On March 8 2024, AELEX Partners (‘AELEX’) hosted La French Tech for a breakfast session where the topic “To what extent has the Nigerian Startup Act transformed the landscape of the Country’s Startup Ecosystem” was discussed. This discussion aimed to ignite conversations on the implementation of the Nigerian Startup Act and create awareness on the ways that qualifying startups can take advantage of the benefits under the Act.
Moderated by Tobilola Akinlabi, the Director, Study in France Africa, the event featured valuable contributions from a distinguished panel including: Peretimi Pere-Akinmodun, Senior Associate at AELEX; Fiyinfolu Okedare, Director of Consulting Services at Mazars, and Charles Avis, CEO Fuspay Technology.
In the keynote speech delivered by Tiwalola Osazuwa, a Partner and the Head of the Technology, Media and Telecommunications Team at AELEX, she highlighted the steep decline in funding received by startups in Nigeria in 2023 in comparison with funding received in 2020 and 2021. However, she noted that regardless of the decline in funding, the trends show an interest in the African and Nigerian market, an indicator that the country’s technology sector still remains an attractive destination for investments. She also highlighted the government’s commitment to fostering innovation and investments through the Startup Act on a National level, as well as the commitment of states such as Kaduna and Rivers State who have domesticated the Act.
In summary, this article provides a comprehensive overview of the major talking points from the session, shedding light on the financial benefits for startups and investors under the Act as well as the mechanisms put in place by the Act to spur innovation and encourage ease of doing business. Below are the major highlights.
Benefits Under the Startup Act
The immense benefits available to startups under the Act were highlighted during the session. While some of these benefits are available to startups, others are directed at attracting investors to the startup ecosystem.
Access to Funding:
Access to funding is the lifeblood of startups, and the Nigeria Startup Act recognises this crucial need. The legislation introduces measures to facilitate easier access to funding for startups, including tax incentives for angel investors and venture capitalists. This is expected to attract more investment into the startup ecosystem, providing startups with the capital they need to scale and innovate. For instance, the Startup Investment Seed Fund was established and is to be funded with at least N100,000,000 annually. Export-oriented labelled startups can also access the Export Development Fund, Export Expansion Grant, and the Export Adjustment Scheme Fund. The Act also provides for low cost credit facilities for labelled startups under a Credit Guarantee Scheme
Innovation Hubs and Incubators:
The Nigeria Startup Act encourages the establishment of innovation hubs and incubators, fostering a collaborative environment for startups to thrive. These hubs are to serve as focal points for knowledge exchange, mentorship, and networking, creating a supportive ecosystem that nurtures the growth of innovative ideas.
Intellectual Property Protection:
Startups often grapple with the challenge of protecting their intellectual property. The Nigeria Startup Act addresses this concern by strengthening intellectual property rights, providing startups with a more secure environment to innovate without the fear of unauthorized use or infringement.
Tax Incentives:
In a move aimed at stimulating investment, the Nigeria Startup Act introduces tax incentives for both startups and investors. Startups can benefit from tax breaks during their early years if they are eligible for Pioneer Status, promoting financial sustainability, while investors enjoy reduced tax burdens, encouraging more significant capital injection into promising ventures.
Government Support Programs:
To further support the growth of startups, the Nigeria Startup Act establishes government-backed programmes and initiatives. These programmes aim to provide startups with essential resources, mentorship, and guidance, ensuring a conducive environment for their success.
Market Access and Regulatory Support:
Navigating regulatory frameworks can be a daunting task for startups. The Nigeria Startup Act addresses this challenge by providing regulatory support and facilitating market access for startups. This allows them to focus on their core business activities and expansion strategies rather than getting bogged down by regulatory complexities. A Startup Portal was created which is to be a dedicated platform which serves as a one-stop shop for registrations and prioritises applications by startups. It also serves as an interactive forum for connecting investors, regulators and startups and was recently launched in 2023 and is available at https//startup.gov.ng.
The conversation segued into the metrics for qualification as a startup under the Act, which includes registration as a limited liability company and having been in existence for less than 10 (ten) years. In addition, the startup must be involved in innovation, development, deployment or commercialization of a digital technology project or service. At least one-third of its shareholding must be held locally and it must have a Nigerian founder or at least one Nigerian co-founder.
The Decline in Funding Experienced in Nigeria
The funding drought in Nigeria was also discussed at length as the total amount of funding received by startups in 2023 plummeted. It was explained that the decline could be attributed to a number of factors including the global economic depression, Nigeria’s volatile foreign exchange market and the emergence of new technologies. As the world faces economic depression, institutional investors are becoming increasingly cautious about businesses that they fund, as startup investing is very high risk with a limited number of businesses eventually becoming profitable. In addition, the forex instability is a challenge as investors’ dividends are significantly reduced upon repatriation of their capital and profits. The rise of emerging technologies such as artificial intelligence has caused investors to rethink their investment strategies and channel some of their funds towards backing innovators in that vertical.
Unlike 1999 which saw the emergence of the dotcom boom with the emergence of companies like Google and the 2010 boom which saw the advent of social media such as Facebook. The 2020 technology boom was influenced by COVID-19 which impacted how people and businesses interacted with and relied upon technology and witnessed the growth and adoption of blockchain technology. In 2023 on the other hand, green technology and artificial intelligence have enjoyed a meteoric prominence. This development has caused investors to rethink their investment strategies and spread their funds across multiple verticals, instead of streamlining them as they did in the previous eras.
Membership of the Startup Council
The audience engaged the panel on the membership of the startup council, which is led by the President of the Federal Republic of Nigeria. The President is the Chairman and is supported by members from ministries such as the Ministry of Finance, Ministry of Innovation, Science and Technology, Ministry of Communications and the Digital Economy, Ministry of Industry, Trade and Investment, the Governor of the Central Bank and representatives selected from the startup ecosystem. The objective of the Council is to drive policies and ensure the implementation of the Act. The NITDA however has the responsibility of implementing the Act. Where the Act is silent on certain policy decisions, the Council may make policies with the President’s approval.
The Bureaucracy of Accessing the Benefits Under the Pioneer Status
It was emphasized that the Startup Portal deals with issues such as the bureaucracy that is typically associated with regulatory applications and approvals or incentives like the Pioneer Status incentive scheme. The Startup Secretariat was set up as a mechanism to lessen these hurdles for labelled startups as its mandate is to make these benefits more accessible. It was also emphasized that there is no specific fostering of one sector over the other as the defining factor is the business’ qualification as a startup.
The Panelists explained that a key reason why small businesses struggle with applications like Pioneer Status is because they sometimes fail to meet the eligibility criteria and/or documentary requirements. Failure to do this could jeopardize the application for Pioneer Status. This underscored the need for businesses to understand what regulators require from them, in order for their businesses to take benefits under the Act.
Benefits To Investors
The Panel discussed the need for investors to conduct due diligence investigations prior to investing in businesses and highlighted the need for those investigations to cover potential incentives which may accrue to them by investing in labelled startups, especially those innovating in specific market verticals. It was clear from the discussions that legal and financial advisers have the responsibility of advising investors and startups on accessing the benefits provided under the Act.
Conclusion
The Nigeria Startup Act is not merely a legal framework; it is a catalyst for change, a beacon of hope for local entrepreneurs, and a testament to our collective commitment to shaping a vibrant and dynamic startup ecosystem. The Act is clearly replete with benefits for both investors and startups. However, we must ensure that those benefits and the intention of the legislation does not remain on paper but is actually implemented. One of the ways to ensure that is by sensitisation in different fora and making a demand on the relevant bodies responsible for its implementation, to fulfil their objectives and responsibilities under the Act.
AELEX Technology, Media and Telecommunications Practice Group
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