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Ecosystem Deep Dives #1: Tunisia - Getting their start-up act together
How Tunisia passed one of the most important start-up policies on the African continent.
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!
Tunisia famously became one of the only countries to successfully carry through the popular aspirations of the Arab Spring. This period, marked by the region's anger at tyrannical strongmen, high unemployment rates, and an overarching economic stagnation, led to mass protests from Tunis to Sana'a. The current dichotomy between these two cities demonstrates the extremely different results the Arab Spring produced over time.
In 2011, Tunisia's population deposed dictator Zine El Abidine Ben Ali following its Jasmine Revolution, and implemented a transitional government led by various civil society actors. One of these civil society groups, the National Dialogue Quartet, even won the Nobel Peace Prize in 2015 for its efforts to establish a roadmap for peaceful transition.
However, the transition from dictatorship to democracy did not prove to be a panacea for the country's woes. In recent years, some of the problems that have been plaguing Tunisia for decades, such as high youth unemployment and socio-economic disparities between the country's different regions, have continued to hinder the lives of Tunisians and even led to a dangerous revival of Ben Ali era nostalgia.
The country's difficulties can seem daunting, but one must not forget the incredible strengths Tunisia possesses. An educated and young workforce, direct access to the European market, as well as an impactful diaspora population just to name a few. It is by recognizing how the country's assets could alleviate the country's hardships that in 2018, Tunisia passed one of the country's, if not one of the continent's, most important piece of recent legislation: the Start-Up Act.
Clearly defined purpose
The Tunisian Start-Up Act is a smaller subset of two existing initiatives. The first is Digital Tunisia 2020, a government plan to digitize the country, which includes Start-Up Tunisia, an initiative carried out by Tunisia-based organization Smart Capital, which aims to "make Tunisia a country of start-ups, at the crossroads of the Mediterranean, the MENA region and Africa".
The Start-Up Tunisia initiative revolves around four main axes:
Act: Setting the legal framework for national start-up growth.
Invest: Creating an active investment ecosystem in Tunisia.
Empower: Connecting and kickstarting Tunisian SSO's (Start-Up Support Organizations)
State: Encourage innovation in the public sector.
The Start-Up Act itself contains five key elements:
Define/label start-ups in the legal sense.
Facilitate the creation, liquidation and development of companies.
Expand access to funding.
Grow access to international markets.
How it works
The way the Start-Up Act works is that it gives what the government calls "labelled" start-ups access to a plethora of different advantages aimed at reducing the founders' personal risk, facilitating the company's administrative and tax workload, as well as incentivizing investors.
In order to get the label, which unblocks all of the aforementioned advantages, a start-up must validate five key requirements:
Age: The company must be less than eight years old.
Size: The company must have less than a hundred employees and must be making less than $5 million in yearly revenue.
Independence: The company must be 2/3 owned by individuals, VC's or other start-ups.
Innovation: The company must propose an innovative product and business model.
Scalability: The company must prove its potential to scale.
Alternatively, a founder can also decide to apply for a "pre-label", if their their company isn't yet incorporated.
Upon obtaining this label, which acts as the cornerstone for the entire Start-Up Act, founders get generous advantages and benefits to help them in their journey.
Living stipend for a year.
Government help with IP/Patent registration process.
Paid leave for up to a year, with a guaranteed spot at the same company if the start-up fails.
Support with potential liquidation of the company.
Advantages for young graduates to join or create their own start-ups.
Corporate and investor tax cuts.
Foreign currency account.
Digitalization of many administrative steps.
This list of advantages goes on and contains many more details/caveats that I encourage you to check out on the Start-Up Act's official website.
Impact of the Start-Up Act
Cynics may say such legislation supports only a tiny majority of the tech-savvy Tunisian population while leaving "ordinary people" behind. The reality is that legislative efforts such as the Tunisian Start-Up Act create a snowball effect for improvements in a variety of national sectors.
First, start-ups' inherent fast pace and complete digitalization requires the government to digitize its own administrative services, rendering the government more efficient for the wider population as a result. The cutting of red tape and necessary bureaucratic hurdles does pose the question of civil servant job loss however. Indeed, digitalization of government services inevitably leads to the loss of now "useless"government jobs, which brings about a problem in a region where large swaths of the population are employed by the state. In Tunisia, 5% of the population is employed by the Tunisian government, costing the government considerable amounts of money while providing a non-sustainable band-aid to the country's unemployment problem. Digitalization of government is thus a necessary double-edged sword, as it solves a problem while creating a new one. In an ideal world, digitalization of government will lead to a more dynamic private sector, which can provide job opportunities for those affected by the government's digital transformation.
Another notable impact the Start-Up Act has had has been the renewed focus on the creation of opportunities for the Tunisian youth, as well the modernization of the educational sector. Start-ups require tech-savvy, digital-minded and ambitious young talent. Both secondary and tertiary education facilities are thus pushed to update their curriculums, by teaching their students relevant skills applicable to today's modern economy. While the public education sector definitely has its role to play in this transition, new actors and alternative methods of education can stem as a result of this demand for fresh talent.
One example, albeit not in Tunisia, is the Colombian education start-up Platzi, which acts as a fully-online school offering courses covering topics such as coding, blockchain, English and digital marketing, all aimed at preparing their students for the modern job market. Platzi even collaborated with the Colombian government in 2017, a telling example of potentially fruitful public-private partnerships in the education sector. In the MENA region, one can think of Jordanian start-up Abwaab as another illustration of how start-ups usher in important innovations in education. In Tunisia, the incredible work carried out by GoMyCode, which has trained more than 5,000 Tunisian developers, should be duplicated many times over. Bold innovations in education are key to prepare the MENA region's youth for a more plentiful, yet more competitive, international job market resulting from the recent democratization of remote work.
Lastly, one of the other widespread national benefits the Start-up Act has bought along has been the reduction of the regional "brain drain" debacle, in which local talent leaves the country in search of better opportunities. A healthy, dynamic national start-up ecosystem creates attractive opportunities for young Tunisian talent, which creates incentives for them to stay. Moreover, it can be argued that the the Start-Up Act has even reversed the "brain drain" trend, as 140 of Tunisia's start-up founders are or have been part of the diaspora. In other words, one of the most efficient ways to leverage the incredible power of a country's diaspora community is by creating impetus and reasons for them to come back. While diaspora communities have long been ostracized and seen as a net-loss for countries in emerging markets, countries that view diaspora communities as an asset can radically transform their economies, as India has done in recent decades.
In numbers: what the Start-Up Act has done for the Tunisian ecosystem
As a preamble to this section, I would like to applaud the incredible work carried out by Smart Capital in its formulation of the 2020 Start-Up Tunisia report, through which I collected all of the following data.
Here are some of the most interesting data points (a non-exhaustive list)
401 start-ups have obtained the prized "label" during the period April 2019-December 2020. This constitutes a 63% acceptance rate.
189 founders are supported by the living stipend mentionned earlier.
21.5% of start-ups operate in deep-tech (AI, blockchain, IoT, robotics).
3.6% of start-ups operate in a B2G (Business2Government) model, a proof of potentially gamechanging public-private innovation.
In 2020, 82 start-ups raised a total of $8.2 million.
91% of those investments were less than $350,000.
The report is full of other interesting data points, such as founder background, growth rates, international start-ups in Tunisia, diaspora founders, etc... I encourage you to check out the full report.
What's left to do
The Tunisian Start-Up Act is encouraging, but there is obviously still room for improvement. One of the elements the Act hasn't nailed yet has been the decentralization of tech hubs. 70.1% of the ecosystem's activity is concentrated in the Greater Tunis area, which leaves out many of the traditionally marginalized regions.
However, it should be noted that tech hubs usually function when a high density of talent, infrastructure and opportunities are concentrated in a small space. An equally distributed and decentralized start-up ecosystem would never be as efficient as a tight one. However, this doesn't mean marginalized regions have to be left out. One of the ways to solve this conundrum would be by taking advantage of the remote work wave, by centralizing company HQ's and investors in a couple cities while making a large effort to decentralize job and education opportunities to the entirety of the country.
Another huge challenge the Tunisian ecosystem faces, albeit one faced by every start-up ecosystem worldwide from New York to Ramallah, is the low participation of women. In Tunisia, only 5% of start-ups are founded and directed by women, compared to 65% for men (the remaining 30% are mixed teams). Better inclusion of women is fundamental and necessary.
Lastly, one of the most pressing demand Tunisian start-ups continue to have is the continuous digitalization of administrative tasks and requirements. It can also be added that the investment landscape in Tunisia is still nascent and lacks early-stage capital opportunities. The combination of potential diaspora angel investment networks, as well as greater visibility on the world investment stage bought about by Tunisia's recent addition to the 2021 Start-Up Genome GSER Report, will be crucial in filling that early-stage funding gap.
Why did the Start-Up Act work?
It undeniable that the efforts carried out by the entire Start-Up Tunisia initiative and the Start-Up Act in particular have had a huge impact on the Tunisian start-up ecosystem. As of 2019, Tunisia ranked 2nd in African start-up ecosystems according to the Global Entrepreneurship Index.
One of the most crucial and fundamental aspects concerning the development of the Act was its bottom-up approach. Actors from the ecosystem, founders, investors, lawyers, and enablers were all involved in creating a piece of legislation that would truly address the pain-points and the bottlenecks that Tunisian start-ups faced. The cutting of administrative red tape and the continuous digitalization of such tasks (although there is still work to be done) was absolutely fundamental in enabling and encouraging more talented Tunisians to start their companies.
On top of that, the continuous involvement of the team behind the Start-Up Act has helped the ecosystem stay united during the destructive Covid period. This unity bolstered the ecosystem's resilience and led to initiatives such as the SAVE program, an extremely flexible loan given to labelled start-ups to help them confront the financial challenges usher in by the pandemic. The SAVE program is just an example of the patience and generous approach the Start-Up Act took towards developing the ecosystem. By truly understanding that start-ups were a long, undulating and uncertain process, the Tunisian Start-Up Act implemented policies to let a large number of founders grow and thrive, rather than offer cumbersome and strict grants to a handful of them. In other words, the Tunisian government decided to be an incubator rather than a VC, thereby choosing to create a buzzing, early-stage ecosystem rather than a skewed behemoth ecosystem with two or three massive exits every five years (although those would still be welcome).
Other important players in the development of the Tunisian start-up ecosystem are the many international aid agencies, who provide grants, funding for incubators and expertise on various start-up programs. It is interesting to see more and more aid agencies, traditionally humanitarian-centered, turn to the private sector and the start-up/innovation field in particular. While their monetary help and expertise is welcome at the early-stage, this should be a temporary crutch. The best start-up ecosystems in the world are strong because private incubators make money off their start-ups' exits, and because successful local entrepreneurs decide to invest back in the ecosystem.
The Start-Up Act's influence on the continent
One often forgets how recent the Tunisian Start-Up Act is (2018), and yet it is already lauded as one of the most important African legislative modernizations of its era. Shortly after Tunisia, Senegal, which is well-connected to the North African start-up ecosystem, passed its own version of a start-up act in 2019, touting many similar policies than the Tunisian one. The importance of start-up acts across the continent surpasses the sole goal of helping start-ups; it kickstarts processes of government digitalization, competitiveness on the world stage and updated education curriculums that benefit the country as a whole.
One of the most decisive organization working to implement start-ups act across the continent is i4Policy, a Pan-African organization that unites the continent's incubators and emphasizes the importance of co-creating progressive legislation for the start-up world. They take a collaborative and innovative approach to policymaking, and they're already helping numerous other start-up legislative efforts in other African countries, including Kenya, the DRC and Libya just to name a few.
The Tunisian Start-Up Act is just a start to a long road of policy modernization across the continent, aimed at making African economies more dynamic and attractive by supporting local changemakers.
One significant question to ask ourselves however, is how far this types of legislation can go without creating more problems than it solves. Regarding taxation, while lower taxes are an efficient measure to encourage innovation, governments also need to benefit from fiscal revenue bought on by their national start-ups' growth. Maybe one potential solution would be for governments to make quasi-automatic $30,000-50,000 investments in promising seed stage start-ups, and redistributing the profits made by subsequent exits on social programs.
While creating local start-up hubs, government should also be mindful of not aggravating the marginalizations of rural communities. While we've established that creating a fully-decentralized start-up ecosystem is not a good idea, marginalized communities should be the ones benefiting the most from the augmented fiscal revenue bought on by the country's new, booming start-ups.
Start-ups are by no means a remedy to a country's problems, and the utopian vision of "start-up nations" through which a couple visionaries save the entire population from its demise is not realistic. However, as Tunisia's Start-Up Act has shown, the development of a blossoming national start-up scenes brings about modernization, economic growth, but more importantly, hope and opportunity for the country's youth.
That's all for this week's edition of "Ecosystem Deep-Dives". Next week, we will be talking about the RDC's nascent but promising start-up scene.
If you enjoy and gain value from my work, feel free to share and subscribe!