Kenya's Senate has passed the controversial 2022 Startup Bill, setting the stage for a transformative shift in the country's burgeoning startup ecosystem. If President William Ruto signs the bill into law, it will mandate Kenyan startups to allocate at least 15% of their expenses to research and development (R&D) and maintain wholly Kenyan ownership to qualify for legal recognition and government support.

The bill introduces a range of incentives, including tax breaks, grants, incubation programs, and credit guarantee schemes aimed at boosting innovation. However, it has sparked concerns, particularly around its requirement for wholly Kenyan ownership. Critics argue that the bill could stifle growth by excluding startups with foreign co-founders or foreign investors that do not meet the bill's ownership criteria.

Such startups, which have been a significant part of Kenya's entrepreneurial rise, would be unable to access key benefits, limiting their growth potential. Many successful Kenyan startups have attracted significant foreign capital and have foreign founders or co-founders whose contributions and expertise have positioned Kenya as an African innovation hub. The bill's local ownership mandate could exclude such startups, potentially undermining the country's appeal as a magnet for international venture capital.

Kenyan startups have attracted millions of dollars in VC funding over the last decade, highlighting the country's growing appeal for investors. In 2024, the country's startups raised $638 million (KES82.3 billion), according to a report by Africa the Big Deal. The 15% R&D expenditure mandate has been received more warmly as it aims to spur deeper innovation within the Kenyan startup ecosystem, encouraging founders to secure patents, register software, and engage in critical research—all vital for staying competitive globally.

As Kenya's startup sector matures, this requirement will push companies to prioritize long-term innovation and intellectual property. If President Ruto signs the bill into law, the Registrar of Startups will oversee startup operations, including research activities and tracking the flow of venture funding. While this oversight could improve accountability, it also raises questions about the burden of compliance for startups already dealing with tight budgets and complex business challenges.

Steve Okoth, a tax director at BDO East Africa, described the 15% R&D requirement as a move to "institutionalise" innovation among founders and enhance "competitiveness" in the startup ecosystem. He argues that it would strain startups as most operate on thin margins and cannot prioritise cash flow for survival over discretionary spending like R&D.

"This approach may be overly prescriptive. Startups are diverse, and their ability to innovate often depends on their specific industry, stage of development, and business model. A blanket mandate could be counterproductive," Okoth said. "A more flexible, incentive-driven approach that accounts for the realities of Kenya's startup ecosystem would be more effective in fostering sustainable innovation and growth."

The passage of the Startup Bill has significant implications for Kenya's entrepreneurial landscape. As the country strives to become a hub for innovation and technology, it must balance the need to support local startups with the importance of attracting foreign investment and talent. The bill's fate now rests with President Ruto, who must weigh the potential benefits against the concerns raised by critics.

The outcome will have far-reaching consequences for Kenya's startup ecosystem, and its impact will be closely watched by entrepreneurs, investors, and policymakers across the continent. As the country navigates this critical juncture, it must prioritize a nuanced approach that fosters innovation, supports local talent, and remains open to foreign investment and collaboration.