A LEGAL FRAMEWORK FOR INNOVATIONAND ENTREPRENEURSHIP IN KENYA

1.0 INTRODUCTION 

1.1 Definition 

A startup is a new business venture that is in the early stages of operations and is typically created to resolve real-life problems. Startups are often founded by entrepreneurs looking to create new and innovative products or services that target an untapped market or improve an existing one.

In Kenya, startups contribute significantly to economic growth and development by tackling specific market issues or fulfilling unique demands through groundbreaking ideas and business structures. There are various ways in which the significance of startups can be observed within Kenya’s economic terrain.

1. Startups significantly contribute to employment generation, particularly for young and skilled workers, by recruiting domestic talent and offering skill-enhancing training programs, thereby reducing unemployment rates and boosting economic output.
2. Startups in Kenya drive innovation by introducing new products, services, technologies, and business models, causing economic growth and fostering competition, creativity, and entrepreneurship culture.
3. Kenyan startups attract both domestic and foreign investments due to their growth potential, scalability, and profitability, thereby increasing capital influxes into the country.
4. Startups in Kenya boost economic productivity and consumer spending through commercial activities like sales, licensing agreements, and partnerships, driving investment opportunities across various sectors.

According to a report by The Standard, the Kenyan government has been working to create a favourable environment for startups by providing tax incentives, reducing the cost of doing business, and increasing access to funding.

The Kenyan government supports startups through initiatives like KENIA and KEPSA, promoting entrepreneurship and innovation in the country.

1.2  Challenges faced by startups in Kenya

Kenyan startups face significant challenges due to limited capital access, hindering their operations, research, development, and marketing efforts.

Limited infrastructure is another challenge faced by startups in Kenya which hinders startups from accessing markets, transporting goods, and communicating with customers hereby limiting the growth potential of startups and make it difficult for them to compete with established businesses.

The Kenyan government is fostering a favorable startup environment through tax incentives, reduced business costs, and increased funding access through initiatives like KENIA and KEPSA which works to promote entrepreneurship and innovation in the country.

1.3 The concept of a “Startup Act” and benefits in addressing these challenges.

The Startup Act in Kenya aims to stimulate business creation for local and foreign investors by supporting registered startups through research and development, fostering a culture of innovative thinking and entrepreneurship, and offering various benefits.

Kenya’s Startup Bill empowers executive committees to establish incubation facilities and policy frameworks, addressing startup challenges like limited capital and regulatory hurdles, promoting research and development, and effective product marketing.

Government establishment of incubation facilities and partnerships with local and international business incubators can aid startups in accessing resources, mentorship, and overcoming challenges.

2.0 CURRENT STATE OF KENYA STARTUPS: SIZING UP 

Size:

• Estimates vary: Figures on the exact size of the Kenyan startup ecosystem range from 450 to 600 active ventures, highlighting the fluidity and dynamism of the landscape.
• Employment footprint: The ecosystem employs over 11,000 individuals, with the fintech sector alone accounting for over 3,100 jobs.
• Funding landscape: While still nascent, venture capital funding in Kenya has shown promising signs, with over $242 million invested in Kenyan startups between January 2015 and November 2022.

Composition by Sector:

• Fintech dominates: The financial technology sector reigns supreme, accounting for roughly 27% of active startups and 53% of total jobs. M-Pesa’s success and the growing demand for digital financial solutions have fueled this dominance.
• Other key players: Agri-tech, e-commerce & retail-tech, and business administration follow closely, each representing between 7% and 18% of active ventures.
• Emerging sectors: Insurtech, investtech, and blockchain are gaining traction, showcasing the diversification and dynamism of the ecosystem.

Stage of Development:

• Early-stage bias: The majority of Kenyan startups are in the early stages of development, with seed-stage and Series A funding rounds being the most prevalent.
• Growth hurdles: Access to Series B and beyond funding remains a challenge, hindering the scaling up of promising ventures.
• Emerging support: Incubators and accelerators are playing a crucial role in nurturing early-stage startups, providing mentorship, networking opportunities, and access to resources.

Regional Variations:

• Nairobi: the epicentre: Nairobi is the undisputed hub of the Kenyan startup ecosystem, attracting talent, funding, and infrastructure.
• Beyond Nairobi: However, initiatives are underway to foster growth in other cities like Mombasa, Kisumu, and Eldoret, promoting regional inclusivity and diversifying the ecosystem.

The Kenyan startup ecosystem’s size, composition, and challenges need to be understood for effective interventions, including support for early-stage ventures, talent development, and simplified regulations.

2.1 Impact of Challenges on Kenyan Startups: From Failure Rates to Stifled Innovation

Kenyan startups face many challenges that hinder their growth and innovation, leading to high failure rates. According to studies, over 70% of Kenyan startups fail within the first three years. The following are some of the challenges that Kenyan startups face:

• Funding bottleneck: Insufficient access to early-stage funding is a major culprit, leaving promising ventures starved of resources and unable to survive beyond the initial stages.
• Regulatory red tape: Complex and inconsistent regulations discourage investment and delay growth, leading to cash flow problems and eventual closure for many startups.
• Risk aversion: Outdated regulations and risk-averse investors hold back ventures from exploring audacious solutions and disruptive technologies.
• Talent gap: The lack of specialized skills in areas like AI and data science impedes the development of groundbreaking innovations.
• Infrastructure disparity: Uneven access to the internet and electricity restricts the reach and impact of tech-driven startups, limiting their ability to experiment and innovate.

These challenges have a tangible impact on Kenyan startups, as evidenced by the following real-world examples:

• A promising fintech startup was unable to secure Series A funding and facing bureaucratic hurdles, it was forced to scale down operations and pivot to a less innovative model.
• A rural agri-tech venture faced a lack of reliable electricity and poor internet connectivity in its target market, severely hampered its reach and impact, ultimately leading to its closure.
• A talented developer migrated abroad, discouraged by the limited opportunities and skill development resources available in Kenya, depriving the ecosystem of his valuable expertise.

3. 0 THE KEY PROVISIONS IN THE KENYAN PROPOSED STARTUP ACT

The Kenyan Startup Act, passed in 2020, aims to foster growth, sustainable technological development, new entrepreneurship, innovation, talent attraction, and connectivity among Kenyans.  The Act has several key provisions, which some are summarized below:

1. Establishment of incubation programs: The Act establishes the role of the National and County Governments in the establishment of incubation programs. 
2. Registrar of Startups and Admission into an Incubation Program: The Act outlines the roles and responsibilities of Registrars, eligibility for incubation program admission, application, registration, effect, refusal, application, de-registration, startup register, alteration, and obligations of registered startups.
3. Certification of Incubators: The Act provides for the eligibility for admission into an incubation program, certification of incubators, withdrawal and obligations of an incubator.
4. Incentives for Startups: The Act provides support to startups, credit guarantee schemes, training and capacity building, applications for grant or revocation of patents, fiscal incentives, and growth objectives.
5. Regulations: The Act mandates businesses registered with the Business Registration Service to be registered with the Kenya National Innovation Agency, responsible for registering new businesses and designing incubation policies. Additionally, the Agency will be responsible for forging links between local and international business accelerators.

These provisions are aimed at creating a more conducive environment for startups to thrive and contribute to the growth of the economy.

4.0 POTENTIAL CHALLENGES IN IMPLEMENTING A STARTUP ACT  IN  KENYA

The Kenyan Startup Act, passed in 2020, aims to foster growth, sustainable technological development, and entrepreneurship employment, but limited capital access remains a significant challenge. However, these sources of funding are often limited and difficult to access, which can hinder startups from scaling their operations, conducting robust research and development, and effectively marketing their products or services.

Startups face complex regulatory environments, including data protection and anti-money laundering, which can hinder innovation and growth. Sector coordination is crucial for ensuring startups receive necessary support, but duplication of programs can hinder growth.

5.0 CONCLUSIONS AND RECOMMENDATIONS

The Kenyan Startup Act is a bill that aims to provide a framework to encourage growth and sustainable technological development, new entrepreneurship employment, create a more favourable environment for innovation, attract Kenyan talents and capital, and for connected purposes. The bill is expected to be signed into law by April 2024.

The bill aims to support Kenyan startups through tax breaks, loan facilitation, and resource support, it’s expected to create a legal structure that promotes the growth of technology in Kenya, attracting skilled individuals and investment capital. The bill defines a Kenyan startup as a newly registered company or one that has been operating for a maximum of seven years since the bill became law. 

The startup should have at least one-third of its ownership held by Kenyans and must have a headquarters or branch in the country. The bill requires the Agency to manage the registration of startups and appoint a Startup Registrar. The Kenyan Startup Act, if implemented, could boost innovation, attract investment, create jobs, and stimulate economic growth by offering tax breaks, easier loan access, and resources for startups. The adoption of startup acts is fast becoming a trend among African countries, and Kenya joins the list of African countries such as Tunisia, Senegal, Congo, and Nigeria that have formulated startup acts to support the growth of their tech ecosystem.

Here are some recommendations for policymakers and stakeholders on designing and implementing a well-crafted Startup Act in Kenya:

1. Incentivize innovation: Policymakers should incentivise innovation by providing tax breaks, grants, and other incentives to startups. This will encourage entrepreneurs to take risks and invest in new ideas.
2. Simplify regulations: Policymakers should simplify regulations to make it easier for startups to operate. This includes streamlining the registration process, reducing the time and cost of compliance, and eliminating unnecessary bureaucratic hurdles.
3. Encourage investment: Policymakers should encourage investment in startups by providing tax incentives to investors, creating a favourable investment climate, and promoting venture capital and angel investment.
4. Promote collaboration: Policymakers should promote collaboration between startups, universities, research institutions, and established companies. This will help startups access resources, expertise, and networks that can help them grow.
5. Provide training and support: Policymakers should provide training and support to startups to help them develop the skills and knowledge they need to succeed. This includes providing mentorship, coaching, and access to business development services.
6. Monitor and evaluate: Policymakers should monitor and evaluate the impact of the Startup Act to ensure that it achieves its intended goals. This will help policymakers make adjustments and improvements to the Act over time.