Start-ups Requirements and Challenges

When building a business, start-ups have a myriad of challenges and obstacles that they face such as:

• Financial Issues-Entrepreneurs face the financial challenges resulting in fewer funding opportunities. In overcoming this, one need to have a fantastic sales pitch and a solid business plan to improve chances of attracting the financing needed to open or expand a business.
• Social Rejection-Family members and friends might not understand an entrepreneur’s reason to start a business. They might not share one’s passion or ideas. Many others would question why you left employment.
• Criticism-As a young entrepreneur, people might criticize your ideas or second-guess your plans. Some may critic your business decisions with full of negativity.
• Low Calibre Development Team- The process of identifying, recruiting, and training the right talent for your business can take time and cause frustration. You need to create a great company culture that attracts employees that have the right combination of skill, ability, and attitude. Most start-ups fail because of mismatch talent.
• Finding customers-A small marketing budget and global competition can hinder your efforts to attract and retain customers. To complicate matters, many of your leads and prospects might turn away when they find out that the business has little experience.

Start-ups Challenges in Kenya

Funding, Capital, and Securing Investment

Emerging economies such as Kenya tend to exhibit rudimentary and sometimes barely functioning financial markets. Often linked to more general problems of high depreciation and inflation rates, this causes difficulties in securing capital for business creation.

In Kenya, for example, interest rates average around 9 percent. Consequently, entrepreneurs often have no choice but to rely on personal savings or informal lending through their social networks in order to fund their ventures.

Many entrepreneurs looking for investments struggle to approach investors; many technology entrepreneurs perceive a challenge in attracting the appropriate amounts of capital and the entrepreneurs have a disconnect between the types of funding sought and the types of funding offered.

Although capital from donations and impact investments might be available, many entrepreneurs are wary of the associated administrative processes, often in the form of regular reports and presentations.

Changing Traditional Mindsets

Although foreign investment is coming in, a lot of work still needs to be done to improve the infrastructure in many African nations, to say nothing of improving access to capital and encouraging favorable government policies.

But there is an even bigger challenge standing in Africa’s way – traditional cultural mindsets. One of the biggest challenges for young entrepreneurs in Africa is the value system in Africa. Kenya is moving to a digital space and new economies, and most of these economies depend on trust.

Doing business face-to-face is one thing, but many African cultures are distrustful of e-commerce because it requires doing business with someone you’ve never met before, and trusting that they will deliver goods that are exactly as promised.

Value systems that uphold a high level of ethics, integrity and discipline must be created. It would be great for Africa to have a single market, but this will take some time, and a lot of work on cohesion between the nations

Fierce Competition

One of the biggest challenges that all start-ups will face is competition, particularly in markets dominated by well-known, established brands. The key is to find a niche market, not yet saturated by other companies with the same product.

As there will almost always be another brand offering a similar product, think outside the box; ensure you establish a clear target audience and a specific brand message to differentiate your start-up. The corporate world is quite fierce.

There is always a competition going on between the giants. Competition poses one of the biggest challenges for the survival of star-tup businesses.  And if you have an online business start-up, the competition gets tougher.

The competitive environment keeps the start-ups on their toes, as there is no margin of error available. In order to survive in this competitive business environment that covers both traditional and online businesses, the start-ups need to play aggressively, and punch above their weight to gain the much- needed recognition amongst the clusters of ever challenging and expanding businesses.

Rapid Changes/Advances in Technology

With advances in technology and the shift online, information is constantly changing. Not only keeping up but staying ahead of the competition is a significant challenge for young companies.

Furthermore, with plans to roll a start-up out into multiple markets, each country needs to be approached with an individual strategy based on market conditions.

A key challenge in some markets, where the Internet penetration is low, is convincing consumers of the value of the Internet and e-commerce – the value in shifting online. In other more mature markets, which are already heavily digitized, there is stiff competition for start-ups from well-established competitors.

Unrealistic Expectations

Success does not come alone. It brings expectations with it. Most of the times, these expectations seem realistic, but, in the real sense of the word, are merely unrealistic. This same concept holds true for young start-ups.

Start-ups tend to face challenges when they set ‘unrealistic expectations’ following a booming success. Remember, success is short-lived and expectations never end. This is where start-ups need to translate what the real expectations are?

Sustainability is the name of the game. And sustainability requires consistent efforts. In order to succeed in a competitive business world, start-ups need to have high but controlled expectations, keeping view of the resources available, the extent of growth potential, and other market factors as well.

Hiring Suitable Candidates

Hiring employees to support your venture can be a nerve-wracking experience, but is one of the most important investments for any start-up. To find the right talent whilst sticking to a budget is a challenge for any company, in particular for unknown brands.

Building a strong team to nurture and develop a young company is key to success, as you are putting your time, money and trust in your team, it is worth the investment.

One of the most important factors that define organizational culture within a start-up company is the synergy of the team.

A team comprises of individuals with similar capabilities and identical focus. In order to develop a highly successful team culture, organizations in general – and start-ups in particular – need to hire suitable candidates.

There is a huge pool of aspiring individuals available. Selecting a suitable candidate that fits the job well enough is a peculiarly tricky task. It is one of the biggest challenges facing the start-up businesses in this digital age.

When hiring employees, one should comply and keep up with the employment laws appropriate.

It is imperative on any sound business person to have any employees they bring on board to have a written contract on what is expected of both the employer and employee.

This also extends to any specialists or experts you engage with. Ensure everything is in writing and terms are clearly defined.

Partnership Decision Making

Partnership is the essence of success. And this logic holds true for start-ups as well. In this ever-expanding and ever-changing digital era, where organizations need to battle hard for their survival, start-ups also find it difficult to find trustworthy partners.

It’s really a big challenge for start-ups today. And as far as tech start-ups are concerned, stakes in partnership are much higher for them.

Going into a partnership pays great dividends for the start-ups, but they need to consider a variety of factors before making any decision to collaborate with another company working in the same ecosystem.

To reap out maximum benefits out of a partnership, start-up businesses should look for organizations that enjoy a sound presence within the market and a good reputation amongst the industry giants.

Financial Management

Money begets money. Remember the fact that when income increases, the expenditures also increase. There is no doubt about it.

One of the biggest challenges that start-ups face today relates to financial management. It is a fact that small start-ups rely heavily on financial backups from the so-called investors.

At times, when there is a cash influx, small firms, most importantly start-ups tend to find it really hard to properly manage their finances, and they bog down against the pressure.

In order to address this kind of situation, start-ups need to play a safe and cautious hand, by keeping all the cards close to their chests.

Taking help from a reputed financial consultancy firm may really help out in managing financial crises facing today’s start-up businesses.

Cyber Security

This is the digital age. And surviving the challenges in this age requires small start-ups – especially the ones operating online – to be super agile to counter the so-called online security threats.

Hackers are everywhere, and they are going to take advantage of any loophole within the systems installed within a start-up firm. The rate of cybercrimes has increased dramatically during the past couple of years.

The percentage is going to increase in the coming years as well. Start-ups that are active online do face online security threats.

Be it unauthorized access to start-up’s sensitive information, employee records, bank accounts’ information, or any other related information that is deemed important for the survival of a tech start-up, they are at risk. In order to safeguard the important online data, start-ups need to have robust and military-grade security systems in place.

A virtual private network (VPN) connection serves the purpose of protecting a start-up’s information, and employee records, by offering the much-needed encryption and data security to the start-up’s employees, thereby restricting unauthorized access to organizational data over the web.

Customer Trust

The customer is the king. And that’s absolutely right. Winning a customer’s trust is one of the most important challenges that businesses in general – and start-ups in particular – face today.

With a highly satisfied and loyal customer base, start-ups can scale and make progress towards excellence.

Customers are the real force behind a start-up’s success. Their word-of-mouth power and their presence on social media can give tech start-ups an edge against all the traditional businesses.

To win customers’ trust and loyalty, start-ups need to work aggressively to implement a customer-centric working philosophy, so as to enable them to succeed in their pursuit of attaining the height sustainable growth and progress they desire to achieve in this tech-savvy and challenging business world.

Managing and Having a Website

For Internet-based start-ups, adapting a website is one method of ensuring keeping up with the changes in the market. Is your website mobile-friendly?

Does it have an attractive, easy-to-manage user interface? With so many websites, it is difficult to make yours stand out in the crowd. However, a secure, reliable, and well-performing website can often speak for itself.

Low Demand for Some Products or Services

Emerging markets tend to exhibit relatively low levels of demand for new products and services.

Due to subsistence incomes prevail in emerging markets, potential customers are less likely to risk spending the small amounts of available cash on new products and services whose functionality has not yet been confirmed by widespread adoption.

In Kenya, although penetration rates for mobile phones are relatively high, consumers have been comparatively hesitant to buy technology innovations that were locally created. Instead, consumers prefer the products and services of global technology companies such as IBM, Nokia, and Huawei, which dominate mobile and software markets in Kenya

Infrastructure

Infrastructures are frequently inadequate for business creation in emerging markets, impeding access to suppliers, consumer markets, and market information.

Nairobi struggles particularly with the insufficient capacity of its roads and its power grid. Entrepreneurs in emerging markets may therefore incur additional costs in order to reach suppliers as well as customers.

One frequently used strategy is to rely on personal networks to access market information and suppliers and to disseminate products or services through family and friends.

Legal Challenges Start-ups Experience

Some of the challenges start-ups experience in Kenya include the following among others:

Business Structure

Identifying the type of business structure to set up and its relevant advantages and disadvantages when it comes to risks and taxes among others. The start-ups need information on the various types of business options one can register and the benefits.

• Business foundation and documentation

After starting up the business, there comes the challenge faced of foundation documents such as shareholding structure, agreements, responsibilities of parties, key decision making among others.

• Legal and Tax compliance

Start-ups face the challenge of compliance with tax laws and other laws concerning businesses. The requirements to pay taxes on businesses including the recent digital tax provides challenges to growing new businesses in some sectors. the lack of tax awareness may also cause one to incur penalties for non-compliance.

• Employment laws

Start-ups are common for having limited funding that they may not even be able to maintain employees’ salaries and some may opt for share payment options, delayed salaries, payment in kind that may not be at par with employment laws.

It is a challenge to keep up with employment laws such as employee contracts, employee salaries, adequate working hours, office and work environment requirements, leave days among other requirements.

• Data protection laws

Start-ups have the challenge of complying with data protection laws and the unavailability of clear regulations on how businesses should protect and distribute or share data may come to affect some start-up businesses in one way or another.

• Non-disclosure agreements/Confidentiality agreements

Protection of information and ideas is vital for any new business, therefore where start-ups are searching for investors and funding and they share ideas about their businesses or potential plans it is important to ensure the protection of this information, and such agreements are key.

• Contractual engagements

In the course of every business, one has to deal with suppliers, clients etc. It is important to also secure such agreements with regard to timelines, payment amounts and payment modalities. Employment contracts are important too as well as purchase agreements and borrowing contracts.

• Expert and professional advice

A big challenge for start-ups is having the capability to seek expert advice due to financial constraints. Despite this, a new business needs the most expert advice whether it be legal experts, tax experts, IT experts, accounting experts among many others, and the lack of expert advice may come to cause problems in the future and more expenses.

• Regulation and regulatory bodies

Start-ups face the challenge of lack of regulations or better yet regulations that affect them especially when it comes to compliance. In some ways too many requirements which a start-up that is affiliated to too many industries may cause a start-up to face obstacles to been regulatory requirements, fees, compliance, and others.

1. Protection of intellectual property

Start-ups especially in the digital age require protection of their intellectual property which will cover the ideas and expressions that the start-up will own or have in the new business. The development of new apps requires protection to avoid violation and misuse by others and this protection also proves expensive for a start-up.

1. Limited legal framework

Another challenge a start-up may face is limited legal framework applicable in its field. The technological space is developing faster than how the legal expectations and provisions are and this may pose a challenge when it comes to protection of data, compliance o laws, requirements or guidelines of doing business among other issues.

Legal and Business Compliance

Another thing start-ups have to deal with is to figure out what laws and/regulations you need to comply with in your line of business. You don’t want to be in hustle with authorities over compliance issues.

Inquire as to what you will need to comply with and get it over with. It saves you the headache of running your business looking over your shoulder every time and enables you to concentrate on what is actually important: running your business.

Business Structuring

For many start-ups, the type of business structure to register and carry on is a challenge. It may seem to be a casual issue but there are various instances where this has been detrimental.

What happens when an investor comes on board? How does the founder negotiate the terms? It is important to have this clearly defined as early as possible based on the industry one is operating in.

One is often likely to start as a sole proprietorship business and plan to revisit the structure once the business grows. This should be one of the key considerations when drawing up the business plan.

Different business structures have different legal as well as tax implications and it is imperative that this is undertaken with sobriety.

Slow Administrative Systems

Legal and administrative systems are often marked by slow procedures, corruption, and a lack of property rights enforcement, which make processes associated with the creation and operation of a new business time-consuming and unnecessarily costly.

Kenya ranked 136th (of 189 economies) for ease of doing business in 2015, with administrative costs for setting up a business requiring over 40 percent of the average gross domestic product (GDP) per capita. 

Often, therefore, in order to save costs and time, entrepreneurs hesitate to register their new businesses, which, in turn, excludes them from property rights protection and other legal safety nets, as fragmented as they may be.

Procedures when Starting up a Business in Kenya

Investment Approval Process

The Kenya Investment Authority (KIA) operates a one-stop office as the focal point for investor assistance in the processing all the relevant licenses and permit for all the government ministries and department.

Investors can submit their application to the Kenya Investment Authority with the certificate of Incorporation, Investment Authority form, memorandum and articles of association and all relevant requirements listed by the Kenya Investment Authority.

Personal Identification Number and VAT registration

All businesses are required to obtain a Personal Identification Number (PIN). This is the tax registration document.

An application for a PIN is to be made to the Kenya Revenue Authority (KRA) and can be done online (on their website https://www.revenue.go.ke

Such application can only be done after completing the company registration formalities and obtaining the Certificate of Incorporation/Registration.

PIN registration online, the taxpayer is required to endorse the tax obligations on the systems such as corporation tax, PAYE, income tax, withholding tax. All employees, directors, partners and sole proprietor are required to have a PIN.

Accounting Periods

The Income Tax Act permits incorporated businesses to choose any period end. However, certain laws e.g., the Banking Act and the Insurance Act require banks and insurance companies to have an accounting period ending on 31 December of each year.

Unincorporated businesses (partnerships and sole proprietors) are also required to have accounting periods ending on 31 December.

Incorporated businesses can change their period end with prior written approval of the Commissioner by giving at least a 6 months’ notice before the date to which the financial statements are intended to be made up to.

The first period end for the preparation of audited financial statements can be a maximum of 18 months from the date of commencement of business.

Capital Contribution

Shares can be issued at par (the face value of the shares) or at a premium. Shares cannot be issued at a discount without the sanction of the Court. The authorised capital can be increased by an ordinary resolution of members in a general meeting.

Statement of increase of Nominal Capital has to be submitted to the Lands Office for stamping within 30 days from the date of passing of the resolution. The rate of stamp duty payable is 1% of the amount by which the capital is increased. The stamped Statement of Nominal Capital has to be filed with the Registrar of Companies.

Regulation of foreign investment

Under the new Companies Act 2015, there is a restriction of up to 70% on the percentage of equity that foreign nationals may hold in locally incorporated companies operating in the Communications Industry.

The remaining 30% should be owned by Kenyan citizens. Also, foreign national are not allowed to own agricultural lands.

Thin capitalization

Thin capitalization arises where a company incorporated in Kenya is controlled by a non-resident person alone or together with 4 or fewer other persons, and the highest amount of all interest-bearing loans (defined to include all liabilities on which the company is paying interest, finance charge, discount or premium) to that company at any time during the year are more than three times the sum of the revenue reserves (including accumulated losses) and the issued and paid-up capital of that company.

Where a company is thinly capitalised, the Income Tax Act provides for the disallowance for tax purposes part of the interest charged in proportion to the amount of debt that exceeds the prescribed ratio of debt to capital.

In addition, any foreign exchange loss on such loans is also deferred for tax purposes. Control in the case of a body corporate means the holding of 25% or more of the capital or the voting rights.

Moreover, where a company which is subject to the thin capitalisation rules received interest free loans from the shareholders, the Income Tax Act provides for the levying of deemed interest on such loans at a rate pegged to the 91 days Treasury Bill rate.

Withholding tax is payable on the deemed interest, and both the deemed interest and the withholding tax paid thereon are not deductible for tax purposes. A bank or a financial institution license under the Banking Act is exempt from this provision.

Financial audit requirement

In accordance with the Income Tax Act, all companies in Kenya are required to have their financial statements audited at the end of each financial year.

Companies, unless specifically restricted under a certain Act, can prepare their first set of financial statements for an eighteen-month period from the date of commencement of operations.

The company has to appoint an auditor by a resolution of the directors at any time before the first Annual General Meeting. The auditors shall hold office until the conclusion of that meeting.

Subsequently, the auditor is appointed at each Annual General Meeting. Societies are also required to have their financial statements audited in accordance with Section 29 of the Societies Act.

Partnerships and sole proprietors do not have any audit requirements but it is common that partnerships and sole proprietors have their financial statements audited for control and to enhance governance.

Statutory Framework

The legislation governing companies’ financial reporting is the Companies Act. In addition, there are other legislations that impact on financial reporting. These deal with specialised sectors such as insurance, banks, retirement benefits schemes and listed companies.

The Companies Act requires all limited liability companies to prepare and keep proper books of account as are necessary to give a true and fair view of the state of the companies’ affairs.

Financial Reporting and Auditing Standards

The Institute of Certified Public Accountant of Kenya (ICPAK) requires that all financial statements must be prepared in accordance with International Financial Reporting Standards (IFRS) or International Financial Reporting Standards for Small and Medium Enterprises (IFRS for SMEs) framework.

ICPAK also requires that all audits are to be carried out in accordance with International Standards on Auditing (ISA).

The definition of an SME in Kenya as formulated by ICPAK is an entity:

• That does not have public accountability;
• That publishes general purpose financial statements for external users (e.g. owners not involved in the day to day management, KRA, existing and potential creditors, credit rating agencies);
• Whose debt and equity instruments are not traded in the public market (a domestic or foreign stock exchange or an over-the-counter market); and
• That does not hold funds in a fiduciary capacity for a broad group of outsiders as one of its primary businesses such as banks, credit unions, insurance companies, securities brokers/dealers, mutual funds, and investment banks.

The following entities are public interest entities and therefore cannot use IFRS for SMEs:

• Companies whose debt or equity instruments are traded in a public market or are in the process of issuing such instruments for trading in a public market;
• Banks and building societies;
• Savings and credit unions including SACCOs;
• Insurance companies;
• Retirement benefit schemes;
• State-owned entities including state-funded parastatals;
• Mutual funds;
• Investment banks; and
• Stockbrokers.

Document Retention period

All accounting documents must be kept on file. Both manual files and electronic files are accepted but must be in reproducible format.

The retention periods are;

• accounting source documents – for seven years from the end of the financial year during which the source document was recorded in the accounts;

• accounting ledgers, journals, contracts, financial statements, reports and other business documents

which are necessary for reconstructing business transactions during audits – for seven years as of the end of the corresponding financial year;

• business documents relating to long-term rights or obligations – for seven years after the expiry of their term of validity;

• accounting rules and procedures – for seven years after the amendment or replacement thereof;

• accounting registers created electronically should be preserved electronically. The legibility of the data should be ensured within the preservation period.

Protection of Mobile Apps

The increased use of smartphones and improved internet penetration have seen an increase in the use of mobile applications (mobile apps) worldwide.

The development of apps related to financial technology (fintech) has had a positive impact on the financial services industry in Kenya and the region.

Kenya, being the origin of mobile money thanks to mobile money services such as M-PESA, is expected to continue to play a leading role in this space.

Intellectual Property Rights of Mobile Apps

Mobile apps are often created by software developers on behalf of their clients. It is critical that developers or owners of mobile apps ensure that their legal rights are protected.

As such, the mobile app software development agreement entered into between the software developer and the client should be clear on who owns the intellectual property rights in the mobile app.

Where a client intends to ensure that its ideas are kept confidential, it may require the developer to execute a non-disclosure agreement.

In addition, where an employee develops a mobile app, the employer should ensure that the employment contract contains a clause stipulating that all intellectual property developed by the employee during the course of employment will be assigned to the employer.

Where the developer is a corporate entity such as a company, deeds of assignment should also be executed by individual developers assigning all rights to the client.

Where appropriate, the developers should also waive their moral rights in the mobile app developed.

The waiver of moral rights would for instance ensure that the developers do not object to treatment of the mobile app in ways that they would consider to be derogatory.

Different forms of protection for different purposes

Once a mobile app has been developed, it is important for the mobile app owner to consider the various forms of protection available.

Protecting the mobile app will enable the owner to enforce its rights in the app in the event that they are infringed by third parties. In this regard, the four main forms of legal protection that may be considered are trademarks, copyright, utility models and patents.

1. Copyright protects the various components of a mobile app such as source code, object code, graphics, and text. Under Kenyan law, registration is not a prerequisite for copyright protection. Copyright protection accrues once work that is subject to copyright is recorded in a permanent form. However, registration is still recommended since constitutes prima facie evidence of copyright ownership.
2. Trademark registration, on the other hand, protects the name or logo of the mobile application. It is important that before any use or registration of the proposed trademark is undertaken, a trademark clearance search is carried out to confirm that the proposed trademark is available. Trademark registration should ideally be undertaken in all the territories where it is envisaged that the mobile app will be used. An owner of a mobile app may go further and register a domain name in respect of the website that will be used together with the app.
3. It is generally recognized that a process or method embodied in an app may be patentable. In this regard, the manner in which a mobile app communicates with a server or another mobile device may be the subject matter of patentability. The requirements for patentability (such as novelty and inventive step) must be met. Patent protection is for 20 years from the filing date.
4. In instances where it is not possible to secure patent protection relating to a mobile app, it may be possible to obtain a utility model certificate. Under utility model protection, there is no requirement for an inventive step, as with the case of patent protection. Utility model protection is for 10 years from the filing date.

Also read protection of Mobile Apps in Kenya

Terms and conditions should not be overlooked

In addition to the measures that could be taken to protect legal rights in a mobile app, the owner of an app should have in place terms and conditions set out when and how third parties may use the software.

The terms and conditions should also contain appropriate limitations of liability arising from the use of a mobile app.  

Another critical requirement is a privacy policy to govern the manner in which the personal data of users will be collected and used.

These are some of the key issues that are relevant in the legal protection of mobile apps.

They set out the terms under which the Services operated by a business start-up (the websites, portals together with the content, search facilities, directory services, e-mail, forums, expert, blogs, newsgroups, and other services provided by a business start-up from time to time and to which additional terms and conditions may apply) are made available to you.

These Terms and Conditions apply to Members, Advertisers, Subscribers to any Services provided by the business start-up and to visitors. By accessing any of the Services whether as a Member, a Subscriber, or a visitor you agree to be bound by the terms and conditions.

Start-ups in Kenya