Guide to Ethiopia: why this country is attractive for Russian startups

According to Mikael Gorsky, founder of the business development agency Explore Ethiopia (Addis Ababa, Ethiopia), which registers and supports businesses in Ethiopia, conducts market research and audits of potential partners, Africa is the most promising region on the planet.

Startups from the USA, EU countries, India, Arab countries and China have already turned their attention to the Ethiopian market. Startups from Russia also have prospects here, because Ethiopia’s main needs are related to the strengths of Russian innovations — medicine, energy, digital technologies and the agricultural industry.

Mikael spoke about the peculiarities of economic development in Africa, in particular — Ethiopia, as well as what Russian startups need to consider when entering the Ethiopian market.

What areas of the African economy will develop in the near future

In addition to those changes that predictably follow from general economic development: increased efficiency of agriculture (mechanization, agricultural technologies), urbanization, industrialization, increased energy consumption, changes in food structure, etc., new directions will emerge that correspond to global trends and trends.

In the next two to three years, mobile Internet using the 5G standard is expected to appear in the capital of Ethiopia, Addis Ababa.

It is clear that 10 years ago there was no mobile phone service in Addis Ababa. Another example: a startup developing vertical farms on the outskirts of Addis Ababa adapts the latest American developments to the Ethiopian reality.

It is worth recognizing that the definition of venture investment (high risk, high reward) fits the majority of investments in projects in African countries.

Those parameters that are desirable for venture projects — exponential expansion of the client base and constant growth in the volume of use of the new service — can be achieved in such non-venture examples as selling electric fans or retailing ice cream.

All basic consumer segments are undeveloped in Africa: banking services (from 60% to 80% of the country's population are not bank clients), urban services (catering, retail, dry cleaning), affordable and high-quality housing and much, much more .

If we talk about projects that correspond to the profile of classic venture technology investors, then, of course, it is worth highlighting a cluster of projects in the field of consumer analytics, e-commerce projects and all types of entrepreneurship, the opportunity for which arises with increasing penetration of mobile communications and the mobile Internet.

The tech entrepreneurship sector in Africa is extremely small compared to the global size: the Partech 2020 report (only digital tech startups and deals over $200,000 are taken into account) says that African tech startups attracted investments worth approximately 1.5 billion US dollars, which is less than 1% of the global total.

A total of 359 transactions were taken into account (in all 54 African countries), the leaders — Nigeria (307 million), Kenya (304 million), Egypt (269 million) and South Africa (259 million) — make up 80% of transactions by investment volume and 70% by number of transactions.

In 18 African countries, researchers did not note a single transaction; in Ethiopia — two.

Of the total investment, 25% went to fintech, 13% — in agricultural technology, 11% — corporate innovative solutions, 10% — off-grid energy, 10% — medicine, 7% — e-commerce.

How the Ethiopian economy is developing

Ethiopia — the second largest country in Africa (115 million people), but also one of the poorest countries on the continent (GDP per capita at purchasing power parity - 2.3 thousand US dollars, which is six times less than in South Africa and 10 less than in Mauritius). Population of Ethiopia — very young, average age of residents is 19 years old, more than 50% of the population is under 18 years old.

Ethiopia — The country is agricultural, more than 80% of the population is engaged in agriculture, and this agriculture is rather reminiscent of gardening — the average size of a land plot does not exceed two hectares.

The main article of Ethiopia's agricultural exports — coffee (in ninth place among all countries in the world), the country also exports cereals and oilseeds, the light herbal drug khat (legal in Ethiopia and countries neighboring Ethiopia, where it is actually exported), as well as animal skins.

In addition to agriculture, the country has weaving, clothing and footwear production.

Other industries are also present: food products, building materials, simple assembly — but this is all an extremely small part of the country’s economy and they are concentrated around the capital and several cities.

Historically, the national airline of Ethiopia, Ethiopian Airlines, has always enjoyed increased attention from the country's leadership, and from three aircraft in 1946 (the moment the airline was created) it has grown to become the largest airline in Africa with 100 international and 21 local cities, more than 100 aircraft , 12,900 employees and the number of passengers transported was 10 million (2018 data).

It is important to understand that all fundamental areas of the economy (energy, transport, telecommunications, roads, banking services) today are under complete or dominant control of the state. At the same time, there is a strategic position of the government to move towards increasing the role and involvement of private capital and private entrepreneurship, laws and regulations on public-private partnership (PPP - public-private partnership) have been introduced.

On March 21, 2021, a ten-year development plan for the Ethiopian economy was published, which highlights six strategic areas of development:

1. Quality of economic growth (sectors: agriculture, manufacturing, mining, tourism, energy, finance, transport, urban development, irrigation);
2. Increase in production volumes and labor productivity;
3. Institutional reforms and transformation;
4. Leadership of private business in economic reform;
5. Equal participation of women and children in socio-economic development;
6. Attention to the climate impacts of economic initiatives.

The text of the same document defines the numerical goal of economic development: the growth of the national economy over 10 years has more than doubled, by 161 billion US dollars. A two-fold target increase in the economy will inevitably change the life and economic condition of the country's citizens, whose cash income will increase.

Equally inevitable will be the urbanization of the country's population, which from the current 12-15% will approach 30%, which will be followed by a massive change in the behavior patterns of residents towards urban behavior.

In mid-2020, Ethiopia's digital development strategy (Digital Ethiopia 2025), developed by the Ministry of Innovation and Technology, was also presented. The document was approved at a meeting of the Cabinet of Ministers on June 15, 2020, its implementation is coordinated by the Office of the Prime Minister of Ethiopia, where the author of the document, Myriad Said, moved to work in the status of Digital Advisor.

The four main areas of implementation of Ethiopia's digital strategy are outlined as:

• increasing the efficiency of agriculture;
• development of value chains;
• IT integration of service industries;
• digital technologies as a factor in winning competition in tourism.

The strategy also highlights urgent goals:

• reform of the telecommunications sector;
• deregulation of the mobile communications market;
• development of government connection channels;
• implementation of universal access;
• create a digital ID;
• strengthening cybersecurity;
• electronic government;
• updating and improving government portals;
• electronic transactions with the government;
• development of e-commerce.

An approximate estimate of the costs of updating the Ethiopian economy — 10 billion US dollars (12% of the country's GDP in 2019), but about 80% of the required resources are planned to be received from international organizations such as the International Monetary Fund, World Bank, European Investment Bank and others.

Everything that relates to the field of innovative development of Ethiopia in the field of agriculture is the responsibility of the Agricultural Transformation Agency (ATA), which develops and implements programs for the development of the agricultural industries of Ethiopia, including the cultivation of grains and oilseeds, fruits , vegetables and berries, livestock farming, fish farming and fishing, various types of product processing.

Along with this structure, there is also the Ministry of Agriculture and its subordinate Institute of Agricultural Research and the Agency for the Development and Marketing of Coffee and Tea Production.

Ethiopia's health development is the responsibility of the Ministry of Health and its structures, which include a public health research institute and several research hospitals. A recent initiative by the Ministry of Health — creation in August 2020 of a digital health center (Digital Health Innovation and Learning Center) with the support of the Bill and Melinda Gates Foundation.

The purpose of the center — development and testing of solutions in the field of digital technologies in healthcare, promotion of best practices and scaling of developments.

There are also the Ministries of Innovation and Technology, the Ministry of Science and Higher Education, the Ministry of Education, the Ministries of Trade and Industry and the Office of the Prime Minister — each of these departments is also involved in the implementation and coordination of innovation initiatives in Ethiopia.

All foreign investments are regulated and serviced according to the “single window” principle. at the Ethiopian Investment Commission.

What Russian startups need to know when entering the Ethiopian market

Despite the fact that the number of students in Ethiopia (an approximate figure, no current data) is more than a million people, there are no more than 10 thousand startups.

Startups from the USA, EU countries, India, Arab countries and, of course, China are turning their attention to the Ethiopian market.

However, the competitive field for startups in Ethiopia is certainly not saturated. Another thing is that the business model in Ethiopia must necessarily be cooperative and not monopolistic.

A startup that aims to sell its solution to one consumer or another in Ethiopia is doomed to fail. Ethiopia — one of the poorest countries in the world, most purchases are made with funds from international development agencies and charitable organizations, and in those rare cases when purchases are made at their own expense, priority is given to the cheapest and most standard solutions.

The optimal scenario for a Russian startup to enter the Ethiopian market, as well as the market of any other African country, is to be involved in joint, cooperative development with local African participants.

Given the significant requirements for organizing enterprises with foreign investment (the minimum authorized capital is $200 thousand), Russian companies should apply the strategy of working through a local agent or a consolidated representative (a single structure representing many different startups).

Financing of “naturalized” (in the form of an — Ethiopian, in essence — Russian-Ethiopian) project will occur through international grantmakers or local, Ethiopian support for economic development projects.

Entrepreneurs should be initially prepared for the fact that the implementation of a project in Ethiopia is not aimed at obtaining maximum revenue, but at accumulating project experience, collecting statistical data and testing hypotheses and models.

Directly receiving foreign exchange payments from project work will face difficulties in repatriating proceeds, restrictions on foreign exchange transactions and shortages of foreign exchange in exchange trading in Ethiopia.

The range of issues (the fashionable startup term “client pain” is appropriate here), the urgent solution of which is critically important for Ethiopia, is extremely wide (re-read the state of the Ethiopian economy I described above), from which it follows that almost any Russian a startup can find collaborative development opportunities in Ethiopia (subject to joint development with a local team).

We see that in 30-40 days of deep immersion in the information environment of Ethiopia, with a stay in Addis Ababa and holding dozens of negotiations with potential customers, regulators and grant givers, a Russian startup can lay the foundation for Ethiopian development.

Ethiopian Startup Law

The Ethiopian government is going to adopt a special law on startups, Startup Act.

Its main provisions are as follows: a national startup council, a technical commission and an innovation fund are being created. The task of these structures — development of an innovative economy, formation of an ecosystem, support for start-ups and innovative companies, synchronization of innovation and Ethiopia's development plan, provision of support to start-ups and innovative companies, assignment of appropriate statuses.

The Innovation Fund will finance programs such as:

• «Startup Scholarship» (no details yet);
• compensation to companies where startup founders worked before they left for their startup (also without details yet);
• payment for registration of intellectual property rights;
• financial assistance to startups in paying administrative expenses (accounting, etc.);
• providing guarantees for startups to borrow;
• support for organizations creating a startup ecosystem (incubators, accelerators).

Companies that meet a number of conditions will be assigned the status of “startups” and “innovative businesses”. The Technical Commission is responsible for assigning the status.

There are five criteria that a business must meet to obtain the status of a startup and innovative business:

• the product/service developed by the company must provide an incremental or breakthrough change to one or another existing product/service;
• the company must have high growth potential or a scalable business model;
• more than 25% of the shares must belong to the innovator;
• the company must be a micro, mini or medium-sized enterprise;
• the company must be less than five years old.

Having the “Startup” status or "Innovative business" will allow the company to receive a variety of benefits and preferences: from receiving auxiliary business services to exemption from almost all taxes.

A separate set of incentives and financing programs "Startup Act" also promises those who will be recognized as participants in the ecosystem (we are talking about incubators, accelerators, scouts and others).

The one who invests in a company that has “startup” status and “innovative company” will also be exempt from part of the taxes.

A company with status must always meet three criteria:

• implement the stated growth program;
• keep accounting in accordance with the procedure established by law;
• provide detailed information whenever the development plan changes.

Failure of a company to meet the above criteria automatically means deprivation of status, but only after the company is given the opportunity to explain the reason for this non-compliance.

Attracting a minority foreign investor does not deprive a startup or innovative company of its status as a local company (a number of industries in Ethiopia are closed to foreign companies).

If a startup is created by foreigners, then the requirement for the minimum amount of authorized capital can be reduced (the minimum amount of authorized capital for a company founded by a foreigner is currently 200 thousand US dollars).

A legal innovation such as “pre-registration” is being introduced. startup in the National Commission on Startups, which exempts you from the need to fully register a legal entity and pay taxes for two years.

The Ethiopian government’s own assessment of the barriers and obstacles to the country’s innovative development, which was included in the text of the country’s digital development strategy (Digital Ethiopia 2025), determines the following list:

• outdated copyright regulation;
• the existing business licensing system for each individual type of commercial activity does not take into account modern types of business;
• the minimum requirements for the volume of foreign investment (200 thousand US dollars) significantly exceed a reasonable level;
• state support for export-oriented companies does not apply to companies exporting IT services due to the inconsistency of the customs classification system with realities;
• lack of foreign currency to pay for imported components and services;
• unpredictability of customs procedures and payments when importing IT components;
• the overall level of import payments for IT equipment is very high;
• legislation does not facilitate the easy exercise of ownership rights to technology companies;
• government procurement regulation does not correspond to the specifics of the supply of IT services;
• there is no legislation on data exchange between different market participants.

In our opinion, some of these estimates are correct, some are exaggerated, and about 50 more obstacles are not mentioned in the list. However, the number of obstacles to business development in Ethiopia may seem small only when compared with the number of opportunities in this country.