Recommendations to support digital start-ups

Cenfri supported Digital Financial in producing a technical guide on the creation of a fund to support a digital start-up ecosystem in Ethiopia. This work was commissioned by the Ministry of Finance (MoF) of Ethiopia in partnership with Digital Pathways at University of Oxford and forms  part of the Digital Economy Toolkits, which examine how developing countries can govern digital technologies to ensure inclusive growth. 

This guide provides recommendations on the design and structure of a fund for digital start-ups. It aligns with the Digital Ethiopia 2025 Strategy and factors in global best practices. Some of the identified universal guidelines for structuring digital startup funds are: 

• Do not target specific sectors as this distorts markets as entrepreneurs and incubators are incentivised to focus on the sectors with funding rather than responding to market opportunities. 
• Provide a fund of funds (FoF) that sees government provide supporting funds to venture capital investors. Screening these investors helps identify the diamonds in the rough and has been successful in other countries. The original lump sum investment in the fund should be of sufficient size to lower the risk for future investors: usually set at 25-30% of the desired capitalisation of the FoF.  
• Select competent investment managers and do not rely solely on the (underdeveloped) domestic investment market. Ensure the investor understands venture capital investments require patience and the absorption of losses to access very high returns from successful startups. 
• Manage funds through a semi-autonomous operating entity (SAOE) as they can leverage support and oversight from both private and public sector entities. Regardless of investment structure, the management team needs to be cushioned against political changes, external shocks, and public pressure by strong legal contracting. 

In addition to the specific recommendations on the fund, the report highlights the need to create an enabling environment for the startup ecosystem to operate. This requires a range of support, including: 

• Startup events and hackathons to help stimulate interest in specific areas without creating any long-term market distortions. 
• Supportive policies and regulations that include easy access to the requirements entrepreneurs need to meet and feedback from startups to continually improve. 
• Information on the different funding mechanisms and support available to entrepreneurs. This will help ensure access to the right type of funding at the right stage of development, from early-stage grants to later VC investment. 
• Strengthening the supporting institutions in the startup ecosystem: incubators, accelerators, colleges, technical and business schools.  

For detailed recommendations on the Creation of a Fund to Support a Digital Startup Ecosystem in Ethiopia view the full note: