Kenya’s Startup Bill: A Boost for Local Innovation or a Barrier to Growth?

In a controversial moment for Kenyan startups, the Kenyan government has passed a new law that would require startups to meet certain conditions in order to qualify for legal recognition, tax breaks, grants, incubation programmes, and credit guarantees. The 2022 Startup Bill, which now awaits President William Ruto’s assent, raises questions about the direction that should be taken by a country to promote entrepreneurship and innovation in Africa.

Key Provisions of the Bill

The newly passed Startup Bill introduces several regulatory measures aimed at fostering innovation in the country’s startup ecosystem.

The first measure is a requirement for Startups to allocate at least 15% of their budget to research and development (R&D) if they wish to develop themselves in the country. The intention behind this measure is to force startups to further value innovation in their proceedings as to further benefit the Kenyan citizens. Furthermore, an unseen benefit of this law is that it would strengthen the local research ecosystem by ensuring sustained funding.

The second measure is the local ownership requirement. This law requires startups to be owned at a minimum percentage by Kenyan locals. This provision would not only ensure that economic value generated by startups remains within Kenya but also encourage foreign investors to form partnerships with Kenyan stakeholders

Then, the bill also introduces a startup registry where eligible businesses must register to receive government support if they meet the two previous requirements.

Startups that meet the criteria will gain access to:

• Financial incentives such as tax breaks or grants.

• Business development programs, mentorship, and networking opportunities.

• Access to government-backed incubators and accelerators.

Finally, the legislation encourages partnerships between startups, corporations, and government agencies to facilitate technology transfers and industrial innovation, strengthening Kenya’s position as a leading startup hub in Africa.

Potential Benefits for Kenyan Entrepreneurs

With the measures it proposes, this Kenyan Startup Bill, designed to create a more structured and supportive environment for local entrepreneurs, could therefore empower Kenyan entrepreneurs. The main benefit that can be surmised is the increased role of Kenyan founders in startup's strategic decisions and the increased access to legal and financial benefits as startups led by Kenyans will be better positioned to receive government support.

The bill will also drive technological advancements within Kenyan startups which will create a better ecosystem for Kenyan startups to develop in. Moreover, a positive consequence of the bill could be an increase in the global competitiveness of Kenyan startups which would not only be more attractive to foreign investments but also improve Kenya’s overall position as a hub for innovation. What's more, the increase in innovation could help startups lead more sustainable business growth as startups will develop higher value intellectual property (IP) and greater resilience to market disruptions.

Should Africa’s attainments come as a surprise? Not really. Leading science and innovation has run in African veins since ancient times. Its accomplishments, however, have seldom been attributed or publicised. They range from algebraic equations born some 35,000 years ago to the engineering genius of the pyramids; from the astronomical brilliance of the Dogon people, to architectural masterpieces of Timbuktu or Great Zimbabwe. Though, advancing Africa’s Science, Technology and Innovation (STI) and its effective application to economic transformation is the new challenge.

- Carlos Lopes, executive secretary of the UN Economic Commission for Africa.

Challenges and Concerns

As much as this new bill is acclaimed to be the start of a new wave of technological innovation in Kenya, some are skeptical and believe that it does not respond to the reality of most startups in Africa. The problem with such a measure is that it does not take into consideration three key aspects that are vital to certain start-up’s early stage development:

Startups in Kenya rely heavily on equity funding from foreign investment which help them stay afloat in the inevitably difficult times of its creation.

As such, capital flight could be a byproduct of this bill.

Investors look for clear pathways to acquire, merge, or exit their investments. Restrictions on ownership might complicate acquisitions, making it harder for startups to scale or attract global partners.

Exit strategy challenges could therefore be a direct consequence of the laws presented.

Not all industries are dependent on R&D, such as service-based startups, which could suffer greatly from the R&D requirements.

Some startups might therefore be favored over others for their R&D expenses which does not necessarily reflect its benefits for the economy.

A More Global Perspective

So, the bill has some flaws. However, it is part of a global trend where governments worldwide are implementing policies to support and regulate local entrepreneurship. Indeed, European countries such as France, Germany, and the UK take a more government-supported approach by offering grants, incubator programs, and funding initiatives like La French Tech. Countries like Nigeria and South Africa have more flexible foreign ownership policies, which make them more attractive to global investors.

As such, instead of restrictive policies, Kenya could incentivise foreign investors to collaborate with local entrepreneurs through partnerships, research grants, and co-funding initiatives. This would ensure that international capital continues to fuel innovation while also empowering Kenyan founders. If the Startup Bill is implemented thoughtfully, furthermore, it could attract more African entrepreneurs, encourage regional investment, and position Kenya as a model for startup regulation across the continent. The 2017 Tunisia Startup Act, often cited as the best example of a government-backed startup policy in Africa, could serve as an example as it was widely successful.

What KABA sees in this

Kenya’s Startup Bill aligns with global trends, but it must remain flexible and adaptive to avoid unintended negative consequences. By studying global success stories, collaborating with international investors, and ensuring the right balance between protectionism and openness, Kenya can create a thriving startup ecosystem that competes not just in Africa, but on the global stage. We also believe that this is a continuation of Kenya’s Startup success so far and that there could be interesting developments to come.

Written by Thomas Viarnaud and EL KHADER Mohamed-Amine