Currently, Ethiopia’s value chain for start-ups and SMEs growth is fragmented and lacks fundamental elements for the successful development of innovative businesses with a high employment and growth potential. However, Ethiopia’s government is showing a high commitment in addressing those challenges and defining a roadmap together with actors from private sector and civil society through the organisation of policy forums and public dialogues. Start-ups and SMEs face numerous challenges such as access to fast and reliable internet connection, which is crucial to many companies for their successful development.
Compared to other countries, Ethiopia has a high cost for data access which limits the use of online services and their growth. Even though the access for startups is provided by the hubs, this limitation remains on the user end and is cutting off a large number of potential new users. For hardware based solutions, start-ups are facing the lack of electrical and computing components to develop and advance products, which have the potential to contribute to the growth of Ethiopia’s manufacturing industries.
Access to Foreign Direct Investment
In order to scale, innovation hubs taking an approach to fundraise for start-up programmes targeting a specific sector. Ethiopia’s bottleneck in terms of funding originates from restricted foreign investments in certain sectors, which would benefit tremendously from FDIs that come together with technical expertise. For sectors that are opened for FDIs, the minimum threshold starts at USD 150,000, which exceeds the funding need of early stage and post revenue start-ups in most of the cases. Local equity funding is not available, as the Ethiopian business community is still unaware of this opportunity or not willing to take the risk. The Ethiopian banks have not developed any loan instruments for the sector, and software products are not considered as a collateral. In addition to that, the capital of the majority of start-up’s is typically too low to receive funding from banks.
The African Development Bank (ADB) has launched the Boost Africa Programme (end of 2017), which targets the early stage investment gap. This is a good example of addressing the biggest challenge for start-up growth – investment in a size of USD 50,000 to 100,000. If backed by public loans, the expected success of this programme could be leveraged.
Overview of the Regulatory Environment
The regulatory environment is the same for all business in Ethiopia with no policy or regulation specific to start-ups
- The Ethiopian Investment Commission (EIC) is the autonomous government institution which regulates investments in Ethiopia.
Main legal framework for investments
- The Investment Proclamation No. 769/2012 (as amended)
- The Investment Incentives and Investment Areas Reserved for Domestic Investors Council of Ministers Regulation No. 270/2012 (as amended)
- The Ethiopian Investment Board and Ethiopian Investment Commission Establishment Council of Ministers Regulation No. 313/2014.
Key services provided by EIC include
- Promoting the country’s investment opportunities and conditions to foreign and domestic investors
- Issuing investment permits, business licenses and construction permits
- Notarising memorandum and articles of association and amendments
- Issuing commercial registration certificates as well as renewals, amendments, replacements or cancellations
- Effecting registration of trade or firm name and amendment, as well as replacements or cancellations
- Facilitating the acquisition of land and utilities, loan and residence permit applications.
Other relevant institutions
- The Ministry of Trade
- The National Bank of Ethiopia
- The Ministry of Environment, Forest and Climate Change
- The Documents Authentication and Registration Agency.
Requirements for foreign investors
- USD 200,000 – the minimum capital required of a foreign investor to invest in Ethiopia
- USD 150,000 – if the foreign investor invests in partnership with a domestic investor(s)
- Approval from the Ministry of Trade – required in advance if foreign investors wish to purchase an existing private enterprise, or shares therein
- USD 100,000 - the minimum capital required of a foreign investor investing in architectural or engineering works or related technical consultancy services and analysis or in publishing work if the investment is wholly foreign owned
- USD 50,000 if the investment is made jointly with a domestic investor.
Areas reserved for domestic investors
- Banking, insurance, finance
- Air transport, shipping
- Wholesale trade, resale trade and the export of coffee, oilseeds, hides and skins
- Printing industries
- Import trade (excluding Liquified Petroleum Gas (LPG) and bitumen).
Challenges in the Ethiopian Entrepreneurial Ecosystem
Funders, start-up hubs, incubators and accelerators identify the following challenges in the entrepreneurial ecosystem in Ethiopia.
- Very few angel investors
- Not enough start-up support programmes
- High rent prices
- Co-working spaces, start-up hubs, incubators and accelerators are located in Addis Ababa and in close proximity to one another
- Existing support systems are not delivering and producing the intended impact
- Not a lot of start-up or entrepreneur support programmes focusing on coaching and building the character of the founder(s)
- Donors not allowing much room for failure, especially when it comes to start-ups
- More funding directed towards external compared to local experts in supporting the development of the entrepreneurial ecosystem.
- Financial institutions are not creating products specific to start-ups
- Foreign currency shortage and restrictions (e.g. some investors not willing to invest in companies that are dependent on forex)
- Access to foreign investors is limited due to sector restrictions.
- Limited number of legal and financial service providers available with experience in transaction advisory services, mergers and acquisitions (M&A), etc.
- Lack of collaboration between stakeholders in the sector
- Lack of collaboration between private and public sector in decision-making.
- Regulations and directives are not clear and up to date (e.g. difference between documentation available and information on the ground)
- Sector restrictions and funding amount restrictions for foreign investors limiting the supply of capital to different sectors and businesses who require small amounts
- Investment policy not focused on start-ups
- Double taxation issues.
- Fear of political instability may affect risk averse investors.