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Naturally, developed economies are ahead of emerging markets in this regard. However,
many rapid-growth markets are taking action in terms of the implementation of the
mentioned pillars, and now boast high-profile projects across different sectors that are
currently underway, consequently stimulating dynamic clusters of entrepreneurial
activity.
The contribution of the Micro, Small and Medium Enterprise (MSME) sector to the GDP
in developing countries, including Kenya, ranges between 50% and 70%. MSMEs are
where many entrepreneurs and future large companies start, thus supporting them is
vital in terms of economic development.
Furthermore, and given the instrumental role entrepreneurs play in stimulating
economic growth, policymakers are moving towards actively promoting
entrepreneurship opportunities based on an integrated approach that brings together
both government and industry entities. The approach targets unemployed youth and
educates them about potential entrepreneurial prospects, publicly celebrating young
entrepreneurial successes, promoting domestic startups on an international level,
integrating media and cultural campaigns within a broader national strategy, and
creating initiatives that offer alternative sources of capital. Progressive policymakers are
also developing fund mentoring programs that establish strong relationships with and
provide incentives from venture capitalists, incubators, loan guarantee schemes and
angel investors.
While the venture capital industry continues to globalize, governments and markets are
exploring a range of financing strategies to provide capital to entrepreneurs, including
micro financing, crowdfunding and credit guarantee schemes.
Along with failure to be profitable, lack of funding is cited as the primary reason for
business discontinuance around the world. As entrepreneurial businesses grow and
develop, the sources of finance they rely on change. As such, smart governments are
creating a range of mechanisms and institutions to extend to entrepreneurs financing
options that meet these changing requirements. They are establishing targeted venture
capital funds and encouraging private sector investors to focus more on startups
through improved tax incentives. Furthermore, alternative funding platforms, such as
crowdfunding and microfinance, are gaining traction for seed and early-stage
companies, but require regulatory support to achieve scale.
Government startup programs have become some of the most valuable sources of help.
Public money is a powerful catalyst, particularly when delivered in partnership with
private sector funds. Corporate venturing also continues to grow, with almost 1,000
units worldwide and becoming more widespread in rapid-growth markets.
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Source Of Financing
More than ever before, it is imperative that governments, policymakers and business
leaders come together to support and advance entrepreneurship, which has proven to be
essential to socioeconomic development worldwide, especially in a country such as
Kenya that has massive entrepreneurial potential and depends almost entirely on SMEs
to grow its national economy.
Often the hardest part of starting a business is raising the money to get going. The
entrepreneur might have a great idea and clear idea of how to turn it into a successful
business. However, if sufficient finance can't be raised, it is unlikely that the business
will get off the ground.
Raising finance for start-up requires careful planning. The entrepreneur needs to
decide:
The finance needs of a start-up should take account of these key areas:
Set-up costs (the costs that are incurred before the business starts to trade)
Starting investment in capacity (the fixed assets that the business needs before it
can begin to trade)
Working capital (the stocks needed by the business e.g. r raw materials +
allowance for amounts that will be owed by customers once sales begin)
Growth and development (e.g. extra investment in capacity)
One way of categorizing the sources of finance for a start-up is to divide them into
sources which are from within the business (internal) and from outside providers
(external).
Internal Sources
The main internal sources of finance for a start-up are as follows:
Personal sources - These are the most important sources of finance for a start-up.
Retained profits - This is the cash that is generated by the business when it trades
profitably another important source of finance for any business, large or small.
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Share capital Invested by the founder. The founding entrepreneur (/s) may
decide to invest in the share capital of a company, founded for the purpose of
forming the start-up.
A start-up company can also raise finance by selling shares to external investors this is
covered further below.
External Sources
Loan capital - This can take several forms, but the most common are a bank loan
or bank overdraft.
Share capital For a start-up, the main source of outside (external) investor in
the share capital of a company is friends and family of the entrepreneur.
Business angels are the other main kind of external investor in a start-up
company. Business angels are professional investors. They prefer to invest in
businesses with high growth prospects. Angels tend to have made their money by
setting up and selling their own business in other words they have proven
entrepreneurial expertise. In addition to their money, Angels often make their
own skills, experience and contacts available to the company.
You will also see Venture Capital mentioned as a source of finance for start-ups.
You need to be careful here. Venture capital is a specific kind of share investment
that is made by funds managed by professional investors. Venture capitalists
prefer to invest in businesses which have established themselves. Another term
you may see here is "private equity".
A start-up is much more likely to receive investment from a business angel than a
venture capitalist.
Personal Sources
Most start-ups make use of the personal financial arrangements of the founder. This can
be personal savings or other cash balances that have been accumulated. It can be
personal debt facilities which are made available to the business.
An entrepreneur will often invest personal cash balances into a start-up. This is a cheap
form of finance and it is readily available.
Borrowing from friends and family is also common here. Friends and family who are
supportive of the business idea provide money either directly to the entrepreneur or into
the business.
Credit cards is also a surprisingly popular way of financing a start-up. In fact, the use of
credit cards is the most common source of finance amongst small businesses
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3. Pay stamp duty at the Huduma Center - The entrepreneurs pay the stamp duty at
the Huduma Centers, if it does not exceed KES 80,000. Alternatively, it can be
paid at the National Bank of Kenya or the Kenya Commercial Bank which are the
designated Banks for the collection of stamp duty revenue on behalf of Kenya
Revenue Authority. It takes a day and costs KES 110
4. Stamp the memorandum and articles of association, and a statement of the
nominal capital - After the stamp duty assessment and payment are completed,
the company founders return to get the memorandum and articles of association
stamped. This should take 1 day with no charges involved.
5. Sign the Declaration of Compliance before a commissioner of oaths or a notary
public - According to the Companies Act (Cap. 486), an advocate engaged in the
formation of the company or a director or company secretary named in the
articles of association must sign the declaration of compliance (Form 208). This
form is submitted to the Registrar of Companies along with the registration
documents. It takes 1 day and costs KES 200.
6. Register with the Registrar of Companies at the Attorney General Chambers in
Nairobi. The entrepreneur must submit the incorporation deed and the following
to the Registrar of Companies:
Stamped memorandum and articles of association
Statement of capital
Notice of Situation of Registered Office (Form 201)
Particulars of Directors and Secretary (Form 203)
Declaration of compliance with the Companies Act (Form 208)
Copy of the company name approval
Fee schedule for registration under the Companies Act (Cap. 486):
submit the certificate of incorporation and receive log-in details to proceed with
online tax registration. It should take 1 day with no charge
8. Apply for a business permit - Applicable permit fees fall within the following
scales:
Large trader, shop, or retail service with 21-50 employees and premises of 3003,000 square meters (or at a prime location): KES 30,000.
Medium trader, shop, or retail service with 5-20 employees and premises of 503,000 square meters (fair location): KES 15,000
5 days KES 15,000
9. Register with the National Social Security Fund (NSSF) - The National Social
Security Fund provides the employee with a lump-sum retirement benefit.
Historically, the rate of return paid by the state is considerably less than that
achieved by private schemes, but participation is mandatory. The employer pays
a standard contribution of about 1% of salary, subject to a maximum of KES 400
per month. Half the contribution is deductible from the employees salary. The
precise amount of the contribution (less than the maximum) is determined by
reference to salary bands. It takes 1 day with no charge
10. Register with the National Hospital Insurance Fund (NHIF) - The employee
contributes a fixed sum to the National Hospital Insurance Fund (NHIF), which
must be deducted by the employer from the employees salary. The contributions
are used to offset the costs of medical treatment, but they only cover a fraction of
actual costs. Hence, most companies provide employees with medical insurance.
It takes 1 day with no charge.
11. Make a company seal - Seal makers request a copy of the certificate of
incorporation in order to make a company seal. It should take 3 days, and cost
between KES 2,500 and KES 3,500
Socio-Cultural Dynamism in Entrepreneurship
Businesses do not exist in a vacuum, and even the most successful business must be
aware of changes in the cultures and societies in which it does business. As society and
culture change, businesses must adapt to stay ahead of their competitors and stay
relevant in the minds of their consumers.
A major socio-cultural factor influencing businesses and business decisions is changing
consumer preferences. What was popular and fashionable 20 years ago may not be
popular today or 10 years down the road. Different styles and priorities can undermine
long successful products and services. For example, a clothing company must constantly
be aware of changing preferences when creating new products or it will quickly become
outdated.
Changes in demographics are also a significant factor in the business world. As
populations age, for example, markets for popular music and fashions may shrink while
markets for luxury goods and health products may increase. Additionally, changes in the
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proportion of genders and different racial, religious and ethnic groups within a society
may also have a significant impact on the way a company does business.
Advertising is perhaps the area of business most closely in touch with socio-cultural
changes. Advertising often seeks to be hip and trendsetting, and to do this, advertising
agencies and departments cannot lose track of the pulse of the societies in which they
engage in business. Changes in morals, values and fashions must all be considered when
creating outward facing advertising.
In addition to a company's interactions with the market and its customers, sociocultural factors also impact a company's internal decision-making process. For example,
changing gender roles and increasing emphasis on family life have led to increased
respect for maternity and even paternity leave with organizations. Additionally,
attitudes towards racial discrimination and sexual harassment have changed drastically
over the years as a result of socio-cultural change.
Disruptive Innovation and Entrepreneurship
Disruptive innovation in business can be defined as changing markets by doing
something in a significantly different way. To an entrepreneur, the word can imply a
leap into a new paradigm for a product or service. Companies that start with a what if?
attitude have grown to disrupt industries large and small, from commerce (Amazon) to
movies and TV (Netflix) to waste management (BigBelly Solar).
Its easy to see the value proposition in these successful businesses now that they are
established, but each had to change established habits in their markets. Even with a
compelling story to tell, one of the most difficult chores of disrupting a market is
actually convincing people they should change. Selling disruption might be more
difficult than creating it.
David Perla, co-founder of legal outsourcing firm Pangea3, notes that, A disruptive
business doesnt sell against its competitors but against the status quo. Truly disruptive
businesses have no competitors. Ultimately, selling a disruptive product is a matter of
positioning it as an unexpected solution to a customer need, not as a bundle of features
and benefits.
Key attributes of selling a disruptive product can include:
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workforce. From the highly qualified programmer to the construction worker, the
entrepreneur enables benefits across a broad spectrum of the economy.
Entrepreneurs Add to National Income - Entrepreneurial ventures literally
generate new wealth. Existing businesses may remain confined to the scope of existing
markets and may hit the glass ceiling in terms of income. New and improved offerings,
products or technologies from entrepreneurs enable new markets to be developed and
new wealth created.
Additionally, the cascading effect of increased employment and higher earnings
contribute to better national income in form of higher tax revenue and higher
government spending. This revenue can be used by the government to invest in other,
struggling sectors and human capital.
Although it may make a few existing players redundant, the government can soften the
blow by redirecting surplus wealth to retrain workers.
Entrepreneurs Also Create Social Change - Through their unique offerings
of new goods and services, entrepreneurs break away from tradition and indirectly
support freedom by reducing dependence on obsolete systems and technologies.
Overall, this results in an improved quality of life, greater morale and economic
For example, the water supply in a water-scarce region will, at times, force people to
stop working to collect water. This will impact their business, productivity and income.
Imagine an innovative, automatic, low-cost, flow-based pump that can fill in people's
home water containers automatically. Such an installation will ensure people are able to
focus on their core jobs without worrying about a basic necessity like carrying water.
More time to devote to work means economic growth.
For a more contemporary example, smartphones and their smart apps have
revolutionized work and play across the globe. Smartphones are not exclusive to rich
countries or rich people either. As the growth of China's smartphone market and its
smartphone industry show, technological entrepreneurship will have profound, long
lasting impacts on the entire human race.
Moreover, the globalization of tech means entrepreneurs in lesser-developed countries
have access to the same tools as their counterparts in richer countries. They also have
the advantage of a lower cost of living, so a young individual entrepreneur from an
underdeveloped country can take on the might of the multi-million dollar existing
product from a developed country.
Community Development - Entrepreneurs regularly nurture entrepreneurial
ventures by other like-minded individuals. They also invest in community projects and
provide financial support to local charities. This enables further development beyond
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their own ventures. Some famous entrepreneurs, like Bill Gates, have used their money
to finance good causes, from education to public health.
The Other Side of Entrepreneurs
Are there any drawbacks to cultivating entrepreneurs and entrepreneurship? Is there an
upper limit for the number of entrepreneurs a society can hold?
Italy may provide an example of a place where high levels of self-employment have
proved to be inefficient for economic development. Research reveals that Italy has in the
past experienced large negative impacts on the growth of its economy because of selfemployment. There may be truth in the old saying, "too many chefs and not enough
cooks spoil the soup."
The Role the of Government
Regulations play a crucial role in nurturing entrepreneurship, but regulation requires a
fine balancing act on the part of the regulating authority. Unregulated entrepreneurship
may lead to unwanted social outcomes including unfair market practices, pervasive
corruption, financial crisis and even criminal activity.
Findings from United Nations University also indicate the possible implications of over
nurturing" entrepreneurship. While entrepreneurship may raise economic growth and
material welfare, it may not always result in improvements in non-material welfare (or
happiness). Promotion of happiness is increasingly seen as an essential goal.
Paradoxically, a significantly high number of entrepreneurs may lead to fierce
competition and loss of career choices for individuals. With too many entrepreneurs,
levels of aspirations usually rise. Owning to the variability of success in entrepreneurial
ventures, the scenario of having too many entrepreneurs may also lead to income
inequalities, making citizens more not less unhappy.
The Bottom Line
The interesting interaction of entrepreneurship and economic development has vital
inputs and inferences for policy makers, development institutes, business owners,
change agents and charitable donors. If we understand the benefits and drawbacks, a
balanced approach to nurturing entrepreneurship will definitely result in a positive
impact on economy and society.
REFERENCES
Audretsch, D. B. The Entrepreneurial Society. Oxford: Oxford University Press, 2007.
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