Ensuring Resilience for Technology Startups

The technology start-up ecosystem has proved to be challenging with a number of technology startups in Kenya shutting down their operations in the last few months. The underscoring factors are the harshness of the Kenyan market and inability to raise funding from venture capital (VC) and private equity (PE) firms.

In addition to having the right market entry strategy which is largely informed by an in-depth understanding of the market i.e., the target market and the market need, there are various other nuances technology start-ups should be aware of. Legal and regulatory compliance is one of the key factors considered in risk management be it at the entry or scaling up stage.

• Having the right business structure which conforms to the various policy requirements in Kenya such as the National ICT Policy saves a start-up legal headache. For instance, the National ICT policy requires all ICT firms operating in Kenya to have at least 30% substantial local ownership. Non-compliance with this and other business structure requirements may lead to the revocation of operational licenses which is one of the risks that may scare away investors.
•   Tax is another important legal issue to put into consideration. In addition to the corporate tax, technology startups need to be aware of other taxes levied on various technology associated services such as excise duty and digital services tax. The pricing of goods and services show allow a profitable margin taking into account the taxation rates. Case in point, in the Kenyan market, the rate of excise duty is adjusted annually, often to an increase, to factor in inflation. This more often than not, instantly affects within a month’s shift, the costs of excisable services and goods in the market. A potential investor will obviously have regard to the period it will take to recoup back their investment and this may be accelerated by having large margins.
• Technology start-ups will require varied licenses which are dependent on their market segment. In addition to this, local permits may be needed to roll out operations and to operate business premises. There are also industry-explicit directions that startups may be required to follow with fines being imposed for non-compliance which eat into the profitability of the business. This further continues to make the case for a unified multiagency business permit at least tiered as the national and county government levels to avoid the uncertainties of ambiguous licensing regime.
• The protection of intellectual property assets is another legal front. Ensuring exclusivity when it comes to a brand ensures competitiveness which ensures resilience. Therefore, these procuring intellectual property rights through the registration of trademarks, patents, utility, models and others also builds resilience.
• With most of the technology start-ups handing personal data, it is imperative for them to comply with the data protection regulatory regime in Kenya. In avoiding the imposition of penalties, the technology start-ups need to implement a robust data protection compliance framework that ensures the right of privacy.

Corporate restructuring and other scaling activities undertaken by these technology start-ups may need the approval of regulatory bodies such as the Competition Authority of Kenya, the Communications Authority, Capital Markets Authority, the Kenya Civil Aviation Authority and others. Processing without the requisite approval may lead to the issuance of penalty notices thereby affecting the operations of the business.

Overall, beyond market consideration, it is important for that technology start-ups partner with services providers who understand the nuanced nature of the regulatory and licensing regime in Kenya to ensure compliance with the various legal provisions applicable to them before the commencement of operations and scaling up. This goes a long way in mitigating any risk to the business continuity.