The Startup Act: What it is and why it matters

The Nigerian technology and innovation space in general, and its startup ecosystem in particular, has been gaining momentum and recording impressive growth in recent times.
For instance, Nigerian startups retained USD1.37 billion of Africa’s USD 4 billion funding in 2021 and reports show that Nigeria has the highest volume of startups in Africa. Unfortunately, Nigerian startups have a high failure rate with a whopping 61% startup failure rate recorded from 2010-2018; these failures have been attributed to various factors including aggressive government policies, regulatory bottlenecks, over-saturation of startups in select locations, talent dearth, high cost of doing business, funding challenges, etc.

Consequently, it is evident that steps must be taken to maintain/spur the development of the ecosystem and reduce the failure rate of tech-enabled businesses. Achieving these goals requires conscious and consistent government efforts to address the challenges earlier identified, promote existing participants in the ecosystem and encourage prospective participants to fully engage in the ecosystem.

Startup Acts have proven themselves to be a veritable tool towards achieving the goals set out above. For example, over €34,000,000 (thirty-four million Euros) in investments went into Italian startups between 2012-2015 following the introduction of a Startup Act. Similarly, following the introduction of a Startup Act in 2018, Tunisia recorded $22,400,000 (twenty-two million four hundred thousand United States Dollars) from investors in 2019 alone. Startups in Tunisia have also been exploiting the Act. For example, while only 16 startups applied to be labelled as startups in March 2019, 40 applications were recorded in July 2022 alone. It suffices to say that the Tunisian Startup Act has helped rapidly develop the startup ecosystem in Tunisia.

It is to this end that Stakeholders canvassed for the introduction of a Nigerian Startup Act (“the Act”). The Bill for the passage of the Act has been passed by the National Assembly and the President has given his assent to the Bill. As such, from 19 October 2022, Nigeria has introduced its own Startup Act.

In this article, we will examine the provisions of the Act, why it matters, and the potential the Act offers the Startup Ecosystem and the Nation in general.

Why the Act matters
As earlier referenced, Nigeria recorded a 61% startup failure rate from 2010-2018 which may be attributed to various factors including aggressive government policies, regulatory bottlenecks, over-saturation of startups in select locations, talent dearth, high cost of doing business, funding challenges, etc. The Act does a decent job of addressing these issues.

We will explore the notable provisions which may serve as a catalyst for growth and possibly increase the rate of success for early stage startups in Nigeria.

Application of the Act
The Act applies to all companies incorporated under the Companies and Allied Matters Act and granted the startup label and organizations and establishments, whose activities affect the creation, support, and incubation of labelled startups in Nigeria. It seeks to: a) provide a legal and institutional framework for the development of startups in Nigeria; b) provide an enabling environment for the establishment, development, and operation of startups in Nigeria; c) provide for the development and growth of technology-related talent; and d) position Nigeria’s startup ecosystem as the leading digital technology centre in Africa.

The establishment of the National Council and its Secretariat
Nigeria presently has over 900 Ministries, Departments and Agencies (MDAs) which brings its own set of challenges. As a result, it may have been a bit of an overkill if this Act also set up another agency to administer the provisions of the Act.

The drafters of the Act seem to have taken this into consideration and so rather than creating a new agency, a National Council for Digital Innovation and Entrepreneurship (National Council) was set up with the National Information Technology Development Agency (NITDA) serving as the Secretariat to the Council.
The role of the National Council includes formulating and providing general policy guidelines for the realisation of the objectives of the Act, giving overall direction for the harmonisation of laws and regulations that affect startups and ensuring the monitoring and evaluation of the regulatory framework to encourage the development of startups in Nigeria.

An interesting inclusion in the Act is that 4 members of the startup ecosystem will sit on the National Council along with the following persons: the President of the Federal Republic of Nigeria; the Vice-President of the Federal Republic of Nigeria; the Minister for Communications and Digital Economy; the Minister responsible for Finance, Budget and National Planning; the Minister responsible for Industry, Trade and Investment; the Minister for Science, Technology and Innovation; the Governor of the Central Bank of Nigeria; the Director-General of NITDA; a representative of the Nigeria Computer Society; and a representative of the Computer Professionals (Registration Council of Nigeria)

The effect of the foregoing is that, by having members of the ecosystem forming part of the National Council, the ecosystem itself will be in a position to identify issues that directly affects startups and present policies and regulations that could strengthen and build the ecosystem.

This is commendable and could ensure that the laws and policies that affect the ecosystem would be considered and properly implemented by the ecosystem players and not just left to the hands of government officials.

The role of NITDA and a Council Agent
NITDA plays a crucial role under the Act which complements its already existing position as the government agency responsible for developing programs and policies that drive the growth of technology and tech-enabled businesses in Nigeria.
NITDA serves as the Secretariat under the Act and has the responsibility of implementing the provisions of the Act. It will also collaborate with other existing MDAs to ensure that startups are allowed to enjoy the incentives that are provided for under the Act.
The role played by NITDA here would be quite beneficial to the ecosystem and obviates the need to set up another agency as it already has the structures in place to serve as an implementing agency.

Another innovative introduction in the Act is the Council Agent which would serve as a monitoring and evaluation agent in ensuring that the provisions of the Act are implemented. It would also provide quarterly reports and feedback to the National Council on developments in the ecosystem.

Definition of Startups under the Act
Startups are defined under the Act as a company in existence for not more than 10 years, with its objectives being the creation, innovation, production, development, or adoption of a unique digital technology innovative product, service, or process.
What this definition connotes is that the Act will apply to tech-enabled startups, which are companies that leverage existing innovative technological advances to solve operational issues or improve customer experience. It would therefore not apply to small and medium enterprises (SMEs) that are not tech-enabled.

Labelling of Startups
In order to determine the startups with the right metrics to be considered tech-enabled, the Act provides for “labelling” which is a merit granted to qualified startups and grants them access to incentives provided under the Act.

For a startup to be eligible for labelling, it must meet the following criteria:
be registered as a limited liability company under the Companies and Allied Matters Act and has been in existence for a period not more than 10 years from the date of incorporation;
its objects are innovation, development, production, improvement, and commercialization of a digital technology innovative product or process;
it is a holder or repository of a product or process of digital technology, or the owner or author of a registered software;
it has at least one-third local shareholding held by one or more Nigerians as founder or Co-founder of the startup; and
in the case of a sole proprietorship or partnership, it satisfies the three preceding conditions.

For sole proprietors and partnerships that meet the other criteria but are not limited liability companies, they are granted a “pre-label status” for a period of six months so they can enjoy the incentives under the Act and subsequently incorporate a company. Where they fail to incorporate a company at the end of the six months period, the pre-label status would be revoked.
However, it must be noted that the Act, and the labelling provisions thereunder, do not apply to an organization which is a holding company or subsidiary of an existing company that is not registered as a startup.

It can be inferred that these provisions of the Act are geared towards ensuring that early-stage startups that are usually constrained with regards to funding, can be the main beneficiary of the labelling process. However, startups can have foreign founders and investors that hold up to 2/3rd of the startup share capital and still be qualified for labelling.

In Part 2 of this article, we’ll address funding for startups, tax incentives and regulatory interventions.