining a young company. “As a 35-year-old North American, you are almost a wimp if you don’t do a startup,” Moore says. For Kenyans, “if I’m an executive at a bank, I’m probably the first person to go to university in my family. It’s not just your financial security at stake, it’syour family’s.”
Penda’s second employee, Elijah Chege, was initially hired as a receptionist. “We just totally clicked,” Koczela says. When the company built its first clinic, Koczela talked with him about every detail. Chege’s since risen to oversee the operations of Penda’s physical assets and managed a $15,000 construction project to more than triple the size of the facility.
Until this fall, Koczela managed both of Penda’s clinics. She recently hired Michael Ndung’u to run the Kitengela branch. He came from a health insurer, a suit-and-tie operation typical of Kenyan businesses. “It was very rigid, and I never interacted with the directors,” he says. He likes Penda’s startup approach, the constant feedback, the expectation that people will take their own initiative, and the focus on employee happiness. If he has an idea, he can just make it happen. Koczela now needs to find another Michael Ndung’u to handle Penda’s second clinic. During a work day in late November, she sat in a baby-pink office at the Kitengela branch conducting interviews. The day’s fourth candidate arrived, a man named Lashan who worked at a local nonprofit. His references were impeccable, but he told Koczela he “hates” receiving negative feedback. After Lashan left, Koczela sighed. “Yeah, he’s not getting the job.”
The company recently secured financing from Jason Williams, the founder of a chain of urgent-care clinics based in North Carolina. If the company can fine-tune its model, Koczela’s confident it can expand rapidly. “It’s just copy paste, copy paste, copy paste,” she says. Penda’s board expects its two clinics to be consistently profitable by April so they can raise money before Williams’s infusion runs out. “We should be able to demonstrate that this is really working,” Koczela adds, “and then be able to say, ‘This is the thing.’ ”