The success story of local tech ecosystems across Africa has provided a positive narrative over the past decade.
But much of this success has come despite the lack of an enabling environment or reformist legislation. Increasingly, however, governments across the continent are beginning to focus more on how to boost fledgling ecosystems. With a newly passed Startup Act (in Arabic)—a law which sets out government’s policies for startup growth—Tunisia appears to be taking the lead in this regard.
The law has come after two years of deliberations with legislators engaging entrepreneurs, civil society, and investors. The big picture is largely to put science and technology at the heart of Tunisia’s economic transformation rather than traditional sectors like tourism and agriculture.
As part of its provisions, the law supports startups in funding, grants them exemptions from corporate taxes, allows both private and public sector employees up to a year off from their current jobs to run their outfits, provides a government-sanctioned salary to founders and helps firms file for international patents.
It also strictly defines who can call their business a “startup”, compelling developers to apply for a “label” after fulfilling five main criteria. These include that the company not have existed for eight years; the number of its employees not be more than 100; that more than two-thirds of its shareholders be founders, angel or hedge fund investors; have an innovative business model, preferably technologically-based; and that its activities significantly contribute to economic growth. While the act doesn’t require a “startup” to be a pure tech business, it does articulate that its operations involve “the use of new technologies.”
Houssem Eddine Touil leads international partnerships for Tunisian Startups, an umbrella organization for startups that helped draft and vigorously campaign for the law. Besides improving administrative processes, Houssem hopes the new regulations will reduce the talent exodus to bigger hubs, help fill the huge funding gaps, and make “more people to believe in their dreams and launch their ventures, run and grow them on a global scale.”
Following the passage of the bill, prime minister Youssef Chahed tweeted it was “one more step to anchor our economy in the digital age.” It is a measure that’s become necessary as low economic growth, high unemployment, and poverty rates threaten the progress the north African nation has made since the Arab Spring began there in 2011.
Getting it right
Industry insiders like Houssem know that the passing of the law isn’t going to be a panacea for all the problems facing Tunisian startups. To draw on best practices, they have launched an index that will measure the impact of startups and track how they are impacting the local economy.
Wafa Ben-Hassine, a policy counsel in North Africa with digital advocacy group Access Now, says the government will also need to solidify privacy gains and loosen broad surveillance powers. Freedom House, the US-based advocacy group, scores Tunisia as “partly free” with regard to internet freedom. “For start-ups or any business to really operate well, a free environment, both online and offline, is crucial,” Ben-Hassine says.
Given the incentives involved, there’s also the risk of startup founders engaging in rent-seeking rather than true innovation and manipulating this policy to increase their own profits. Chiheb Ghazouani, a law professor and legal advisor to startups in Tunis, says there are guarantees against these manipulations including the various government commissions that approve a “startup label,” besides the strict objectives “defined by decree” that startups have to achieve during operations.
The lack of a legal and regulatory framework is also a reality that is prevalent across much of the continent. For most African startups, bureaucratic bottle-necks, a lack of access to capital as well as high and multiple taxes pose serious challenges.
For their part, Tunisian startups have faced legal, administrative, and investment challenges that hinder them from achieving full growth. One of those is archaic legislation which keeps off angel investors. For example, in Nigeria startups aren’t permitted to raise money through crowdfunding due to an antiquated law. Countries including Ghana and Nigeria have also taken up tough regulations that make it difficult for startups to operate drones, despite their potential benefits including tackling climate change.
To turn the tide, however, African governments need not just focus on tech startups but the overall operating ecosystem. Making regulation easier is the “the low hanging fruit,” Ameya Updhadyay, principal of the investment team at Omidyar Network, says. In addition to providing incentives such as tax subsidies to “make life easier” for founders, Updhadyay says countries must also focus on improving the local business climate and measure their progress on the World Bank Doing Business rankings.
One success story of how government interventions can boost ecosystems has come in Lagos’ Yabacon Valley where, in 2013, a partnership with the state government allowed for the deployment of high-speed internet fiber cables to boost connectivity for startups.
In Rwanda, Paul Kagame’s focus on improving the local business climate has been a boon for startups with the success of drone deliver program Zipline, being a testament. In Kenya, the government has partnered with innovation hubs like Nailab to support entrepreneurs, besides providing funding and passing a slew of progressive legislation to improve digital literacy and internet penetration.
The clear upside in Tunisia, Walid Sultan, the founder of Digitalmania, Tunisia’s first video development company, says, is that the new startup law will give many young people the chutzpah to start their own businesses and get connected—something that was also realized in post-revolution Egypt.
A few days after the law’s passing, Google started supporting merchant payments in Tunisia—a boost, he says, for local tech startups. “The failure-averse strategy will be gone,” Sultan said via email. “No fear of failure equals more risks taken.”