Reflections of an entrepreneur on the proposed Startup Bill (Kenya 2020)
The historical relationship between business and government in Kenya has traditionally been a one-way transfer of value; the legal obligation to part ways with hard-earned profits in the way of taxes and little, to no, government support
As a result, most businesses prefer minimal bureaucracy, fewer taxes and bare minimum involvement in the industry. Therefore, like many in business, I was sceptical about the recently drafted Startup Bill (2020), proposed by Senator Johnson Sakaja, and its intent.
The draft Startup Bill (2020) aims to establish a legal framework that ‘fosters a culture of innovation thinking and entrepreneurship’ among many other lofty goals. However, historically, Kenya’s most successful entrepreneurship ventures have succeeded either because of an unfair advantage given by the government to select businesses (i.e. cronyism) or because of a complete lack of attention paid to the innovation (e.g. M-Pesa). This enabled the business to succeed without getting caught in the red tape of government approvals and licenses.
Despite the above, the Startup Bill (2020) is surprisingly one of the few gems in an otherwise lacklustre history of useful government intervention to support industry. There are two critical features of this proposed bill that I believe will provide a foundation for future success. The first is the proposal to create a registration of startups and the second is the proposal for the provision of fiscal and non-fiscal support to startups.
The registration of startups will be critical in addressing concerns of potential fraud that investors may face before funding a startup. Investors will now be able to find government-accredited innovators. The bill outlines a non-trivial list of requirements for admission into an incubation program which will separate the ‘wheat from the chaff’ when it comes to supporting documentation. This includes a patent or trademark registered in Kenya and a statement qualifying the innovative elements of the business model. Naturally, not all startups in Kenya will be able to fulfil all these requirements but the few that do will be worth serious consideration by interested parties.
And then there’s the proposal for the provision of fiscal and non-fiscal support to startups. This is possibly the single most important element in the proposed bill. The inherent risk of a startup that faces negative cash flows in the early stages of business, followed by either failure or exponential success, requires a non-traditional financing model. The few startups that do succeed can have a disproportionate benefit to the country through direct employment and indirect support of a network of suppliers and customers. Given our widening youth unemployment rate and disappearing formal employment sources, we need to support startups that can fill the gap in job creation.
Despite the potential for occasional exponential success by a startup, the brutal truth is that most startups will fail and every banker worth their salt knows this. As a result, access to finance for startups is minimal and mostly sourced through entrepreneur savings or as the saying goes: fools, family and friends. The role of government in such a situation is to step in and correct this market failure through the provision of incentives to give young businesses a fighting chance.
The proposed bill correctly identifies this incentive opportunity but in my opinion, incorrectly proposes a solution. The nature of startups doesn’t lend itself to predictable cash flows that can repay a loan and so any government credit guarantee (as proposed in the bill) is likely to be called upon to an extent that would make the model unsustainable. Instead, I would argue that the government should establish a fund that can provide recoverable grants which are only repayable should the startup succeed. Secondly, I propose that the government considers a raft of tax incentives for businesses that qualify as startups in the form of tax exemptions — such as, zero P.A.Y.E on salaries and zero-rated duty on imports for goods and services which are critical for the development of the startup product.
In summary, the proposed bill is an articulate and well-crafted proposal to create a framework that acknowledges and aims to support start-ups. However, the truth of the matter is that it is only one small step in the mountain that is rising youth unemployment in Kenya. Not everyone can be a startup entrepreneur nor can everyone qualify for employment in increasingly technical startup roles. For the vast majority of Kenyans, the government will have to emulate the Senator and craft proposals for the micro and small-medium enterprises that employ 90% of the population. If this is not possible, then perhaps the government will have to think up methods to get out of the way of small business through less: minimal bureaucracy, fewer taxes and bare minimum involvement in the industry.