Government Should Amend Certain Laws, First, For Venture Capital To Work In Uganda

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Aristotle once said, and I hope our government takes this quote seriously, that:

“to give away money is an easy matter, and in any man’s power. But to decide to whom to give it, and how large and when, and for what purpose and how, is neither in every man’s power – nor an easy matter. Hence it is that such excellence is rare, praise worthy and noble.”

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I found this quote on the brochure of the Youth Bank International which was distributed during last year’s commonwealth Youth Ministers’ meeting at Speak resort Munyonyo.

I attended that four day meeting – a function whose closing ceremony was graced by President Museveni himself.

During that that meeting, I was privileged to interact with some of the representatives from the Youth Bank International.

We shared a lot in the realm of utilizing venture capital and how they could possibly extend their operations to help build capacity of Ugandan start-ups to utilize venture capital.

They however expressed skepticism about whether the tax and regulatory framework in Uganda favours venture capital (VC).

From a practical standpoint, I don’t think key government officials or even institutions know how venture capital works, they are just distributing money just to excite we the youth without the intention of sustainably empowering a generation.

I get the feeling that this is done just for political expediency to get the youth support and then abandon us in mid-stream after the political pressure dissipates.

Recently, I saw a newspaper that had a dictum that “a total of Shs 17.5 Bn has so far been disbursed to the Youth under the Youth Venture Capital Fund (YVCF)”

I scoffed at this dictum and even wrote a Facebook post recently castigating the move. If this Government really intends to empower the youth without capital to do business with venture capital, not with the motive of political expediency, then a lot needs to be done to make this money effective and sustainable in youth businesses.

The fact that Stanbic Bank and DFCU Bank did not renew their commitment on this project, further gives credence to my assertion that indeed this project met a dead end.

As of today its only Centenary bank that is managing these funds that are channeled from the Ministry of Gender.

Why am I stressing the point that a lot has to be done?

Venture Capital is the form of equity financing where investors provide capital to startup companies and small businesses that are believed to have long-term growth potential. Like any private equity investment it is characterized by negative cash flows.

Under this Uganda tax regime, where we the youth are getting out of business due to high indiscriminate taxes, no one would be willing to make such an arrangement in highly risky start-up businesses – where government hasn’t put in place both laws and policies that protect infant businesses.

Even in other Jurisdictions, Venture capital uses high discount rates, typically between 40% to 70%. If we are to use discounting and compounding, due to the fact that government is increasingly competing with private citizens for credit, you will discover that the venture capitalist will use even higher discount rates for a country like Uganda due to government distortions.

Other African countries, in order to help start-ups by use of venture capital have created a favourable environment.

Much as Uganda is lagging behind in making progressive legislation to catch up with this new wave of venture capital, Nigeria, Ghana, Botswana and Kenya are doing quite well.

Nigeria passed the Venture Capital (incentives) Act 2004 which was enacted for the purposes of granting additional tax incentives to venture capital and start-ups generally.

This Law, gives a 50% reduction in withholding tax over a period of 5 years, on dividends payable to an investor in a Venture Project Company (VPC).

In Uganda, such moves for people operating start-up businesses sound as a utopia they can only find in heaven.

As a person that is part of a team that is struggling with a start-up business, I can firmly say that since most of venture capital is coming from the US, most venture capitalists are telling we in start-ups to do corporate inversions, commonly called a flip in VC language, where you incorporate offshore holding companies in Delaware, Mauritius, or other jurisdictions considered to be investor-friendly so that you – the Ugandan founders, run an operating subsidiary company.

These corporate inversions can be easily done through certain websites like stripeAtlas.com. It’s not complex. There are a number of reasons why a VC may prefer an offshore holding company structure as a vehicle for investment into a start-up.

One of the most prominent reasons is the prospect of minimising or avoiding capital gains tax. Capital gains tax is more often, but not always, a source-based taxation.

The other reason is to make sure certain legal instruments VCs use, easily apply.

In Uganda, for instance instruments like compulsorily convertible preferred shares can’t work due to our Companies Act, 2012, yet the venture capitalist relies on converting stock into shares to get his dividends.


 

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