Kenya is in the process of adopting startup-specific legislation for the first time after the gazetting of “The Startup Bill, 2020”, but how does the process work, and what impact will the Act, once passed, have on the local startup ecosystem? Disrupt Africa dug into the details.
The first specific startup law globally was passed in Italy in 2012, and Tunisia and Senegal were the first two African countries to have enacted them. A host of countries, including Mali, Ghana, Ivory Coast, the Democratic Republic of Congo (DRC), and Rwanda, are expected to implement their own this year.
Kenya is the first of the “big five” startup ecosystems to publish its own proposed legislation, though there have been some movements to do the same in South Africa. “The Startup Bill, 2020” was published in the Kenya Gazette on September 14, sponsored by Nairobi County senator Johnson Sakaja, under the auspices of the Ministry of Education, Science and Technology, with most of the implementation assigned to the Kenya National Innovation Agency (Kenia).
How will the Bill become an Act?
The Bill, which aims to “provide a framework to encourage growth and sustainable technological development and new entrepreneurship employment; to create a more favourable environment for innovation; to attract Kenyan talents and capital; and for connected purposes”, will now go through both houses of the Kenyan parliament and a public participation stage before it potentially becomes law. Senator Sakaja held a first meeting with various ecosystem stakeholders on Thursday, September 24, and the first Senate reading is scheduled for tomorrow (Tuesday, 30).
There will then be 30 days of public participation, and the Bill is apparently very much open for review. After three readings and a vote, the Bill will also have to proceed through the National Assembly, as the Senate does not discuss “money” clauses. The whole process of First Reading, Second Reading, Committee Stage and Third Reading is followed again here. Once passed by the National Assembly, it will be referred back to the Senate for concurrence on any changes. Once the Bill is passed by both houses, it is referred to the President for assent, and becomes an Act once this has been granted.
So it will still be a little while before we see The Startup Bill, 2020 passed into law, if indeed that does come to pass, and whether the proposed Act retains its current character also remains to be seen. But what exactly does the Bill, at this early stage of the process, entail?
A focus on incubators
Though called “The Startup Bill”, the proposed legislation is actually primarily focused on incubators. It allows for the “the establishment of incubation facilities at the National and county levels of government”, and empowers Kenia and county executive committee members to establish a national and county incubation policy framework for the development of the business incubation sector and startup system.
Among other things, it legislates for partnerships with local and international business incubators, the launch of programmes for the certification and admission of incubators into the incubation programmes, and the creation of an enabling environment for the promotion of business incubators, including fiscal and non-fiscal incentives.
What is, and what is not, an incubator, in this case? Well, the Bill says an entity certified as an incubator can be registered as a public limited company, a non-governmental organisation, a private limited company, a limited liability partnership, or a partnership, but it must have as its principal object the “delivery of services to support establishment and development of innovative startups”. They must also have in place “facilities suitable to accommodate innovative startups”, and “adequate equipment for startup activities and innovation”, whatever they may be, and be administered by persons of “recognised competence on business and innovation”.
Legislators would also like your incubator to have established “collaborative relationships” with universities, centres of research, public institutions and financial partners that carry out “activities and projects related to innovative startups”. If your incubator meets all these requirements, it can apply to be listed with a Registrar, who will be recruited by the Public Service Commission of Kenya and appointed by Kenia.
How are startups affected?
The Bill may focus more directly on supporting incubators, but the idea is that startups across Kenya will be the beneficiaries of this. Among other things, it proposes to “support any research and development activities undertaken by startups”, “put in place mechanisms for pre-incubation of entities and for this purpose, provide training and capacity building programmes to startups registered under this Act”, “put in place mechanisms to enable access to entities from marginalised groups”, and “put in place facilitative structures that ensure the protection of the innovations of startups at the national and international level for the protection of the intellectual property”.
So far, so vague, but the Bill gets very specific when it comes to what criteria a startup must meet in order to be registered as such and qualify for any of the benefits offered by the Kenya Startup Act. To be eligible for this, and therefore admission into an incubation programme, businesses must be registered in Kenya as a company, a partnership firm, a limited liability partnership, or, a bit bizarrely, a “non-governmental organisation”. It must be majority owned by one or more citizens of Kenya.
Startups must be seven years old or less, unless they are in the biotech sector, in which case you can be up to 10 years old, and have as their objects the “innovation, development, production or improvement and commercialisation of innovative products, processes or services”. The Bill also wants you to have a scalable business model, though it doesn’t describe what it considers this to be, while a startup must have its “human resources, total assets, and annual turnover number as prescribed by the Cabinet Secretary”. Any ideas? Me neither.
Oh, and at least 15 per cent of the startup’s expenses must be attributed to research and development activities. Startups can also apply to be listed by the Registrar, should they meet all of those quite stringent requirements.
There is a LOT of stuff in this Bill that sounds nice in theory, but requires more explanation as to how it will be affected in reality. “Kenia and the county executive committee members shall put in place measures to support the establishment and development of startups,” it says, which will include non-defined attempts to “subsidise the formalisation of startups”, “facilitate the protection of the intellectual property of innovations by startups”, “provide fiscal and non-fiscal support to startups admitted into incubation programmes”, “provide support in the form of research and development activities”, and “provide such other support to enable the development and growth of startups”.
Most of how it will do all of this is not really clear, though the Bill does say that Kenia will put in place a programme for the training and capacity-building of startups, and also “facilitate” startups in the application for grant or revocation of patents as well as institution of legal action for infringement of any intellectual property rights. A personal favourite when it comes to the high levels of both aspiration and vagueness within the Bill: “A startup shall be encouraged to cumulatively achieve growth objectives as set out by the Cabinet Secretary by regulation”.
Either way, help is, in some form or other, at hand for Kenyan startups, as long as they meet the criteria. The Cabinet Secretary (remember, this is George Magoha at the Ministry of Education, Science and Technology, not, as might have been thought, Joe Mucheru at the Ministry of ICT) can also make regulations on the “conditions and process for the exemption of startups from registration fees”, on “workplace and labour issues”, on “commercial transactions”, on “employee benefits and compensation”, and on “protection of intellectual property rights”. Whether “can” means “will”, and indeed “how”, is unclear.
Will there be cash available?
Whisper it, but in a handful of places in the Bill are suggestions the government may help Kenyan startups access funding, or in some circumstances actually provide capital itself. It starts with a (vague) promise to roll out “incentives to invest in innovative startups”, before becoming a bit more direct with an undertaking to “provide financial support to technological innovations registered under the Startups Act”.
Whether it encourages or directly provides capital or not, the Act would help startups from a tax perspective, something that would surely be welcomed, by putting in place measures for the granting of fiscal incentives, including tax incentives, “as shall be considered necessary for the development of startups in the country”. So fingers crossed. And keep those fingers crossed for the promised establishment of a credit guarantee scheme.
This credit guarantee scheme will provide accessible financial support to startups by providing a guarantee for investors in startups. It is again for the Cabinet Secretary to decide the criteria for eligibility and qualification for recipients of funding under the scheme, as well as the criteria for monitoring and a mechanism for transparency.
Let’s not get carried away with the idea that the Kenyan government will play a part in funding startups, as this administration has form for making promises it can’t keep in this regard.
The Enterprise Kenya initiative was launched amid great fanfare in 2015, to support and build the technology entrepreneurship ecosystem in the country, with President Uhuru Kenyatta setting the Ministry of ICT a target of investing in at least 50 startups over the next 12 months through the initiative. The total number of companies to have received investment ended up being exactly zero, and the impact of the Enterprise Kenya project has been negligible.
The hope is that the proposed Kenya Startup Act will succeed where that failed. Disrupt Africa is fully behind legislating for African startup ecosystems in general, as the benefits when done well are clear (check out this Disrupt Podcast episode for more). Yet this Bill will need beefing up via the public participation and its various committee hearings if it is to have any real impact. In many areas it is extremely vague, with the “how” missing from a lot of the admirable intentions.
Stringent as the Bill is on local ownership and registration of startups, which is admirable, it does not take into account the realities of modern business, whereby companies register in places like Delaware and Mauritius fortax purposes. The vague incentives will need to be firmed up and added to in order to convince fast-scaling startups to register in Nairobi rather than elsewhere. It is also not clear what impact, if any, all the new regulations will have with regard to the existing incubator space, if existing players are deemed not to count as such under the Bill’s definitions.
The mere existence of the Bill, and the idea that Kenya could soon have a Startup Act, is in itself good news. The hope is that the Bill will be amended as a result of feedback from those that matters most – stakeholders within the Kenyan startup ecosystem. The Kenya Private Sector Alliance (KEPSA) is hosting a panel discussion on the topic this week, which is good news, but further input will be necessary in order to more effectively communicate how certain benefits of the bill are to be achieved for as many startups as possible.