Nigeria: How much will the Startup Bill change the Nigerian tech ecosystem?

By Temitayo Lawal
Posted on Tuesday, 27 September 2022 18:12

Software developers work on computer sytems at the Information Technology Developers Entrepreneurship Accelerator (iDEA) hub in the Yaba district in Lagos June 25, 2015. REUTERS/Akintunde Akinleye

Nigeria's upper legislative body passed the Nigeria Startup Bill (NSB) in July and forwarded it to President Muhammadu Buhari for final approval.

The NSB is a result of a long, concerted effort by start-up stakeholders – including founders or startup executives, investors and government – to officially recognise the burgeoning tech industry, harmonise inconsistent regulations, and boost growth.

A recent report by Disrupt Africa, ‘The Nigerian Startup Ecosystem Report 2022’, revealed that 383 of Nigerian startups have raised over $2bn in seven years – between January 2015 and August 2022.

Nigeria has always attracted a large chunk of Africa-focussed startup funding, due to its large population and growth potential. However, investors remain wary of perceived or real risks associated with investing in the country. The hope is the startup bill could de-risk the ecosystem and attract more investment into the sector, encouraging growth.

“It is a turning point in terms of how we go about attracting and protecting investment in the Nigerian startup ecosystem,” Victor Famobude, project manager of the Nigeria Startup Bill, tells The Africa Report in an exclusive interview.

“Investors always want to know that there is legislation or regulation in place that protects startups and investors interests. The bill provides regulatory certainty which facilitates all that,” he says.

Skin in the game

The Bill seeks to establish a special seed fund to disburse capital to early-stage startups across the country. One argument that supports this is the need to address the fear that Nigeria’s FX supply challenge may worsen as investors exit the ecosystem when investments begin to mature.

With this view, the government’s involvement in startup funding will not only help deepen the ecosystem by creating diverse funding sources, but also retain FX in the system in the long term.

There are some investors who look out for how invested the government is in the ecosystem to be confident to invest

Famobude admits that there are gaps to be addressed between government and private sector actors within the ecosystem around trust and risk, but suggests that government’s involvement sends a positive signal to foreign investors. “There are some investors who look out for how invested the government is in the ecosystem to be confident to invest,” he says.

Responsibility to control and manage the special seed fund has been ceded to the Nigeria Sovereign Investment Authority (NSIA) due to their competence and credibility. NSIA is co-owned by the federal (52.68%), state (26.72%) and local (20.60%) governments; manages Nigeria’s Sovereign Wealth Fund; and has been in charge of many landmark projects in the country in recent years.

Fiscal and regulatory clarity

Some start-ups in Nigeria have not been registered because their innovative model didn’t fit into a clear regulatory category. This includes bike-hailing companies and crypto-trading exchanges, for example.

The bill provides for the establishment of a council that is responsible for harmonising regulatory difficulties through its active portal; collaborating with relevant regulatory authorities like the Central Bank of Nigeria and Securities and Exchange Commission; and providing regulatory support to new and existing startups.

The drafters of the bill also aim to ensure tax clarity in the ecosystem by leveraging the new Finance Act, and provide tax incentives for startups to ease and accelerate their growth.

“It is to help startups free up cash to invest in their business. For example, because startups are domiciled in the states where they reside, they may be relieved of Personal Income Tax and other tax liabilities on employees. It will go a long way in the growth of the startups,” Famobude says.

The tax incentives are to be benefitted by different classes of stakeholders in the startup ecosystem from founders to accelerators and funders.

Spread

Lagos is home to 425 (88.4%) of the 481 startups tracked in the country as at August 2022. There is however a rise in startup activities in other parts of the country.

Four other Nigerian cities apart from Lagos (122nd) made the global top 1000 of the StartupBlink Ecosystem Index last year. Ibadan rose 601 spots to 353rd globally and 2nd in Nigeria. Abuja (466th), Port Harcourt (906th), Enugu (978th), and Benin City (979th) also made the list.

The ecosystem is no doubt growing, but we hope to achieve exponential growth in coming years

“The overall goal of the bill is to spur growth in the ecosystem by ensuring the nationwide distribution of capital and providing opportunities for talents spread across the country. We still want Lagos to be competitive, but we also want more states to spring up for our collective growth as a nation,” Famobude says. “The special seed fund will spread capital across the country and attract more investment.”

Famobude believes that the establishment of hubs and innovation parks by the bill will also facilitate knowledge exchange. To begin, one park is to be built in each of the country’s six geopolitical zones. These are expected to serve as a template or motivation for private sector players, who are also eligible for the special seed fund, to launch accelerators and incubators for schools and remote communities.

“Elsewhere, where these have been built, they have created opportunities for businesses to employ local and foreign talents that ultimately help improve the economy,” he says.

“We currently have five to six unicorns in the ecosystem. What is stopping us from having 10 to 20 unicorns per year? That is the kind of ambition we have. The ecosystem is no doubt growing, but we hope to achieve exponential growth in coming years.”

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