Why Kenya’s startup space needs to be redefined

The startup policy in Kenya is weak inhibiting the sector’s growth. [iStockphoto]

It seems the challenge with Kenya’s startup environment, as experts deduce, lies with the definition of these types of businesses and how they fit into the context of the country.

The experts point out the assumption that a startup is a small or micro-enterprise business. They also debate how many years of existence qualify a business to be known as a startup.

As noted in a paper authored by Stephen Muathe of Kenyatta University and Kenya Industrial Research and Development Institute (Kirdi), despite the growth, the startup businesses have been thriving in the last decade ending 2020 without State support.

Some of the existing laws in the country also do not favor these businesses.

The paper notes that the startup policy in the country is weak inhibiting the sector’s growth. This stems from the lack of a proper definition of what exactly is a startup – particularly in the Kenyan context.

So what is a startup? The paper defines a startup as a new, small and innovative business with the ability to grow fast (Wickham, 2004) while Robehmed (2013), Nzomo (2020) define a startup as an enterprise that is working to solve a problem where the solution is not obvious or success is not guaranteed and has been in existence for seven or fewer years.

According to a previous definition by Muathe (2022), a startup is an innovative business entity, which is scalable and has survived three to five years.

It has been established that there is a lack of a proper definition of startups in the Kenyan context. This has led to the existing institutional framework focusing largely on micro, small and medium enterprises (SMEs).

“Therefore, in order to strengthen the growth of the startup ecosystem, there is a need for various stakeholders to adopt a definition of a status as an innovative business entity, which is scalable and has survived up to one to seven years,” reads the study published by International Journal of Research in Business and Social Science (IJRBS) – titled Walking the Startups Journey in Kenya: Documentation of Successes and Pitfalls between 2010-2020.

It was published in October 2022.

The paper looks at different definitions given by different experts, which seem to suggest there is no definite definition but rather customized ones that fit the context of the environment the business (startup) operates.

It cites Bahrami and Evans (1995) and Karitu, Wangondu and Muathe (2022) who argue that depending on the sector the startup operates in, the time could range from one to three years or one to seven years.

“Adoption of Kenyan acceptable definition of a startup will lead to harmonization of policies tailored towards startups,” the paper reads.

It adds that the adoption of a Kenyan definition of startups will lead to the establishment of a framework for policy dialogue for all aspects of the startups ecosystem.

This, the experts anticipate, will help enrich policies and provide avenues for solutions to existing sector challenges.

The government could even be enticed to provide risk capital to contributions done by foundations, philanthropists, and companies – minimizing risk capital associated with startups during their early stages.

“This may necessitate the building of existing finance, lending institutions like youth fund and women fund and the capacity of such institutions to ensure effective support to early-stage startups,” the experts say.

The paper deduces that the Kenya startups’ scene is a little over 10 years. This is since 2010.

And during this period, the government’s intervention has been absent.

It adds that in the initial stage, the start-up ecosystem lacked a united vision which led to unmitigated financial risk and significant challenges in funding.

“Further startups sustainability is affected by a number of factors associated with the entrepreneur’s motivation as well as entrepreneurial ecosystem conditions including academia, industry, government, and civil society,” reads the paper.

“The startup’s sector in Kenya perceives government support as insufficient and lack of a consistent pipeline of quality, high potential start-ups limit the country’s potential to produce unicorns capable of transcending geographical markets with successful solutions.”

Higher startup failure rates, the paper says, may also be indications of gaps in a developing ecosystem.

Consequently, sector support organizations development such as hubs, accelerators and co-working spaces are the most realistic avenues to enhance the continued growth and development of the startup ecosystem in Kenya,” it adds.

New developments

While the paper which analyzed 104 startups across 47 counties in the 10 years ending 2020, documents the maturity of this subsector, underscoring the opportunities that it has brought to the continent, there is a need for experts to update the changes occurring in this sector.

This is to have the sector at par with new developments.

Citing the growth witnessed in the startup sector in the country since 2010, the paper notes how receptive the idea was particularly in the urban settings of Nairobi, Kisumu and Mombasa and later being decentralized in towns like Kiambu and Nyeri.

“This is evidence that the concept has been well received and accepted in Kenya and if the right environment is provided, it can be the solution to the high number of unemployment as well as contributing to Gross Domestic Product (GDP),” reads the paper .

It maintains that access to financing remains the biggest challenge for startups in the Kenyan ecosystem, especially for early-stage startups that are considered riskier by investors.

“Startup policy and regulatory framework is weak, punitive and inhibiting to startups, especially taxation regime. Due to lack of proper definition of startups in Kenyan context, existing institutional framework are largely on micro, small and medium enterprises, which led to a leap service on startups,” the paper says.

However, it adds, future prospects of the startup ecosystem in Kenya appear attractive and promising as a result of ongoing policy and legal reforms.

These will ease the way of doing business, resulting in more investors seeking unique business opportunities coming and investing in Kenya.

An inter-county collaboration framework also needs to be established for skills transfer.

“This will help standardize practice across the country, and allow for the harmonization of county-specific policies on the treatment of startups regardless of where they are domiciled or operate in Kenya,” the paper reads.

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