Unconventional Capital (UNCAP) notes that,
- 6/12 of the fastest growing economies in the world are African
- 22% of Africa’s working age population are starting new businesses
- 98% of early-stage enterprises are financially underserved and
- 90% of Venture Capital funding in East Africa still goes to expats.
This statistical evidence highlights the need for African countries to start strategizing on legislation that supports new businesses particularly startups which have become a tool for economic growth in various countries.
African startups have been on the rise, and they are making a positive impact in local communities and beyond. The enactment of a Startup Act initially in Italy and in the first African country, Tunisia, has attracted foreign direct investments and positive economic growth in terms of revenue. This positive outcome has led to a number of countries such as Senegal taking strides to establish a Startup Act.
Afrikanheroes states that before the implementation of Startup Tunisia, one of the pillars of the Startup Act of Tunisia, Tunisia was not on any list for top investment destinations in Africa. Upon enacting the Startup Act in 2018/2019, Tunisia received over $22,400,000 (twenty-two million four hundred thousand United States Dollars) from investors in 2019 alone and is currently one of the top destinations for investors in Africa. Many African countries are making considerations to enact the Startup Act and Zimbabwe is not one of them. So, the pertinent question is, does Zimbabwe need a startup act and why?
This article answers the question why Zimbabwe needs a startup act by looking into; (i) defining and explaining a startup and what a Startup Act is, (ii) challenges that Zimbabwean startups have faced and lastly, (iii) why enacting a Startup Act can be the solution to solve some of the challenges that startups have been facing in the Zimbabwean environment. The article also looks at possible alternatives to the Startup Act.
What is a Startup?
The word startup is not a new concept in this era but defining it is not easy, simply because there is no accepted universal definition of what a startup is. There are various definitions of what a startup is, but for the purposes of this discussion the following two definitions are going to be used;
- According to Steve Blank who is also known as the father of innovation in Silicon Valley, a startup is, ‘a temporary organization designed to search for a repeatable and scalable business model.
- A startup can also be defined as a company or project undertaken by an entrepreneur to seek, develop and validate a scalable economic model.
Startups have been recognized as one of the pivotal drivers to the growth of the world’s biggest economies like the United States of America with examples such as Apple, Google and Microsoft in the Silicon Valley contributing a tremendous amount of tax revenue to the US economy and GDP.
From the above definition, it is notable that one of the significant factors that differentiate a startup from a small scale business is growth. Startups are targeted at growth from the word go and small-sized businesses are usually started to meet the present financial need of their families. It is also imperative to note that startups are not sector-specific against the popular belief that they are usually started focused on the tech-industry.
However, given the technological advancement, many startups have sought to bring a solution to everyday problems through digitalized solutions. In any case, where the startup is not focused on the tech-industry, at some point in the value chain they will have to use digitalized services. Nevertheless, this article focuses on all forms of startups made by innovative founders regardless of the type of industry they focus on.
What is a Startup Act?
The Startup Act Annual Report 2019-2020 produced by Smart Capital describes the Tunisian Startup Act as an innovative and unique legal framework to promote startups. Startup Acts promote regulations, policies, and sometimes create novel institutions, which empower the entrepreneurial ecosystem of a country or jurisdiction.
The Italian Startup Act, enacted in 2012 was the first-ever global law regulating and promoting startups in Italy. It was established in a bid to boost innovation and foreign direct investments within Italy. Senegal has also followed suit in enacting a Startup Act and other countries inclusive of Rwanda, Kenya, Nigeria, Ghana and DRC are already making considerations to establish one.
Research shows that in countries where the Act is functional, there has been a positive change in the economic development of the country hence Zimbabwe can also benefit from such a law if it jumps on the same bandwagon.
Generally, a major criterion used to identify whether or not a startup can enjoy the benefits under the law is the issue of innovation. Startup Acts usually target to support innovative startups that are also referred to as social enterprises. Social enterprises seek to balance between commercial gain and social impact in all business activities. These enterprises can be for-profit or not-for-profit but once an enterprise meets the criteria for being an innovative startup, there are benefits that accrue to the social enterprise and these differ per country. According to the Tunisian Startup Act,
- A startup is a company/business that is below eight years and must not have more than a hundred employees
- The startup founders must own up to two-thirds of the company shares
- Startups get corporate and capital tax exemption benefits and one-year state salaries with three co-founders and
- Startup founders are granted the right to return of their old job should their startup fail among other benefits.
The Senegal Startup Act goes on to include tax policy recommendations and startup financing incentives. The Act stipulated a three-year flat tax exemption, subsidized registration rates, free training for young entrepreneurs among others. The Senegalese governments’ efforts towards digitization of their economy yielded results as two years after their Startup Act was adopted, there has been a significant increase in the number of startups in the country despite the global pandemic.
According to the Review of Startup Act Policy in Africa, the Rwandan government is also championing the enactment of a startup act and they want to integrate the law in their national policy to spearhead policy reforms that will aid startup development in the country.
In Kenya, the published Startup Bill seeks to aid the establishment of incubation hubs for startups and building a network of investors for these startups both local and foreign. If similar law is in place in Zimbabwe this would gel well with the National Development Strategy 1 (NDS1) that provides for the need for innovation hubs catering for innovative industries in the country, one such incubation center has been set up in Waterfalls, Harare.
Why Zimbabwe needs a Startup Act
Fundraising in Africa is a slow, arduous process and early-stage startups need funds to reach their targeted milestones. Traditional investment methods such as cash and bonds are sometimes not scalable or cost-efficient enough to boost startups in their early stages. One of the major causes of failure for Zimbabwean startups at early stage is that they lack sustainable funding. Most local startups, particularly those in the tech industry have been pitching their ideas on digital platforms and getting investments from angel investors without the help of the government.
Recently, a local startup called FlexFinTx became Zimbabwe first startup to be selected for 2021 World Economic Forum Tech Pioneers Cohort and this will certainly open up opportunities for this local startup. This was achieved without government funding and support. If, however, similar innovative startups can get access to government incentives, there is likely to be more room for positive growth because startups can quickly get off the ground and start producing returns given that vital processes that ordinarily take long to complete for startups such as registrations and sourcing seed-funding can be shortened.
Another obstacle that startups are facing is the expense and time required to comply with government regulations. Techzim offers comprehensive insights on startups in Zimbabwe and from the numerous publications concerning startups in Zimbabwe, it is apparent that most Zimbabwean startups have resorted to seeking funding and support from external stakeholders. This stems from the lack of an enabling environment for the growth of startups in the country.
Zimbabwe does not have a clear-cut policy for nurturing startups from ideation to established companies and this is a stumbling block for many entrepreneurs who seek to begin their journey in this industry. The startup founders have to work around regulations of other industries until they adapt to the suitable regulations applicable to their industry. This process is time-consuming and not cost-effective, while the resources channelled towards this process can be used in developing the startup. A system that allows startups to function properly in the economic environment using less time becomes a better option, hence the need for a startup Act that will establish such a system.
The recently adopted National Development Strategy 1 (NDS1) lays out the strategies for economic recovery in the country from 2021 to 2025. Some of the strategies laid out are particularly relevant for innovative startups. The NDS1 mentions that during the period of implementation, governments’ vision is to equip graduates with skills that empower them to become innovative towards societal development through transformative science and technology knowledge application that delivers goods and services.
The objective is to ensure that resources earmarked for Research, Development and Innovation will be availed in order to operationalize Innovation Hubs and Industrial Parks in Institutions of Higher Learning. As such, one of the strategies under the NDS1 to achieve this is to operationalize the Venture Capital Fund among others. With the NDS1 plan to potentially increase the GDP of Zimbabwe through innovation, a Startup Act is arguably the ideal piece of legislation to facilitate the creation of an environment that will push startups to generate more revenue which will have an impact on the GDP of Zimbabwe.
A startup law can jumpstart the Zimbabwean economy and increase job creation by accelerating the growth of startups. The American Startup Act created an Entrepreneurs’ Visa for legal immigrants so that they can remain in the U.S., where their talent and ideas can fuel growth and create American jobs. It also created a new STEM visa so that U.S-educated foreign students who graduate with a master’s or a doctorate in science, technology, engineering or mathematics can receive a green card and stay in this country, launch businesses and create jobs. This provision ensures that both foreign and local talent is channelled towards achieving economic growth.
Zimbabwe has taken up a similar initiative in its NDS1 where it has expressed its interest to revive the economy through incentivizing training in STEM disciplines as a response to the country’s needs for innovation, industrialization and creation of wealth. It also seeks to reconfigure and internationalize Higher and Tertiary Education to attract more foreign students.
Having a dedicated law that seeks to support innovation can buttress the need for the government to support the strategies in the NDS1 and ensure that once university graduates complete their tertiary education, they can also launch startups and create jobs in the country. This can go a long way in curtailing the unemployment rates and contribute to the increase of tax revenue and GDP of the country. Facilitation of skills and technology transfer can also make innovative solutions scalable and sustainable.
This section explores other alternatives that can be used in lieu of a startup law. These include amending the current Companies and Other Business Entities Act [Chapter 24:31] or providing a more comprehensive SMEs policy and laws that provide the same benefits that are guaranteed by a Startup Act. Another consideration that can be taken by the government in Zimbabwe is to amend the Zimbabwe Investment Development Agency Act (ZIDA Act) to include a chapter or a component that provides for the facilitation of investments targeted at the growth of startups in Zimbabwe.
ZIDA is a one-stop shop for investors seeking investments opportunities in Zimbabwe and its mandate focuses on ensuring good investment strategies. The agency can put up a comprehensive legislative framework that protects the interests of both the investor and entrepreneur. Investors seeking to invest in local startups can get to know of the opportunity to invest in enterprises that are in their initial growth stages, and the technical assistance required to conclude the transaction may also be accessed through ZIDA. The agency could also set up committees that focus on the implementation, and monitoring of investments for startups.
In as much as consolidating provisions relating to startups in existing laws is possible, both investors and entrepreneurs need to be assured of a conducive environment hence the need for a separate law for startups which will also establish supportive structures for startups in Zimbabwe.
It is a fundamental goal of every government to create job opportunities in order to lessen unemployment levels and eventually boost economic growth. A Startup Act with the aim of creating deliberate structures to support innovation is a conduit to reaching national economic development goals. Legislation is key as it allows startups to operate with the certainty afforded by a clear framework. As such, it is vital to have an enabling act for startups to be assisted or to be included in the national budget. Now is the time for Zimbabwe to start making these considerations to enact a Startup Act to achieve economic growth.
By Tsitsi Manavele from The Sustainable Practice, an organisation that provides support to SMEs and emerging brands to register and comply with all regulatory requirements and to advise them on appropriate legal structures to facilitate growth and investment readiness.