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Why local capital plays second fiddle as foreigners dominate startups’ funding
From left: Vivo Activewear CEO Wandia Gichuru; Jane Nzau, former pension administrator at CBK; BII Coverage Director of East Africa Seema Dhanani; and Kuramo Management co-CEO Shaka Kariuki.
Domestic capital pools have remained bench warmers as foreigners dominate the funding of local startups to the tune of hundreds of billions of shillings a year, minimising local influence in the growth and prosperity of emerging companies in Kenya.
Wandia Gichuru, the co-founder and CEO of Vivo Fashion Group, relied on personal savings along with funding from friends and high-net-worth individuals to get her first business off the ground.
For her second business, Shop Zetu, Ms Gichuru, however, went the venture capital (VC) way.
She did not come across many local funders on the journey and observed the weight of expectations placed by foreign capital even as it remains a necessary evil in spurring early-stage companies.
“While it was taking someone else’s money, the funding comes with certain expectations, which are understandable. Sometimes that can go a little bit wrong,” she says.
“What I have seen in Kenya mostly is angel investors (high-net-worth individuals providing personal capital and mentorship). I haven’t come across many local venture capitalists with local money.”
Foreign dominance
Ms Gichuru highlights strict timelines placed on local startups to recoup money for their private capital backers and tough valuation scenarios as part of the difficulties, especially when a business has yet to generate profit.
A list of the most active investors in East Africa, compiled by the African Private Equity and Venture Capital Association (AVCA), is largely a foreign capital compilation.
Among the 20 most active general partners, who represent active managers in private equity firms with unlimited liability, only five organisations are headquartered in Kenya, including the Acumen Resilient Agriculture Fund (ARAF), AfricInvest Group, Ascent Capital, the Catalyst Fund and Delta40.
The top 10 most active limited partners, a representation of passive investors, meanwhile, lack any Kenyan firm.
Most active general and limited partners are spread across the rest of the world, including the United States, the United Kingdom, Mauritius, Sweden, Germany, Norway and France.
This underpins the prominence of foreign capital in the funding of local startups.
Kenyan startups shared out a significant Sh524.5 billion ($4.2 billion) in private capital funding between 2021 and 2025, according to additional data from AVCA.
Seema Dhanani, the Head of Office Kenya and Coverage Director for East Africa at the British International Investment (BII), a development finance institution, regrets the absence of domestic funds in the space.
She faults the bias for government securities among Kenyan pension funds for the apathy toward local private capital investments.
“Unfortunately, we’ve got it the wrong way around. You would expect that local capital would take the lead to attract international capital,” she says.
“Our pension funds, particularly in Kenya, receive a very fat fund from government securities. Pension trustees have the easiest decision to vote to invest in bonds.”
The Kenyan pension industry, which reached Sh2.8 trillion in assets at the end of last year, has been a focus point for domestic capital mobilisation to fund alternative asset classes like private equity due to their ability to wait long for a return, enabling the creation of what is dubbed ‘patient capital’.
Government bonds have, however, been the magnet for the sector, taking up more than half of the industry’s assets under management at 52.18 percent as per data from the Retirement Benefits Authority (RBA).
Pension bias
Part of the concentration is attributable to caps on alternative investments.
However, only 1.07 percent of pension assets were in private equity as at the end of December 2025, translating to a meagre Sh29.9 billion, even as the funds are allowed to put up to 10 percent of their portfolios in the asset class.
Local pension funds admit that they lack knowledge in alternative asset classes, a factor accelerating the bias for State coupons from bonds.
“The challenge is knowledge, as most people, including trustees, who are the most important decision makers for pension funds, do not know about this asset class,” says Jane Nzau, former pension administrator at the Central Bank of Kenya (CBK).
Jane is the chairperson of the Association of Retirement Benefits Schemes.
“The reality is that most people are not privy to how private equity or venture capital works. It would take getting them up to speed and showing them the benefits, where they would increase their returns,” Shaka Kariuki, the co-chief executive officer and chief investment officer of Kuramo Management, says.
Slow shift
Local pension funds are, however, taking a gradual interest in the private capital scene, as was evidenced by their participation in the just-concluded AVCA conference in Nairobi.
The State pension fund, the National Social Security Fund (NSSF), says it is eyeing diversification in asset allocation as it approaches Sh1 trillion in assets under management (AUM).
NSSF Managing Trustee and CEO David Koros hinted at partnerships with private equity firms to achieve diversification, while the fund’s portfolio has shown some gradual shift away from government securities in the last five years.
“Partnering with private equity funds would help us diversify and invest in the real sectors of the economy,” he says.
“We are doing an infrastructure project — the Rironi-Mau Summit Highway. The NSSF just stepped forward and said we’ll do it, we will invest in this road.”
Mr Kariuki says that while foreign private capital remains dominant, the picture has been gradually changing.
“The picture is changing, to be honest. While foreign capital continues to grow, which is positive, we have, at Kuramo, anchored 15 first-time indigenous private equity funds. Before we came in, only development finance institutions made these investments. We made a conscious decision to anchor local funds, and we now see foreign funds willing to write a cheque for local institutions,” he adds.
Risk lesson
Across Africa, it has taken default events and haircuts on pension funds’ government bonds in countries like Ghana and Zambia to force diversification.
It’s a shock that Ms Dhanani from BII hopes will not have to be replicated locally to trigger diversification in asset allocation.
“There have not been sovereign defaults in Kenya. In Zambia and Ghana, we are seeing a willingness by pension funds to diversify, having been burned. Some Kenyan pension funds have been adventurous, but it is way too little,” she adds.
The funding of startups in Kenya will likely not follow the Western model, where venture capital follows stages beginning with pre-seed funding at the earliest – the idea stage – and ending at Series C, known as the growth stage, which preludes the exit stage, mostly done through an initial public offering (IPO) where a startup matures into a publicly traded company.
Ms Gichuru says local capital has always been in place, but it will most likely fail to deploy within the established Western framework.
“I would love to see a home-grown venture capital model which doesn’t have to look like what is typically there, but is one that suits us. The exciting thing for me would be to see African money in Africa. It’s still great to see foreign capital,” she adds.
Exit question
For Ms Gichuru, startups must think through the exit strategy for any investors taken on board, which would make the businesses attractive to not just foreign but also domestic capital.
“If it’s not an investment in your son’s or daughter’s business, you must know when and where to get your money. The company has to start paying dividends or sell, but you will find a lot of entrepreneurs who start a business with no idea of an exit.”
Private capital largely takes the form of equity or debt, where, under equity, the investor takes a stake in the business.
Debt funding bears similarities to loan facilities, where investors recoup interest over the life of their investment before the reimbursement of the principal amount at exit.
The reimbursement in private capital debt will, however, often feature an element of payment in kind (PIK), where the business may be obligated to offer an enhanced return based on a percentage of profits or revenues earned.
Debt is seen as a plausible choice for pension funds, which are usually shy of taking stakes in firms.
“We may have to try things and structure innovations that would allow pensions to come in. Private credit would be a good opportunity as pension funds are not keen on an equity-type investment,” Ms Dhanani said.
