The Romanticization of Startups in Ethiopia

This article is published on 24 January 2022 at AfroLeap. AfroLeap is an online publication that operates at the intersection of digital technology and the African experience based in Addis Ababa.

Entrepreneurship is on the rise in today’s Ethiopia. More and more businesses appear to be springing up everywhere, and the buzzword ‘startup’ has spread across the capital, Addis Ababa.

From first-year university students to highly educated experts, it seems that everyone is hopping on the startup bandwagon in an attempt to solve everyday problems.

The fact that obtaining work is extremely tough, with the youth unemployment rate standing at 23.1pc last August, is one of the primary reasons for the sparked interest. With at least two million people joining the workforce annually, Ethiopia’s economy is not creating enough jobs to meet this demand.

The Jobs Creation Commission, the government body mandated with leading the job creation agenda in Ethiopia, has sought to solve this unemployment problem through driving innovation. Its officials, among other leaders, are often heard advocating for the need for ingenuity and entrepreneurship while launching many startup-focused initiatives.  

From government-funded classes in the local kebele to entrepreneurship seminars in schools and sponsored events that teach entrepreneurship, launching a startup is an idea that seems to be pushed everywhere.

The growth of institutions that support businesses, such as the Hult Prize, which encourages entrepreneurship and runs competitions on startup ideas at Addis Ababa University, are another agents of this change.

Entrepreneurship has become the cool new thing to do, thanks to the glorification of billion-dollar businesses like Facebook and Alibaba. The emergence of local heroes such as RIDE, one of Ethiopia’s first ride-hailing companies that have reached immense success, has also contributed to the general interest in the startup space.

As a result, the groundwork for the startup craze is being laid. Major institutional reforms that have addressed the countries digital economy hurdles, such as policy changes tackling poor network connectivity, high telecom costs, and restrictive regulations, have also freed more working areas for Ethiopia’s entrepreneurs.  

Besides, startup-focused reforms have been rolled out. Ethiopia’s first startup act that aims to provide customized support for startups and incentivize entrepreneurship is set to be passed into law after spending over a year in the making.

The Jobs Creation Commission, in collaboration with Mastercard Foundation and Piazza Communication, a local creative agency, launched a nationwide curated portal that connects startups with financers.

The platform dubbed Yegara aims to bring entrepreneurs, investors, collaborators, and innovators together to support the startup ecosystem and allows startups to create profiles and advertise themselves for investors.

In 2020, excluding grants, prize money, and non-equity assistance, Ethiopian startups raised $2.245 million in disclosed venture capital funding, according to the Baobab Network. This represents a considerable increase from the year before. But the figure is more bullish for 2021. Last year financial technology (Fintech) companies alone have raised more than 8 million dollars.

A piece of even more interesting news came out last month with the Development Bank of Ethiopia (DBE), which was known for rolling our massive multimillion-dollar loans for giant projects, announcing it will soon start financing startups.

But does everything has to be a Startup? 

“Startup is an organization built to generate new products and services under situations of great unpredictability,” says Eric Ries, an American entrepreneur and the author of The Lean Startup.

These businesses frequently begin with nothing more than an idea and a strategy to solve a pressing problem or fill a market void. If a business is striving to solve an issue where the solution is not evident and success is uncertain, they are deemed a startup, according to another public figure on the matter to Neil Blumenthal, co-founder of Warby Parke.

In truth, there are no hard and fast rules on what qualifies as a startup, although the phrase is most commonly associated with high-tech initiatives that develop products that use technology to deliver something new, not only tech-based companies are startups, and innovation seems to be the globally accepted parameter for startups.

The draft Ethiopian Startup Act also outlines what constitutes a startup and what qualifies as innovative. For an institution to be labeled as a startup, it must be progressively creative or disrupt existing production, service, or market structure. In addition, for a business to be classified as a startup, it must be either a micro, small, or medium business with a legal existence of fewer than five years.

Such definition means that the strict standard of disruption will be applied for businesses to utilize the many benefits the law extends, such as tax incentives and funding options.

In an article published last year, Britt H. Young, a writer and Ph.D. candidate, argued that tech-driven development in Ethiopia could fail to meet its targets.

In her piece titled “The fraught rise of Silicon Valley-style development projects in Ethiopia,” she argues that the primary focus on startups could lead to businesses operating traditionally failing to get enough attention. 

As a result, she adds Ethiopia’s businesses are finding it necessary to rebrand themselves as a startup to be part of this support ecosystem and receive the benefits.

Starting a business in Ethiopia is still hard

Starting a business is a difficult task. Particularly in Ethiopia, where completing a company registration takes an average of 32 days, according to the latest World Bank’s Ease of Doing Business rankings.

The draft startup act aims to shorten this period by creating a mechanism in which startups that have received the innovative label could get a pre-certification trade license that they can use to operate.

But with the act still in the making process, startups are being launched in the old way. Loha Learn, an Ethiopian e-learning platform that focuses on giving ICT courses to children aged 8 to 16, needed roughly two months to register their business.

“The issues we encountered were getting the correct information and the right actions,” Amen Sime, cofounder, and operations lead at Loha Learn said.

A person who wishes to start a business must obtain a tax identification number (TIN). Then, regardless of the nature of the firm, office space is requested.

Although an office is not necessary for Loha Lena to run their business, it was still required. Though the Ministry of Trade and Industry does not need it, it is connected to other departments that demand it.

Bethlehem Amanuel, another young entrepreneur, had been working in the tourism industry for a while and wanted to expand her business by creating a platform for tourists and local businesses to meet.

When she decided to start a business, she faced paying around an average of 6,000 ETB birr for a 20 square meter office and upfront payment for the next 3 to 6 months.

“It’s quite difficult to expect us to pay this much rent when we haven’t even begun. It quickly becomes disheartening,” said Bethelehem.

Half met past projects cast doubt on future initiatives  

Another issue Bethlehem had to deal with was that most government entities operate independently and don’t collaborate.

“There is a government website called E-trade where you can reserve a company name and see whether there are any other companies with the same name. But this website rarely works, and when it does, and you go to the office to get your reserved name registered, they have no idea what the website is, nor do they have any kind of integration,” Bethlehem added.

Seeing this, some startups fear that future developments to come, such as the procedure to be labeled as innovative so that startups can be entitled to the benefits to be passed by the startup act, will remain in the hegemony of old days and end up becoming bureaucratic.

The topic of startups was the focus of discussion on a recent local podcast, The Growth Cast, that had Nathan Damtew, founder of Beblocky, an app that makes learning programming very interactive and fun as a guest.

“With social media and movies like the social network, it makes it look like one can just make any app and become a millionaire overnight. Plus, with the hustle culture and get the rich quick mindset, individuals expect to be wealthy as soon as they begin a business,” stated the podcast’s presenter.

When it comes to startups, the dangerous reality is that they’re vulnerable to risk, maybe more than we think. Global statics show that 90% of startups fail. Genuine startups are more prone to fail by definition. As they are putting assumptions to the test, it’s extremely likely that these assumptions are incorrect. The riskier the assumptions that the startup is testing, the more likely it is to fail.

In addition, finding seed money is more than half of the labor in the early stages of a startup.

“When people discover that a company has raised money via a grant, they automatically assume that the money was handed to that person and that they are immediately a millionaire. They don’t comprehend that money is being given to the startup for it to flourish,” said Nathan Demise on the Growth Cast.

Perhaps it is because of what is depicted in movies, books, and social media, but what is advertised is only a small portion of the picture. When we hear that a company has raised a certain amount of money, we only see how much they raised, not how many times they had to pitch their ideas or how many times they were rejected to get that funding.

Bethlehem discovered that starting a startup was not as easy as expected. Although the fiction depicts a group of young entrepreneurs who dared to make a difference and alter the world, the truth differed. For her, when people say, “Let’s establish a company or a business,” a subsequent question, “Does it have to be a startup?” should be followed.

While startups and innovation are great and should be encouraged, maybe it’s still okay to launch a traditional business after weighing in the old demand and supply curves.

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