Review of the Start Up Bill, 2020

Author: Lilian Kabaya

Kenya is a leading hub for entrepreneurship and innovation in the African continent. This is attributable to a large number of international investors, a huge population that has access to technology and the business eco-system support available. The Start Up Bill 2020, a Senate Bill, published on 14th September 2020, aims to foster innovation and entrepreneurship in the country by creating a favourable business environment and incentives to encourage growth of the technological sector.

The Act provides a framework for the registration of startups, and establishment of incubation facilities at the National and County levels of government. The office of the Registrar of Start-ups is established by the Act as well as county registrars in each county. The Registrar is required to keep a database of all registered startups including their ownership and intellectual property rights of the entities.

To qualify for registration as a startup/admission into an incubation program, an entity must be a registered company, partnership or NGO; have been in existence for less than 7 years; be majority owned by a Kenyan and be the holder or licensee of a registered patent or software.

Incubation

A key feature of the Bill is the setting up of incubation centers at the County level. Counties, in conjunction with Kenya National Innovation Agency (established by the Science, Technology and Innovation Act of 2013) are required to put in place a policy framework for the development of the business incubation sector. Additionally, they are mandated to enter into partnerships with local and international incubators, offer fiscal and non-fiscal incentives to both incubators and start-ups, support research and development activities in the sector and facilitate protection of intellectual property derived from the start-ups’ innovations.

To qualify for certification as an incubator, an entity must demonstrate adequate technological capacity to accommodate start up activities and competence in management. Incubators will have the role of supporting technological entrepreneurs at the earliest stage of technological entrepreneurship, raising capital and preparing marketing for startups, creating investment opportunities for the private sector, including venture capitalists and facilitating transfer technologies from research institutions into the technological start ups industry.

The role of business support eco-systems for start-ups cannot be overemphasized; studies have shown that entities that receive support from an eco-system have a higher likelihood of securing investment and at a much larger scale than their counterparts. Further, these entities are more likely to create new jobs[1]. The move to create start-up incubators at the county level is therefore highly laudable.

Incentives

There is to be established a credit guarantee scheme to provide accessible financial support to startups as well as provide guarantees to investors. Additionally, the agency is required to offer support to startups in filing of patents as well as claims on infringement of intellectual property rights.

Tax-breaks

More clear fiscal incentives for investors to invest in start-ups are needed. The Act mandates the CS mandates the Treasury to put in place measures for the granting of fiscal incentives including tax incentives necessary for the growth of start-ups. The period between initial funding to the time a company starts generating revenue makes it difficult to attract investors or obtain finance to develop a concept past initial funding, which leads to the death of many start-ups. Tax deductibles /offsets on amounts invested in qualifying startups considering that angel investments are typically much higher risk, tax relief for capital gains and provision for loss relief on a more favourable basis than the baseline tax system are among the common tax incentives in many EU countries and have also been implemented by the Australian Government to support venture capital and business angel investment.

Conclusion

The Act, while laudable in some aspects, creates an extra layer of bureaucracy by requiring registration of already existing businesses into the start-up database. It neither simplifies the registration and compliance process for start-ups nor lowers the costs of setting up a business. Further, the requirement to have a business as “a holder, depositary or licensee of a registered patent or the owner and author of a registered software” in order to qualify for registration may lock out many businesses which do not have access to the capital or expertise required.

The ‘fiscal and non-fiscal support’ incentives intended to be offered to start-up businesses are too broadly put, thus making it difficult to follow up on the progress of implementation of the law. Additionally, there is need to address macro-economic policies that affect young growing and innovative businesses including strengthening of the IPO markets, to enable scaling up of the businesses.