The Senate in Kenya has recently approved the 2022 Startup Bill, a significant move that could bring about notable changes in the country’s startup landscape. Once the bill is signed into law by the President, it will require Kenyan startups to allocate a minimum of 15% of their expenses to research and development (R&D) and maintain full Kenyan ownership to be eligible for legal recognition and government support. The bill is currently awaiting the President’s approval.
Although the bill offers various incentives like tax breaks, grants, and credit guarantee schemes to foster innovation, it has raised concerns due to its insistence on exclusive Kenyan ownership. Critics fear that this requirement could hinder growth by excluding startups with foreign co-founders or investors who do not meet the ownership criteria, potentially limiting their access to crucial benefits and impeding their growth prospects.
One section of the bill stipulates, “An entity shall be eligible to be registered as a startup and for admission into an incubation programme if the entity is wholly owned by one or more citizens of Kenya and at least fifteen percent of the entity’s expenses can be attributed to research and development activities.”
Critics of the bill caution that while its intentions are positive, the stringent requirements could potentially stifle the innovation it aims to promote. Many successful Kenyan startups have garnered substantial foreign investment and have foreign founders or co-founders whose contributions have been instrumental in positioning Kenya as a hub for innovation in Africa. The insistence on local ownership could exclude such startups, potentially diminishing the country’s attractiveness to international venture capital.
The mandate for a 15% R&D expenditure has generally been viewed more positively as it encourages deeper innovation within the Kenyan startup ecosystem, pushing founders to prioritize activities like securing patents, software registration, and engaging in essential research to maintain competitiveness on a global scale. This requirement is expected to compel companies to focus on long-term innovation and intellectual property as Kenya’s startup sector continues to evolve.
If the bill is enacted into law, the Registrar of Startups will be responsible for overseeing startup operations, including research activities and monitoring the flow of venture funding. While this oversight could enhance accountability, it also raises questions regarding the compliance burden on startups already grappling with tight budgets and complex business challenges.
Steve Okoth, a tax director at BDO East Africa, has described the 15% R&D requirement as a step towards institutionalizing innovation among founders and boosting competitiveness within the startup ecosystem. However, he highlights potential challenges, noting that many startups operate on thin margins and may find it difficult to allocate funds to R&D amidst other financial pressures.
In conclusion, while the bill aims to promote innovation and growth within the Kenyan startup ecosystem, there are concerns about the potential negative impact of its strict ownership and expenditure requirements. Critics suggest that a more flexible and incentive-driven approach tailored to the realities of Kenya’s startup landscape may be more effective in fostering sustainable innovation and development.