Kenya’s Start-up bill | Nexus between SMEs and Start-ups

Kenya’s start-up bill was published on 14^th September 2020 through The Kenya Gazette supplement No 163 (Senate Bill No.16) and is set to be debated in Senate before assentation into law.

To understand why Kenya is pursuing to establish a law to recognize and support start-ups one must have the understanding of what a start-up is and how different they are from SMEs as well as factors hindering SME optimal contribution to Kenya socio economic development.

For starters SMEs are businesses that are a copy of existing businesses right from target customers, product offered and product pricing among other factors and key to their success is theoretically on how well the entrepreneur is able to execute their business plan.

The support that SMEs need is based on the challenges they face such as access to finance (Majorly debt), access to market, information, sub optimal policy environment and management skills among others. Cognizant of product market fit in terms of veracity of SME intervention as well as implementation challenges by government , Kenya still has made great strides in supporting SMEs through ; recognition in law, allocation of resources through various funds such as youth fund, women fund, credit guarantee scheme, market support through the Kenya export promotion and brand agency as well as access to government procurement opportunities among others.

On the other hand, start-ups are institution designed to solve challenges faced by society based on cutting edge innovation and new technology under condition of very high uncertainty. Further contrast is that SME led innovation is mostly incremental innovation or improving on existing technologies through improved efficiency.

An example of the uniqueness of a startup is an entrepreneur who has discovered a way of processing water hyacinth by using it as biomass for a new generator. The idea is innovative and scalable, is solving a pressing challenge faced by residents around lake Victoria but  the entrepreneur is yet to figure out how to make revenue from the idea, protect the idea through filing for a patent, get financing to build a team and fine tune the idea among other bespoke challenges.  These challenges of patient capital that enables startups to grow, intellectual property support or idea protection support, idea development support among others are unique to startups as compared to SMEs hence require a different kind of support.

The second area of focus is the fact that despite the continued strong contribution of SMEs to Kenya socio economic development as evidenced by contributing 33 percent to GDP, employing over 30 percent of the population and more specific accounting 83.6 percent of new jobs created in 2018 as well as accounting 98 percent of businesses in Kenya; SMEs are plagued by a high mortality rate of 75 percent within 3 years of inception led by wholesale-retail accounting for 73.5 percent of businesses closing as quality and sustainability of jobs (63.8% and 16.5% being paid employees for licensed and unlicensed SMEs respectively)

Significant incremental contribution of SMEs to the economy is curtailed by the fact that; over 90 percent of SMEs are micro and folding at a very high rate, top SME sub sectors are wholesale-retail which don’t have ability to capture significant value and is exposed to external shocks as witnessed by disruption due to covid 19 pandemic.

Kenya’s labor market is expected to have an additional 9 million people by 2025 (World Bank 2012) meaning between 2015-2025, the country should be creating on average 900,000 jobs annually holding all factors constant.

Start-ups if well supported have the potential to rapidly and significantly contribute to the economy’s GDP as well as employment based on their rapid hockey stick growth due to their ability to scale fast.

Examples of such start-ups are Twiga Foods and Sendy that are fairly young and are supporting over 20,000 persons each on their platforms. Other notable global start-ups are Uber and Airbnb that have transformed transport and accommodation sectors and created job opportunities for thousands of people in Kenya and globally.

Finally, although the start-up bill may be myopically viewed as addressing technology based enterprises only the fact is that is espouses to foster a culture of innovation and entrepreneurship as evidenced by the definition of start-ups having among other  characteristics as enterprise involved in the innovation, development, production or improvement and commercialization of innovative products, processes or services or if it is a scalable business mode.