Startup Cities Fuel a New Economic Era

Ethiopia is rapidly developing into a promising hub for startups and innovation. The recent agreement between the Ministry of Innovation and Technology and the Addis Ababa City Administration to establish astate-of-the-art startup city further fuels optimism for the future of the country’s startup ecosystem. While the success of the startup city is yet to be seen, the initiative carries significant promise for Ethiopia’s future. By addressing key challenges and fostering a vibrant ecosystem, the city has the potential to propel Ethiopian startups onto the global stage and contribute significantly to the country’s economic and social development. EBR’s Eden Teshome explores.

One of the primary challenges faced by startups in Ethiopia is the limited experience among founders, investors, advisors, and mentors. The startup ecosystem is still in its nascent stage, and there is a need for more seasoned individuals who can provide guidance and support to early-stage ventures. Without the necessary experience and knowledge, startups may struggle to navigate the complexities of running a business and making informed decisions.

To address this challenge, it is crucial to invest in capacity building programmes and initiatives that provide training, mentorship, and networking opportunities for aspiring entrepreneurs. By bringing together experienced individuals and budding startups, knowledge and expertise can be shared, empowering entrepreneurs to make informed choices and drive their ventures towards success.

Another significant challenge faced by startups in Ethiopia is the low output and limited access to funding. Startups require capital to develop their products or services, scale their operations, and penetrate a proposed market. However, due to various factors, including a lack of financial resources and risk aversion among investors, startups often struggle to secure the necessary funding that is crucial to take off.

Addis Alemayehu, Chairman at Kazana Group, talks about how the minimum investment requirement for foreign investors is limiting startup’s access for finance that local investors are shy off “For foreign investors to invest in startups in Ethiopia, the minimum requirement is USD 150,000, which some find it to too high.” Addis explains. “Investors often prefer to invest half of that amount, maybe USD 50,000 initially, and then proceed based on the performance of the businesses, rather than investing the entire USD 150,000 at once.”

“Entrepreneurs in Ethiopia, including myself, often face regulatory and bureaucratic challenges, such as complex licensing requirements, slow government processes, and corruption.” Pazion Cherinet HealthTech entrepreneur founder and CEO at Orbithealth and Orbit Innovation Hub told EBR.

As local investors do not typically invest in new startups here, and the capital investment required is relatively high, it creates a significant challenge for these entrepreneurs to take of the ground because they lack the necessary resources that’s crucial to scale up. “We need to provide local investors with tax incentives [when they invest in startups],” says Addis.

“To improve the availability of funding sources, entrepreneurs can seek alternative funding options, collaborate with international organizations, and advocate for government support.”Says Pazion.

“The main challenge that I always mention is the need for renting office space in order to get license, and I believe that is too demanding.” Addis told EBR. “As anyone can work from home or anywhere else, I don’t think it’s fair to ask young entrepreneurs to rent office space, as it is an unnecessary cost.”

“To navigate these challenges, we normally seek legal advice, build relationships with government officials, and advocate for policy reforms to simplify the process and improve the business environment.” Pazion explains. “The government also is proposing an innovative fund, which we hope is going to unlock much potential of startups.” Pazion express his hopes.

To overcome this challenge, there is a need to create a supportive environment for startup funding. This can be achieved by enhancing access to early-stage funding through the establishment of angel investor networks, venture capital funds, and government-backed financing programmes. Furthermore, initiatives such as startup incubators and accelerators can provide startups with the necessary resources, mentorship, and networking opportunities to enhance their chances of securing funding.

“Startups thrive in environments where there is a strong sense of community and collaboration,” says Addis. “However, in Ethiopia, the startup ecosystem is still fragmented, and there is a lack of connectedness among major stakeholders.” This hinders the sharing of resources, knowledge, and opportunities, which are crucial for startup growth.

Pazion states that collaboration and networking are essential for the growth and development of the startup community in Ethiopia. By hosting regular meetups and events; such as workshops, seminars also forming industry specific groups, creating online platforms to develop online forums and social media groups where entrepreneurs can connect, encourage mentorship, collaborate on projects like encouraging startups to work together, and also by leveraging government support; by engaging with government agencies and organizations that support the startup ecosystem, such as the Ethiopian Investment Commission and Ministry of Innovation and Technology and the IT park corporation to access funding, resources and guidance.

Addis Explains, when the Ethiopian investment law was drafted, it mainly focused on big sectors like agriculture and manufacturing industries. It wasn’t specifically tailored to address technology driven businesses, such as the fintech industry.

According to Addis to address this challenge, it is essential to foster a culture of collaboration and connectedness within the startup ecosystem. Initiatives such as startup meetups, networking events, and industry-specific associations can provide a platform for startups to connect, share experiences, and collaborate on projects. Additionally, the government and relevant stakeholders can play a pivotal role in facilitating partnerships and creating platforms that encourage resource sharing and collaboration.

While these basic issues that need interventions are still up in the air, the establishment of a state-of-the-art startup city has made headlines in the city. The establishment of the city, a jointcollaborate effort between the Ministry of Innovation and Technology and the Addis Ababa City Administration, holds a great promise for the country’s startup ecosystem. This initiative by the government demonstrates a commitment to fostering innovation, entrepreneurship, and economic growth by providing an enabling environment for startups to thrive. The startup city will comprise various facilities such as workplaces, training centers, an ICT park, talent schools, and other convenient areas, creating an ecosystem that supports the entire lifecycle of startups.

According to the Ministry of Innovation and Technology, by providing dedicated spaces for startups to work, learn, and collaborate, the startup city can effectively address some of the common challenges faced by entrepreneurs, such as access to infrastructure and resources. The presence of training centers and talent schools indicates a focus on nurturing and developing the skills of recent university graduates, enabling them to seamlessly transition into the technology sector and contribute to the growth of the startup ecosystem. This support for young entrepreneurs can help bridge the gap between education and industry, allowing knowledge to be applied practically and facilitating the generation of wealth.

According to BeleteMolla, minister of innovation and technology, “one million startupswill generate USD 100 billion in revenues in 10 years.” “This is neither a mere ambition nor an unrealistic goal; given there is a conducive startup ecosystem.” The statement, made at the launch of the startup city at the United Nations Conference Centre in Addis Ababa, implies that by fostering a favorable environment for startups to thrive, providing them with the necessary support, resources, and opportunities, and leveraging their innovative potential, it is indeed feasible to create a substantial number of startups and generate significant revenues within the stated timeframe.

According to the minister, early-stage startups and tough tech startups are often the most challenging to launch, but they also carry the greatest potential for disruption and innovation. To address these challenges, the Ministry has developed a plan aligned with its mandate to establish a solid foundation and cultivate a robust startup ecosystem within the next three to five years.

The Start-up and Innovative Business Proclamation, which was initially drafted five years ago in Ethiopia, is still awaiting enactment despite continuous discussions and legislative efforts. Unlike Nigeria, where a start-up act was signed into law within a relatively short period, the delay in Ethiopia has hindered the development of a vibrant start-up ecosystem.

The focus of the discussions has shifted from the betterment of the ecosystem to internal debates about the management of the innovation fund and project ownership. While there have been positive developments suggesting the act may be implemented soon, it is crucial to engage civil servants at the grassroots level to ensure the real-life impact of the proclamation on entrepreneurs and start-ups. “The objective of the proclamation remains the creation of an innovative ecosystem that promotes entrepreneurship, facilitates business operations, and encourages innovation to drive job creation,” says Selamyehun Ade, Director General at the Ministry of Innovation and Technology.

To achieve these goals, concerted efforts are needed from both private actors and the government at various levels. Selamyehun says “we are in the process of developing a list of initiatives, but it is important to note that the innovation ecosystem requires more than just these initiatives.” He further explains that, it necessitates substantial investment and a culture that embraces risk-taking. “Currently, there is no official financing mechanism in place, so it is crucial for us to work towards establishing one.”

“We are eagerly awaiting the promulgation of the startup proclamation, as it is a significant step that could potentially help overcome some of the challenges,” says Addis.  Countries such as Kenya, Senegal, Nigeria, Egypt, and South Africa have already implemented distinct laws for startups, demonstrating their recognition of the sector’s potential.

Rwanda has emerged as one of Eastern Africa’s most favourable countries for setting up a startup. According to the Global Startup Ecosystem Index 2023 by StartupBlink, Rwanda has one city in the top 1000. Globally: Rwanda ranks 95th out of 100 countries in the Global Startup Ecosystem Index 2023.

The Global Startup Ecosystem Index is a comprehensive ranking that evaluates various factors contributing to the growth and success of startup ecosystems worldwide. The inclusion of Rwanda in the index highlights the country’s efforts to create an enabling environment for startups. Rwanda’s government has implemented policies and initiatives to support entrepreneurship, attract investment, and provide access to resources and infrastructure. The presence of the Kigali Innovation City (KIC), a hub for technology and innovation, has played a significant role in positioning Rwanda as an attractive destination for startups.

“The experience of Rwanda and other African countries being recognized as a favorable country for startups serves as a valuable example for Ethiopia,” says Addis. While Rwanda has made significant strides in creating an enabling environment for startups, Ethiopia can draw lessons and insights from their success. EBR

12th Year • December 16 2023 – January 15 2024 • No. 124