For startups in Kenya, it appears government is finally attempting to change the status-quo. The newly launched National Information, Communications and Technology (ICT) Policy spells out a new set of policy guidelines intended to assist the East African country achieve its Vision 2030, which among many things, is anchored on helping Kenya attain the status of an industrialized information society as well as a knowledge-driven economy by 2030. 

“This review of the Information and Communications Technology (ICT) Policy of March 2006 is inspired by, first, the need to align the Policy with the new constitutional dispensation in Kenya, and Vision 2030. This review specifically aims to incorporate the lessons learned from the Vision 2030,” Joe Mucheru, Kenya’s Cabinet Secretary for Information, Communications & Technology said in a statement. 

“By providing local and international connectivity across the country and region, and developing in-country solutions, the Government will enable creation of online and digital jobs, markets, and quality skills allowing Kenyans to embrace the shared economy. In this way, citizens will transition from traditional ways of working to innovative, digitally enabled forms of work,” he added.

Below, we discuss how these policies would attempt to change the narrative for startups in Kenya.

 A New 30% Equity Participation Rule In Favour Of Kenyans

Against the backdrop of increasing foreign participation in the Kenyan startup ecosystem, which has also seen more foreign-owned startups in Kenya funded than locally owned ones, the new ICT policy attempts to reserve 30% of ownership stake in every company registered to do ICT-related businesses in Kenya.  

By the terms of the new rules, only companies with at least 30% substantive Kenyan ownership, whether corporate or individual, will be licensed to provide ICT services. In other words, foreign companies doing any ICT-related businesses in Kenya would have to give at least 30% of their ownership stakes to Kenyans. This applies immediately to foreign new comers to the Kenyan tech startup landscape. However, existing wholly-owned foreign ICT companies in the country will have until 3 years from now to meet the local equity ownership threshold. Once the three years (until 2023) expires, they may have to apply to Kenya’s Cabinet Secretary for Information, Communications & Technology for a one year extension with appropriate acceptable justifications.

To be sure that the 30% rule is not misunderstood, the rules further state that all ICT companies without majority Kenyan ownership will not be considered Kenyan. Consequently, they may not be calculated as part of the 30% Kenyan ownership calculus because they are not owned by Kenyans. Simply put, all foreign-owned ICT firms must, going forward, meet the 30% equity participation requirement. 

For ICT companies listed or to be listed on the Nairobi Stock Exchange, their equity participation or distribution will be governed by the extant rules of the Capital Markets Authority of Kenya. This simply means that even though all foreign-owned startups in Kenya will have to comply with the new 30% rule, once they desire to do IPOs (Initial Public Offering) or list in any way in Kenya, the initial 30% rule will be jettisoned in favour of the prevailing rules of the Capital Markets Authority of Kenya. 

Pension Funds In Kenya To Set Aside 5% Of Their Funds For Investment In Local Startup Ecosystem 

This is a deal breaker, which if properly implemented, will unlock funding for startups in Kenya. By the new rules, pension funds in Kenya are encouraged to set aside 5% of their investments for the local ICT startup ecosystem. Although the language of this rule is not compelling, this will most definitely be the right push for pension funds in Kenya willing to invest in early startups. 

However, it should be noted that, already Kenya has allowed private equity and venture capital firms to raise funds from pension schemes after amending the Retirements Benefits Authority (RBA) Act in 2015. Since then, this has allowed pension schemes to invest up to 10 per cent of their assets in private equity and venture capital firms (firms which, most times, invest in startups and SMEs). The new 5% rule under the new policy, however, will encourage pension funds to invest directly in startups or venture capital firms investing in early stage startups, out of the permitted 10%. 

Nevertheless, it should be noted that even though the rules aim to encourage pension funds to invest in startups, under a proposed amendment to the Capital Markets Act (Cap 485A), Kenya’s Capital Markets Authority will, (once the bill is passed into law), be authorised to license, approve and regulate private equity and venture capital companies that have access to public funds. Analysts have criticized this amendment for duplicating responsibilities and multiplying the cost of running an investment firm in Kenya. For instance, Section 5(a) of Kenya’s Retirement Benefits Act already empowers the country’s Retirement Benefits Authority to regulate and supervise the establishment and management of retirement benefits schemes. 

It is hoped, however, that the new 5% rule will encourage pension funds in Kenya (once valued at over KES1trn ($9.8bn), to invest in the country’s early-stage startups. 

Apart from the 5% rule, there are other funding plans considered under the policy, such as a proposed “anchor fund” that will invest in qualifying Kenyan ventures for a proportionate equity consideration on a first-loss basis, thereby motivating co-funders to commit significant capital to qualified entities.

Also to be created is “a rotating venture capital fund” to be chaired by a person to be determined by the Cabinet Secretary for ICT with membership of a representative of the Kenya Sovereign Fund; the Kenya Private Sector Alliance; the CEOs of the three largest private sector pension funds at any one time; and four other members with ICT expertise as the Cabinet Secretary for ICT may from time to time determine

In as much as these are commendable, it is hoped that, like other promises and projects scattered across Africa, they are not abandoned or completely forgotten, a year from now. 

Increased Preference For Local Startups In Award Of Government Contracts

Kenyan startups aware of this opportunity need to show to relevant authorities the relevant portion of the new policy each time they bid for government contracts. By the terms of the new rules, government ICT procurement will now consider awards of tenders to tech startups to permit greater participation by emerging enterprises, and adopt home grown solutions. Consequently, the rules state that where there is a Kenyan solution that meets up to 70% of stated requirements, the Kenyan built solution will be accepted in preference to any other solution from anywhere else. In government defined priority areas, a 50% solution will be accepted in order to grow Kenyan capacity in those areas. 

For owners of startups who are also young, this is a double advantage. Kenya’s Access to Government Procurement Opportunities (AGPO) presidential directive further guarantees that 30% of government business goes to youth and Persons-With-Disability-owned businesses. Under AGPO, all the startups need to do is to ensure that they are registered under the relevant government body and that at least seventy percent of their members are youth, women or persons with disabilities. Their leadership shall also be one hundred percent youth, women and persons with disability, as the case may be.

Encouragement Of Crowdfunding And Access To Innovation Grants And Funding 

Startups in Kenya seem to have a go-ahead order to crowdfund. Under the new ICT policy, startups in Kenya are encouraged to crowdfund as well as build or participate in mentoring networks. This will be a major boost for a startup ecosystem still dependent foreign-owned venture capital firms. 

There are other steps to make funding easily accessible to startups under the new policy, such as plans by government to encourage early Initial Public Offerings in the Growth Enterprise Market Segment (GEMS) of the Nairobi Stock Exchange as well as support for the growth of Permanent Listed Vehicles that build a bridge between investors and businesses that need investment to grow, but until these are executed, they remain inoperative wishes. 

One other remarkable incentive under the new ICT policy is the rule that all innovation hubs and maker labs in Kenya will now be provided with grants to acquire additive manufacturing capabilities. The new rule also makes room for the protection of physibles (that is, data objects that are capable of being manufactured as a physical object using additive manufacturing processes) as intellectual property. Similarly protected is the physical realisation of physibles. 

Again, all designated ICT incubation centres in each county in Kenya will now be duty free zones under the new rules. Initially also, the Kenyan government will establish 290 constituency innovation hubs which will provide work and maker spaces for the host local community.

Another incentive introduced by the policy is research grant. To that effect, the policy states that every two years, the Kenyan Government will set five (5) research priority areas and provide funding to private enterprises in the form of research grants, equipment purchase grants in the priority areas.

The Bottom Line

The new ICT policy is going to be game-changing for startups in Kenya, especially as it relates to funding available to them. For instance, according to Roble Musse in his book “Un-Silicon Valley,” 70 percent of startups in Kenya that received a million dollars or more of Venture Capital (VC) investment in 2018 were led by white expatriate founders. This is notwithstanding the fact that the expatriate community in that country make up only 0.15 percent of the population. Nevertheless, while the new rules will entirely alter the startup landscape in Kenya if fully implemented, the ball is in the yard of Kenyan entrepreneurs to play. One thing is, however, clear in all these: you can lead a horse to water but you can’t force it to drink. 

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