Startup Acts are the next form of policy innovation in Africa

Street scene in Nairobi, one of the epicenters of Africa's startup ecosystem. (Flickr/Xiaojun Deng)

African nations have surprised the world with the ableness of their defense against COVID-19. But even as most African countries have escaped the high mortality rates experienced in the West, they have suffered disproportionately from the parallel plague of the global economic depression. Africa is expected to face its first recession in twenty-five years.

That recession certainly hasn’t hit Africa’s tech industry. In fact, as countries adapt to the expanding digital universe created by COVID-19, technology ecosystems across the continent are booming—and global investors have noticed. Africa-focused startup funding finally crossed the $1 billion dollar mark last year (at $1.3 billion), already a big increase from previous years (total investment in African startups was just under $200 million in 2015). The better news is that, eight months into 2020 and in the midst of the coronavirus pandemic, total funding had still increased by 8 percent compared to 2019, according to Africa-focused fund Partech, making the tech sector an undeniably lush spot in Africa’s parched economic landscape.

A string of recent investment milestones clearly indicates a sector on the rise. In April 2019, Jumia made history by becoming the first startup from Africa to list on the New York Stock Exchange. Two months ago, Stripe acquired Nigeria’s fintech darling Paystack for over $200 million: the largest exit for an African startup, ever. And just last month, Bezos Expeditions—the personal venture capital fund of Amazon CEO Jeff Bezos—participated in a $30 million Series B round investment for the fintech startup Chipper Cash, which offers cross-border payments in seven African countries. Many US investors once viewed Africa as too risky, but African tech—although still small compared to the global tech sector—is drawing increased attention from Silicon Valley executives and Fortune 500 CEOs.

It’s no surprise that Nigeria, Kenya, and Egypt—big economies home to the continent’s most vibrant startup hubs (Lagos, Nairobi, and Cairo)—have benefitted the most from this surge in investment activity. Because startups are universally recognized to be a vital engine of economic growth, fostering a vibrant innovation ecosystem is a chief goal of governments across the globe. And while countries like the United States, China, Israel, Sweden, and Singapore have taken slightly different approaches to nurturing a ‘startup culture’ (one that encourages risk-taking and rewards talent), these approaches have consistently included both heavy government investment in local ecosystem support organizations and startup legislation that simplifies business transactions. In Africa, successful startup ecosystems have also benefitted from government engagement, too, though there have been far fewer resources available and more red tape for entrepreneurs to wade through. There’s even an argument to be made that the emergence of Africa’s top startup ecosystems is more a function of size than anything else: Egypt, Kenya, and Nigeria have three of the top seven largest populations on the continent, replete with large diaspora talent networks and growing youth populations eager to adopt mobile technology.

Attempting to cash in on the growing global surge in investment, smaller African countries have tried to bolster their own innovation ecosystems through supportive legislation. Italy passed the world’s first-ever Startup Act—a law specifically designed to spur innovation demand and foster entrepreneurship—all the way back in 2012, and since then plenty of African governments have considered following suit. The passage of Startup Acts in Tunisia and Senegal, in 2018 and 2019 respectively, paved the way for multiple proposals in other African countries that reflect growing interest in improving the enabling environment for startups and investors. Rwanda and Ghana, home to two of Africa’s fastest growing economies, have both kickstarted discussions with key stakeholders in the last few months. Even larger economies, such as Kenya, Ethiopia, and Uganda, have jumped on the bandwagon and are in various stages of passing their own versions.

African entrepreneurs have long suffered from unfavorable regulatory environments that can make it harder to start, grow, and scale an innovative business. Endeavor Nigeria CEO Elohu Giban-Mbelu recently made this point in a TechCabal interview, saying that “…the lack of clarity and the time or cost spent on lobbying efforts around policy and regulation can take away from time and cost injected into growing the business instead.” For many entrepreneurs—especially in countries like Nigeria where elderly politicians rule over a young populace—tech-savvy individuals tend to view the government as out-of-touch with their demands. Changing this perception by reviving trust between lawmakers and entrepreneurs, an important first step, requires new policy formation with the interest of entrepreneurs, investors, and other stakeholders at heart.

Startup Acts could help do the trick. Designed to make it easier for startups to operate, Startup Acts include an amalgamation of policies intended to increase the incentives for young people to start a venture, investors to put their money into promising companies, and other ecosystem actors to lend their support where it’s needed. For Tunisia and Senegal—the two first movers in this arena—these policies are part of broader government strategies to position their countries as innovation hubs by leveraging an emerging tech scene to improve economic development.

Ideas put forth in the Tunisia and Senegal acts were developed through an innovative policy hackathon hosted by i4policy, a multi-stakeholder group promoting policy reforms in Africa’s startup space. Key elements of Tunisia’s Startup Act include state salaries for up to three founders per company during the first year of operations, generous tax breaks, and a one-year leave period for both public and private sector employees to start a company with the right to return to their old jobs. Additional incentives encourage potential entrepreneurs to launch new ventures, including available startup grants, fast-track licenses to obtain startup registration documents, and increased state support for covering patent licenses. Similar to Tunisia, Senegal’s version aims to help position the country as the Francophone leader in tech and entrepreneurship on the continent. The country’s policy includes three tax-free operational years for startups, training for youth and female entrepreneurs, and a startup registration platform easily accessible on a government website.

Two years after being passed, Tunisia’s Startup Act has paid off and the country’s digital economy has deepened. 2019 Q4 data obtained from Entrepreneurs of Tunisia (EOT)—a new organization formed after the Startup Act passed—shows that the country had over 165 new startups registered, twenty-four new co-working spaces opened, and $18.5 million fundraised in a one-year period. In an April 2020 profile by WeeTracker, some Tunisian entrepreneurs expressed concerns about how the pandemic will affect business, however they largely credit the Startup Act for solving the ecosystem’s main bottlenecks by making it easier to focus on growing their venture. This is a very promising indicator that undoubtedly influenced other countries to consider following suit and enacting their own version. If implemented more broadly across the continent, Startup Acts could further catalyze a positive change in the broader business environment by improving local support for entrepreneurs and signaling to global VC investors that African innovation is here to stay.

While it’s still too early to tell how Senegal’s Startup Act will impact its fledgling tech ecosystem, the increasing appetite among governments in signing pro-startup legislation is encouraging. Enacting this type of legislation to provide more support and runway for startups—a key engine for job growth in African economies—could prove even more important during economic downturns when businesses suffer and credit dries up. Perhaps this is a sign that governments recognize how intertwined growth in African tech ecosystems are with GDP; data from TechCabal found that, in Nigeria, the technology sector contributed more to the country’s overall GDP than the oil and gas sector did between 2010-2019. Put simply: growth in technology innovation can boost overall economic growth at a time when Africa faces its first continent-wide recession in over two decades. A key component to expanding startup ecosystems, keep an eye on the Startup Act trend to continue across Africa after Tunisia’s success, and expect more countries to sign similar pro-startup legislation to spur innovation, create jobs, and grow trust between governments and entrepreneurs.

Jordan Wolken is an intern with the Atlantic Council’s Africa Center. Follow him on Twitter @WolkenJordan.

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