Unemployed youth have been advised, by mockers and policy makers alike, to start own businesses in order to create jobs themselves. When the youth complain that businesses are hard to start, manage and upscale, the advisers always have a few success stories to point fingers to without offering practical solutions to the several challenges facing new businesses. Personally I have been involved in two startups just this year and progress is not coming easy. I have identified six major challenges that I suggest should be addressed by legislation and they include Funding, Credit Terms, Taxation, Registration Process, Opportunities and Safaricom stole my idea.
From 22nd to 24th November 2013 iLab in Strathmore University will host the Startup Weekend where young and professional entrepreneurs will have the opportunity to interact, share, and dialogue on some of the challenges facing startups. During the event that I plan to attend, I hope that the issues I am raising in this post will be tackled for policy formulators present in the event to pick them up and ensure implementation. Any policy maker reading this should also follow up on these real challenges that face startups and help in enacting legislation to protect startups.
The youth do have ideas, lots of ideas that they think can generate income. Some of these ideas die at thought because of one reality: there are no funds to transform them into viable businesses. I know a lot of successful entrepreneurs point out that funds is never the issue but a viable product. Reality however has it that some of those who say funds are never an issue started with funds, be it as little as Kshs 5000 or as little as Kshs 5 million (I have had a successful entrepreneur saying that he didn’t have money so he started with only Kshs 5 million), funds are needed to transform the ideas into businesses.
As a step towards sorting the funding issue, the Jubilee launched the Uwezo Fund. Kachwanya took time and analyzed the Uwezo Fund and found it wanting (read Uwezo Fund Is a Bad Idea, Create Investment Wing For Proper Funding). Uwezo Fund requires the youth and women to form groups of 10 to 15 people and think of business ideas to thereafter apply for funding. Any serious entrepreneur knows that it is likely to take 10 years for a group of 10 people to agree on an idea that can generate serious income.
What Kachwanya suggested in that analysis is that Uwezo Fund should instead be channeled to startups founded by two to three people. The startups should be funded based on product viability, and to avoid cries of favoritism and tribalism, the startups should be chosen per county.
I would like to take it a step further and recommend the establishment of a Startup Legislation that will establish a Startup Board mandated to fund viable startups every year. The board should be required to establish mechanisms for identifying viable startups based on product valuation, fund them, and help manage them for the first two to five years. If for instance the board decides to hold Startup Shows in every county every year akin to the Agricultural shows, or startup competition akin to music festivals, then with the help of experts and judges they can always identify a number of startups that have the best ideas for funding. The legislation will go further to enshrine rules for angel investors and venture capitalists interested in helping startups get footing, where the legislation will require the investors to consider product viability and not financial history. Once the funding issue is sorted, the legislation goes a step further to address taxation issue.
It has been said that Kenyans are the highly taxed in the world. Lately there have been reports that foreign investors prefer to pitch their businesses in Tanzania and Rwanda as these countries offer lenient taxation regime compared to what is available in Kenya. What Kenya should realize that leniency in taxation for investors is a formidable incentive that would ensure expanded investment opportunity. This leniency should not just be offered to foreign investors but also local investors. And at the understanding that any new business is a startup, then any relaxation on taxation should be applicable to all startups and especially startups started by the local youth.
We do know that taxation on individual has morals. There is a minimum wage below which individuals are not taxed. Although this might not apply directly to corporate citizens, but the principle can be borrowed and enacted into a legislation. The legislation on startups would thus establish that startups less than two or so years are not required to file any taxes, VAT or otherwise. The Legislation should however be smart enough to foresee a possibility of directors establishing startups, doing business within the “tax free” period, abandoning the startups, and establishing news for similar lines of work.
3. CREDIT TERMS
As the situation currently stands, it is quite discouraging to do business with corporates. Most corporate bodies require suppliers to give 60 to 90 days credit period before writing that important cheque for goods already supplied or services delivered. If a startup requires shs 2 million to carry out a project, the startup doesn’t have the funding so probably they take LPO financing, then after the LPO is paid by the customer they pay back the loan with interests, how fast can the startup grow? Those behind the startup need surplus to fund their operations, pay salaries and wages, and plough back some profits for scaling up the startup. A situation where LPO can be paid 90 days after the work is done is the biggest setback for startups.
A report on Daily Nation stated that most startups fail because they cannot fund their operations and LPOs. Most startup directors have been forced to dig into their own pockets and borrow from friends (given the unfriendly terms on bank loans) to fund their operations and finance the LPOs, just because the corporates want the job done first before payment is made 90 days later.
A legislation requiring that services offered by startups younger than two years to be paid let’s say 40% upfront and 60% at completion will help cushion the startups against financial difficulties. This way the startups will have some upfront funding to do the job required then be able to immediately follow on the next project as they save for a big launch after the two years grace period expires.
4. REGISTRATION OF COMPANIES
I have to applaud Kibaki’s government in trying to speed up the registration process of companies and reduce the charges. However this process still need refining. Some companies have come up that can help one get a new company within one day for shs 25,000. The government should capitalize on this and make the process of registration efficient such that within one day a startup can be created for as less as shs 5,000, or even less, for a company to be established. If every government department had computerized databases that are interlinked, then things like name search and verification of directors’ details can happen within minutes.
The suggested legislation on startup should require that it doesn’t take more than one day to have a company or business name registered at rates affordable by anyone with an idea to setup a company/business.
Not so long ago I walked into an established business to market one of my startups to one of the directors. Although the director was friendly and pleased with my bold move, his questions on the line of “who have you dealt with before”, “which major projects have you accomplished” etc were discouragements as the company was not more than two weeks old.
The fact that startups don’t have a history, initial projects, past clients against the preference of the government and existing companies to do business with big names and multinationals is a very big challenge that should be addressed. The proposed legislation should address this issue by enacting the 30% tenders for the youth (should be transformed into tenders for startups) into law and expanding it to private sector. This way every government body and private company will always ensure that the small projects that can be done by startups are tendered accordingly. There are always some “small” jobs that can be done by startups even in the big corportates. These smalls jobs when given to startups that are funded as per item 1. above, exempted from tax as in item 2. above, and paid for immediately as per item 3. above, then a startup will have itself to blame close to 100% of the time if doesn’t succeed.
6. SAFARICOM STOLE MY IDEA
We’ve heard this before and talked about it. (Read Is Safaricom Being Greedy By Launching Services to Compete With Start-ups?) As much as it is true that we cannot blame the big guys for killing the small fish who have brilliant but competing ideas, Startups should be protected against the big fish. Personally I have ideas that I fear presenting to the multinationals as I have been told that these multinations will listen, engage me, and after their staff can carry on with the idea without my help, they’ll discard me like trash.
To protect startups from the unfair competitive spirit, the proposed legislation or another legislation should be set up that completely transforms the currant laws and entire policy framework on patents, copyrights, and trademarks. Ideas that can be patented should be clear. The process of obtaining a patent should be made easy and affordable. Lastly Non-Disclosure Agreement should be such that they are easy to honor than dishonor.
I do believe that if these issues are addressed legislatively, then the ground for fair competition shall have been setup where young kids are not afraid of the giant feet.