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Uganda has often been lauded as being a highly entrepreneurial country. The highly entrepreneurial nature of the country’s population has however been impacted by a difficult operating environment that has limited the growth and scale of start-ups.
The key factors impacting the start-ups in Uganda are characterized by a broken ecosystem, marked by a lack a comprehensive legal and policy regime on start-ups, limited access to funding – including patient capital, and limited market access among others.
It is imperative to note that even in the face of these challenges, there has been commendable effort in strengthening the ecosystem, and driving start-up growth. Indeed, Ugandan start-ups have been engaged in capital raising rounds, and the total amount raised by Ugandan start-ups stood at approximately USD 23 million as at 2019 according to statistics from obtained from startupuniversal.com, largely in the mobility, healthcare, logistics and Fintech sectors.
The Nigerian Start-up Ecosystem
According to Disrupt Africa’s 2022 Report on the Nigerian start-up ecosystem, as at August 2022, Nigeria had a total of 481 start-ups. These start-ups employed over 19,000 people and have raised over USD 2 billion in funding between 2015 to 2022. Nigeria is one of the most popular investment destinations, and home to the biggest fund raising round on the continent so far by Flutterwave (USD 250 million).
The strides made by Nigeria are in no way accidental. As Disrupt Africa reports, the start-up growth is attributable to the strong ecosystem support that the start-ups receive. It may be argued that Nigeria’s success has been influenced by a strong ecosystem, whose pinnacle was marked by the enactment of the Start-Up Act.
This article makes the case for key interventions that may be adopted in Uganda, with reflections on the Nigerian Start-Up Act (the “Act”) and highlights the key aspects that can be adopted locally. The overarching point is that for the ecosystem to grow, the government must be intentional on creating a framework that will spur innovation and remove barriers to entry into entrepreneurship.
The Nigerian Start-Up Act
The core objectives of the Act include providing a legal and institutional framework for the development of start-ups in Nigeria, providing an enabling environment for the establishment of start-ups and to position Nigeria’s start-up ecosystem as the leading technology centre in Africa.
The Act provides for the critical interventions for start-ups including the start-up labelling process, the Start-Up Investment Seed Fund, Training and Capacity Development and Tax & Fiscal Incentives, among others, from which the ecosystem can benefit. These interventions are highlighted below.
- Start-up labelling process
Oftentimes, there is a conflation of the definition of a start-up and a small business/SME. The distinction between a start-up and small business is critical to ensure the efforts towards start-up ecosystem growth are impacting the right entities.
The Act resolves this challenge by providing for the criteria for labelling an entity a start-up, for purposes of such an entity being entitled to the incentives in the Act. The criteria include, among others, that the objects of such an entity must include innovation, development, production, improvement and commercialization of a digital technology innovative product or process and be a holder of a product or process of digital technology or the owner/author is a registered software.
Enacting a law in Uganda that adopts this approach would go a long way in ensuring clearer focus on promoting innovation and leveraging technology to transform Ugandan communities.
- The Start-Up Investment Seed Fund
The Act establishes the Start-Up Investment Fund, managed by the Nigeria Sovereign Investment Authority, and sets a minimum annual funding into the Fund. The purpose of the Fund is to provide finance to start-ups and relief to accelerators, hubs, and incubators.
As highlighted earlier, one of the key challenges of start-ups in Uganda is access to patient capital. Establishing a government-backed fund would therefore improve access to local funding alternatives for start-ups.
Further, the inclusion of accelerators, hubs, and incubators as beneficiaries of the Fund is also critical in strengthening the ecosystem, as these institutions play a critical role in the development of start-ups through various skilling initiatives. For example, Disrupt Africa reports that 45% of Nigerian start-ups had undergone acceleration. Providing support to these institutions ultimately increases their capacity to meet the needs of start-ups.
Uganda has a few hubs and incubators such as the Innovation Village and the Stanbic Business Incubator. Interventions similar to those in the Act would go a long way in spurring ecosystem growth in Uganda.
- Training and Capacity Development
The Act establishes the National Council for Digital Innovation and Entrepreneurship, whose Secretariat is charged with the responsibility of designing and implementing capacity building programs for start-ups. The Act further requires the Secretariat to collaborate with tertiary institutions to develop programmes whose aim is to impart knowledge necessary for the establishment and running of a start-up.
The importance of capacity development cannot be overemphasized. Critical skills such as business management, financial modelling, corporate governance, negotiation, and deal sourcing are relevant for the sustainability of start-ups. The impact of these capacity development programs would have far-reaching impact when championed by state agencies in conjunction with tertiary institutions.
- Tax & Fiscal Incentives
In conjunction with access to capital, the availability of tax and fiscal incentives is a key driver of start-up growth. The Act provides for a host of incentives including tax exemptions, deductions on research & development, access to export facilities, and access to government grants, loans & facilities. The Act also establishes a Credit Guarantee Scheme, whose purpose to extend accessible financial support to start-ups, provide financial and credit information for start-ups and provide financial management capacity building programs for start-ups.
To support Ugandan start-ups to scale and grow, the government must design start-up targeted incentives such as those adopted by Nigeria. These incentives, especially ease of access to credit and tax incentives would ensure that the start-ups are able to manage their operational costs, invest in research & development while being able to access capital for capital investments and scale.
The Act also provides for incentives for investors investing in start-ups by way of tax credits equivalent to 30% of investment in a start-up and an exemption from capital gains tax following disposal of assets by an investor in a start-up. This is indeed a key driver in attracting in-ward investment into the start-ups and is indeed an element that may be considered in the Ugandan context as well.
The case for a similar law in Uganda
The direction adopted by Nigeria, as is seen in the Act is a demonstration of a firm commitment by Nigeria to spur innovation and entrepreneurship. The growth of the start-up ecosystem in Uganda will require deliberate and targeted efforts.
It must be emphasized however, that efforts to drive start-up growth cannot be undertaken by one stakeholder, in isolation of the others. It will require a multi-stakeholder approach involving incubators, start-ups, the private sector, and the government. The targeted steps towards driving start-up will include a comprehensive legal and policy framework with key interventions that alleviate the various barriers to the establishment of start-ups and programs that promote innovation and sustainability of these start-ups.
The key considerations in the legal and policy framework would include:
- Tax incentives for start-ups and investors;
- A government-backed start-up fund, to provide patient capital to start-ups;
- Credit schemes, to provide start-ups with low-cost financing and improve access to credit;
- Government support to start-up hubs, incubators and accelerators;
- Increased focus on training and capacity development;
- Enactment and implementation of supporting legislation such as a Competition Act, to reduce barriers to entry into markets by start-ups; and
- A clear definition of what a start-up is, distinct from a small business, to ensure a more focused approach to the promotion of innovation and digital transformation.
Conclusion
While Uganda has immense potential for innovation, growth will not happen accidentally. It must be pursued with determination and laser-sharp focus through, among others, creating a conducive operating environment that is able to spur innovation and attract inward investment.
Disclaimer: “The views and opinions expressed on the site are personal and do not represent the official position of Stanbic Uganda, International University of East Africa and Makerere University.”