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New Law Lights up Start-up Scene


August 29 , 2020
By GELILA SAMUEL ( FORTUNE STAFF WRITER )


A bill that proposes the formation of the National Start-up Council, which will be tasked with overseeing resource mobilisation for entrepreneurs and start-ups, is making headway in the drafting process.

The Start-up Business proclamation, which is being drafted by the Ministry of Innovation & Technology in collaboration with the Jobs Creation Commission for the past year, was sent to the Office of the Attorney General three weeks ago for legal review.

The Council, which will have between seven and nine members, will supervise the National  Innovation Fund and support the ecosystem for the development of innovation and the creation of jobs. The Minister of Innovation & Technology will chair the Council, while the head of the Jobs Creation Commission will serve as the secretary. Members of the Council will be nominated by the Minister and appointed by the Prime Minister.

The bill is requisite for removing the impediments to entrepreneurship by easing the procedures of establishing, running, expanding and closing down a business, according to Khalid Ahmed (PhD), advisor to the Office of Digital Transformation Programme at the Ministry.

The National Innovation Fund, which will be supervised by the Council and administered by the Ministry, will mobilise resources for the start-ups from the government, as well as loans, grants and investment from private equity groups and angel investors. The mobilised funds will be used to incentivise start-ups by covering the cost of fees for the registration of intellectual property and guarantees given to the start-ups to get funding from financial institutions.

"Providing early-stage risk capital to start-ups can unlock tech entrepreneurship," said Kahlid. "The government can spark this model, and others can follow suit, since the country lags behind peer countries in the creation of space for innovation."

Ethiopia is home to close to 80 start-ups, which is far behind Kenya and Rwanda. Ethiopia stood at 110 out of 137 in the ranking of the Global Entrepreneurship Index in 2018.


"This affects the perception of investors who are looking for places to put their money," he said.

Over the past two years, start-ups raised 11 million dollars from 63 private equity companies and venture capital investors registered in the country.

A Technical Advisory Board under the Council will be formed to screen potential start-ups for funds and will forward its recommendations to the Council. The Board will have members pulled from the public and private sector upon the appointment of the Minister of Innovation & Technology. A Startup & Innovation Unit that oversees the evolution of the start-up and innovation ecosystem will also be formed.

The bill is applicable for micro, small or medium enterprises that have been operational for a period of no more than five years. These start-ups are eligible to secure a Start-Up Label or Innovative Business Lable if they have a product or service that is either innovative or disrupts the existing market structure. To secure the label, the person who developed the system or the product should own at least a quarter of the company.


To acquire the Start-up Label, the bill has set out three stages: pre-registration, registration for competence and commercial registration. The innovative business has to have a defined maximum number of employees and a minimum annual turnover rate as defined by the directive.

For the pre-registration process, the company has to fulfill the conditions set out by the bill and request pre-registration at the Ministry, which will issue a pre-registration certificate that is valid for two years. Holders of this license will be relieved from turnover, value-added and income taxes. The details of this relief will be governed by a directive to be issued by the Ministry of Revenues.

After these start-ups develop a product or service, respective government agencies have to issue a certificate of competence for the start-up that goes through the pre-registration process within a month from initiation. These start-ups should go through commercial registration to acquire a license from the Ministry of Trade & Industry two years after the pre-registration process.


Currently, start-ups are led by young people who are just full of ideas working toward making those ideas viable for the market, according to Samuel Mekonenn, CEO of Afri-tech Software Technologies, a two-year-old tech start-up engaged in developing an e-commerce platform.

"It's a mismatch to be treated like other commercial businesses without standing on our own two feet," he said. "The legal frameworks are losing their chains and an all-round stakeholder discussion is crucial for the development of the sector."

Start-up and innovative businesses will be entitled to incentives for five years and three years, respectively. Start-up leave, start-up scholarships, funds to register intellectual property rights nationally and internationally, administrative legal support during registration, and support for accounting and human resources management will be provided to these businesses.

Access to finance, tax breaks, an extended tax reporting period, exemptions from employee retirement and health insurance responsibilities, guarantees to get financing support, and privileges to open foreign exchange accounts are additional incentives for these businesses, according to the bill.

The bill will also introduce ecosystem builders, such as incubators or accelerators, as recognised businesses. The country has close to 15 start-up incubators and 64 accelerators. The details of the governance of these ecosystem builders will be issued in a directive by the Ministry.

The ecosystem builders are required to obtain the business label and will be eligible to get funding and tax breaks. The bill also promises ecosystem builders operating outside of the capital to get more incentives.

Although lawmakers attempted to address many of the challenges in the start-up environment, there are some challenges that were overlooked by policymakers, according to Markos Lemma, co-founder and CEO of Ice Addis, an innovation hub and incubator that has supported 43 start-ups and gives entrepreneurship programmes yearly.


The bill lacks provisions for the closing of a business, which is a long bureaucratic process, according to Markos.

"Since start-ups are experimenting with ideas and if the market doesn't respond to the ideas," he said, "shutting down the business and introducing a new product is the key rebound."

The issue of physical addresses is still not fixed - though the Ministry of Trade & Industry does not require it while the Revenues Bureau does, according to him.

"Another challenge is over-taxation on grants and funding that discourages start-ups," Markos said. "Company valuation is based on the physical property, however, knowledge and intellectual properties aren't valued."

Investors that support a business that has received a start-up label will be privileged to have a tax break on capital gains, facilitation of expatriation of capital gains for foreign investors and allowing debt investments among other incentives. The Ethiopian Investment Commission might reduce the minimum investment capital set for foreign direct investment for start-ups, according to the bill.

If the government will proactively implement this, it will be revolutionary to the start-up space, according to Anteneh Tesfaye, country lead for Africa Talking to Ethiopia, a pan-African technology company that provides communication and payment solutions for developers and businesses.

The pre-requisites to be labelled a start-up should be thread carefully so as not to add another legal hurdle for start-ups, according to Anteneh, who suggests the requirements be flexible and accommodating.

"Many start-ups that were undermined at their initial stage turned out to be a surprise success," he said. "The end goal should be to support and incentivise entrepreneurship, not to erect more obstacles in its path."



PUBLISHED ON Aug 29,2020 [ VOL 21 , NO 1061]


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