If Tunisia had not passed a Startup Act in 2018, the fate of Galactech, a game publishing startup, located within the Megrine Business Center, would have been heavily uncertain. A year before, in 2017, Tunisia was no where to be found on the list of top ten venture investments destinations in Africa. And if Galactech had worked harder, it would possibly have taken sheer luck to break through the ceiling. Now, barely a year after securing a startup label under the Tunisian Startup Act, the startup has proceeded to raise hundreds of thousands of dollars in investments, thanks to the Oman Technology Fund (OMF) and other angel investors. Not only that, Tunisia is now crawling up on the VC funding table for Africa, occupying the 11th position in 2019. In fact, according to Startup Act Annual Report released by Smart Capital, an organization empowered by the Tunisian government to administer the Startup Act, startups (mostly early-stage) in the north African country received over $22.4m from investors in 2019 alone. This is a big deal for a country of only about 11.8 million people. However, while these may look glamorous on the surface, below, we dig deeper into whether this whole excitement of a Startup Act is worth it, after all.
TUNISIA
Two years on, startups in Tunisia know the respite the Startup Act could bring in their early-stage journeys. Galactech is a living witness, and to have been given a label under the Startup Act means so many things. For a 3 year-old startup that it was then, a startup label is not a fancy appendage; it could open so many doors, including the following:
The startup grant:
The grant, which is in the form of a monetary grant, could allow Galactech’s co-founders and all those who are shareholders in the startup to cover their living expenses for one (01) year, following the grant of the label. The maximum amount of the grant is $2 per month and the minimum amount is $0.37 per month.
Bearing the cost of licences:
Since Galactech (and other ‘labelised’ startups) are in the business of innovation, there is a huge chance that most of their products will need patenting or other forms of legal protection. Smart Capital comes in here to help them by covering the cost of their patent registration whether in Tunisia or in other offshore countries. This support also extends to the provision of legal services and other support necessary to procure all the required protection in respect of the startup’s intellectual property.
Startup creation leave
For founders of Galactech and other startups, being labelled as a startup under the Startup Act will also automatically allow them a work leave of up to one (1) year, which can be renewed for another one year. What this means is that if the founders have previously been in paid employment and are blocked from leaving the employment or setting up a competing business, the grant of the Startup Label to startups founded by them will mean that their employers (public or private) cannot oppose their departure from the companies to build their startups; the only exception being the case of a private employer employing less than 100 employees.
However, if the startup fails within that one year of the leave, or the founders simply do not want to continue the journey, the founders granted the leave may terminate it (any time) and return to their original jobs with notice.
Hence, were Galactech founders to exploit this benefit, it would give them the edge to dedicate themselves full-time to the launch and development of the startup.
Apart from this, the Tunisian government, through Smart Capital, contributes to continued payment of the startup founders for the period during which they are on work leave, under the Startup Grant Scheme.
SIVP and employment programs:
Were any of Galactech employees fresh-out-of-school, and eligible for any employment programs in Tunisia, including the Initiation To Professional Life Course (SIVP), they could still go back to claim all these benefits from Smart Capital once they are done being employed. These benefits are reserved for them till three (3) years after they have quit their employment.
The good fail:
Startups labelled under the Startup Act also get a chance to fail honorably. The Startup Act encourages good failure by promoting the peaceful winding up of startups. For instance, throughout Galactech’s life as a labelled startup (at most, 2 years), it is entitled to pull funds from the Tunisian Startups Guarantee Fund if it experiences financial turbulence.
Galactech, as well as other labelled startups, as long as they continue to be labelled, cannot also pay Tunisia’s corporate tax (which is 25% of their annual turnover). They also will not pay any tax or charges relating to an employee and employer in Tunisia.
Special currency account:
In the same vein, Galactech and other startups also have the right, by virtue of the Startup Act, to open a special foreign currency account which they can freely fund with contributions of capital, turnover and dividends in foreign currency. Through this means, the startups can invest, freely and without any official authorization, proceeds from the accounts in order to buy both tangible or intangible goods, create subsidiaries abroad or acquire stakes in foreign companies.
Other Incentives:
By virtue of the Startup Act, Galactech and other startups in Tunisia are exempt from corporation tax of 25%. They also have access to Technological Cards, loaded to the tune of, at least, $36 per year. Technology cards are a form of credit cards in Tunisia, and usually last for a period of 12 months. They are mostly used to buy things on the internet.
Startups in Tunisia are also considered Authorized Economic Operators within the meaning of the Customs Code. An Authorized Economic Operator (AEO) is a person involved in the international movement of goods in whatever function that has been approved by or on behalf of a national customs administration as complying with World Customs Organization or equivalent supply chain security standards. The advantage of being designated an AEO is that you will be considered low risk by customs authorities, which should result in fewer border delays due to examinations. You will also have faster access to the border and business resumption benefits in the event of border disruptions. Furthermore, you will also have reduced risk of potential tampering to your shipments. This builds confidence with customs and border authorities and enhances a company’s reputation and marketability. There is also another exemption in this regard, for startups in Tunisia. This is in respect of obtaining the approval and technical control procedures of the CERT (Center for Studies and Research in Telecommunications) on import.
Last but not least: Tunisian startups legally authorized to issue bonds which can be converted into shares later on, are also permitted to issue more of those convertible bonds in the future, notwithstanding the periods agreed by the parties during which the bonds may be converted into shares.
Investors in Startups in Tunisia are not left out
Thus, for Oman Technology Fund and a host of other business angels that invested in Galactech (as well as other startup investors), the amounts they invested in the startup will be fully subtracted from their tax base. This is also the case if they invest indirectly in startups through regulated venture capital funds located in Tunisia. The investors will not also pay capital gains tax of 10% on any profit they make from selling their shares (stakes) in Tunisian startups.
Their investments are also protected by the Tunisian Startups Guarantee Fund. That is to say, they will be able to recover the full amounts they invested in any Tunisian startup if the startup goes bankrupt. However, to be able to access their funds back, the startups must properly be wound up, through the right procedure.
These incentives are not only available to startup investors who invest money; they are also available to startup investors who make contributions to startups in kind. Therefore, if the contribution is made in kind, the shareholders of a startup are entitled to choose a contribution auditor that will assess the actual value of the said contribution for purposes of claiming tax benefits, among others.
What results are already on ground in Tunisia?
While Galactech may be a perfect example of a startup under the Tunisian Startup Act, it is merely a sneak peak into a booming ecosystem.
“This project, initiated in February 2016 and which we often like to describe as Law 72 of the 21st century, aims to be a liberating framework of energies and the innovation potential of the country and the region,” says Haythem Mehouach, director-general, Smart Capital.
“It presents a universe of excellence, transparent, inclusive and merit-based that offers set of incentives and services to encourage the launch and development of startups from Tunisia,” he further says.
According to the report recently released by Smart Capital, over 248 startup labels were granted between April 2019 and March, 2020, although this figure currently stands at 379 as at December, 2020.
From the report, 3 sectors (Business Software & Services, Marketplace, EdTech) represent more than a third of the startups granted labels; while only 10 sectors of activity account for 85% of the total number of labelled startups.
The report also shows that only six Tunisian labelled startups have subsidiaries in foreign countries. The subsidiaries are only 8, half of which are in Europe, and the remainder spread between the Middle East and North African (MENA) region and Africa. Europe (and in particular France) remains the 1st international expansion destination for Tunisian labelled startups.
The report also states that foreign startups are gradually migrating over to Tunisia, attracted by the Startup Act. Consequently, about 14 foreign startups in Tunisia have been granted the labels as at March, 2020. The report then hints that 85% of these startups have their parent companies in Europe.
In terms of community support and access to incubators and accelerators, the report notes that 107 startups, representing 43% of labeled startups had already been supported by SSOs (Startup Support Organizations), such as accelerators, incubators, etc., all of them offering various support services to the labelled startups.
Quite interestingly, the advent of the Startup Act has also seen increased participation of female founders on the Tunisian startup scene. In this regard, the report notes that 4% of startups were founded exclusively by women (of whom 62% are individual founders) and 68% exclusively by men (of which 15% are solo-founders). The remaining 28% of the startups were founded by mixed teams of men and women.
Interestingly again, the report notes that labelled startups raised $22.4m in investments in 2019, alone. Before 2019, the total amount of funds raised by Tunisian startups was only $19.6m. 72% of the amount raised in 2019 came from Tunisia. However, the report concedes that more than a third of these startups (38%) have not achieved turnover in 2019 while about a third (32%) made less than $37. Only about 23% of labelled startups have generated a turnover between $37k and $370k and nearly 7% of them have had the volume of their transactions exceeding $370k.
“For labeled startups which reported revenues in 2018 and 2019, we see a more than 80% growth in annual turnover,” the report notes.
In terms of job creation, the labelled startups are doing their bits. From the report, a record number of 2829 jobs (61% male and 39% female)were created by all the labelled startups, with each startup at least creating 11 jobs, and adding at least 3 more new jobs. The report further notes that 28% of these jobs were created during the 1st year of the Startup Act.
In terms of funding, only 1 in 4 startups got venture capital funds from among the labelled startups, according to the report. Although the report pointed out that much of the funding came from families and savings, equity subscription, however remains a major instrument of financing for startups. Startups also accept convertible bonds. Interestingly also, 13% of the startups were supported by donations received from donors.
SENEGAL:
In Senegal, the Startup Act is yet to fully take shape, as is the case in Tunisia. However, the Senegalese government has, by a memorandum dated February 24, 2020 issued by the country’s Ministry of Finance and Budget, the Finance law of December 20, 2019, which came fully into force throughout the country on December 28, 2019, brought to an end the regime of taxation for the country’s startups and SMEs. To learn more about the benefits both startups and investors have under Senegal’s newly passed Startup Act, click here.
Lessons from Tunisia’s seeming success with its Startup Act
Tunisia’s Startup Act has largely succeeded because of a collaboration between the public and private sectors. For instance, Smart Capital, the company in charge of administering the Tunisian Startup Act is privately managed, although with public shareholding. The company was approved by the Tunisian Financial Markets Council, and works with the country’s Ministry of Communication Technologies and Digital Economy and the Ministry of Finance. Smart Capital’s mission is simple and straight-forward: design and implement the Startup Tunisia initiative (including among others, the Startup Act and the Fund of Funds ANAVA), in order to make Tunisia a country of startups at the crossroads of the Mediterranean, MENA region and Africa.
Thus, handing over the administration of the Act to a private entity has saved the Act from the bugs of bureaucracy and inefficiencies that eat up most government commissions and agencies in Africa. The company has been promoting Tunisian startups and planning several launches of funds in support of startups, recently.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer