Hits and misses of startups Bill

By Ivan Mbowa

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 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) by Senator Johnson Sakaja (Nairobi) and its intent.

The draft Startup Bill (2020) aims to establish a legal framework that “fosters a culture of innovative 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 (cronyism) or because of a complete lack of attention paid to the innovation such as in the case of M-Pesa.

This has enabled some businesses to succeed without getting caught up in the red tape of government approvals and licences. However, the Startup Bill (2020) is surprisingly one of the few gems in an otherwise lacklustre history of useful government intervention to support industry.

The two critical features of the proposed Bill, which in my view, will provide a foundation for future success are the proposal to create registration of startups and 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 programme, 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 fulfill 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 law. The inherent risk of negative cash flows in the early stages followed by either failure or exponential success requires a non-traditional financing model for startups.

The few startups that 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 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 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 pay as you earn (Paye) on salaries and zero-rated duty on imports for goods and services which are critical for the development of the startup product.

- The writer is the General Manager Tala East Africa