After having worked at Addis Ababa University — as a fresh graduate of Computer Science — for only two years, I decided to strike out on my own into the fledgling IT private sector. In 2005, along with my friend and co-founder, we set up a Private Limited Company (PLC) that was to provide a range of IT services.
Alas, 13 years later, and after having gone through a maddening six months of bureaucratic hell, I am about to conclude the liquidation of my company.
My main aim in writing this article (a postmortem really) is to give an insider’s view of the Ethiopian tech sector or the Ethiopian private sector in general. I will try to support my claims and pronouncements with financial statements but please bear in mind that these are my own subjective opinions and should be taken with a grain (or a kilo) of salt.
I don’t believe Ethiopia is open for business!
You might ask, “Why did you stay in business this long then?” and I would answer with a question and say “Why do people stay in bad/abusive relationships?”
Some of the reasons may be:
- Hope (false hope?)
- Fear (of the alternatives)
- Fear of the liquidation process
- Lack of alternatives
- Sunk cost trap
- Inertia, pride/shame, indecision etc…
Back in 2005, when we founded the company, we aimed to provide services such as software development and related IT services. We believed we had the necessary skills (or could learn them on the go) to do as well or even better than the handful of IT firms that existed at the time.
Things did not turn out as expected — surviving and thriving as a tech company was much more difficult than I imagined.
A couple of years in, my partner left and moved to another country. The company was in the doldrums. By then, we had only done a couple of websites for a few companies and one or two governmental agencies.
At around the fourth year, I discovered a hardware device that seemed to fill a need here in Ethiopia. I acquired an import license, found a supplier in China and started to import and sell the devices. It was slow at first but I built an ecosystem around the product and over the next few years grew the revenue from the product into the millions.
Most products have a life cycle (introduction, growth, maturity, and decline) and so did this one. I failed to properly predict the end of life of the product and did not work towards replacing the flagging revenue from it with another source. I got complacent. That meant the company’s revenue was also declining. Then in 2014, the company was audited and got slapped with a huge tax bill. This turned out to be a perfect storm only a devastating tax bill, declining revenue, and lack of access to Forex could together create. That was the beginning of the end.
We have all heard the phrases innocent until proven guilty and guilty until proven innocent but in the eyes of the Ethiopian tax authority, you are always and forever guilty. It does not seem like anyone has given serious thought to the possible repercussions of such a pernicious policy. It is almost a perfect example of a vicious cycle. The only possible way to break out of this destructive death spiral would be to eliminate the original assumption that every business is engaged in tax evasion.
One of its effects is reminiscent of the criminal procedure referred to as “double jeopardy”. Just think what the accused is likely to do once he/she has already been penalized for a transgression that was never committed. It feels like the system actually works to ensure the extinction of non-tax evaders!
Having been audited twice, I would like to say more about the experience but words just fail me. All I can say is, this is the worst possible thing that could happen to you and your business and you should prepare yourself from day one!
Would you take on as a partner in your business, someone who would be the majority shareholder but does not add any value, hinders you from carrying out your business activities and in general makes your life miserable? I wouldn’t think so and yet it is so. That unwelcome shareholder is the government.
In general, during the 13 years the company has stayed in operation, it has been the government that has financially benefited the most. If we were to include VAT in our considerations, the government’s coffers have ingested 8 times more than I have as a full owner. And this is not even considering funds they collect from personal income tax and pension.
Look at the chart below to see how the total revenue generated by the company over the 13 years have been disbursed. Finance folks and accountants will probably disagree with this crude portrayal but; it gives you sufficient understanding of how the government gets disproportionately better gains from your small business.
The whole pie represents total revenue generated, black slices are operational costs, orange are government sinkholes and finally green is the collectible dividend (just 5.2 percent of the pie)
There simply are too many to list but I will try to focus on the ones I have been up close and personal with, and are more relevant to the tech industry.
A brutally repressive tax regime which taxes too high, penalizes too hard, is mind-bogglingly incompetent and a huge time sink, not to mention its effect on your humanity, goodwill, and outlook on your country.
Its rules and regulations are illogical at best and create the worst game of whack-a-mole with taxpayers that in the end, no one will emerge as the winner. To add insult to injury, the tax authority is both prosecutor and judge when you want to bring a grievance forward. When guiltiness is assumed, proving one’s innocence is virtually impossible. One just isn’t equipped for that task.
Businesses need to have a predictable legal and regulatory system to be able to thrive. In the absence of that, entrepreneurship becomes a game of roulette.
Rent or its unaffordability is probably in the top three biggest challenges Ethiopian businesses face these days. It certainly is the biggest reason for the high turn over of businesses at privately owned locations.
A quick search on the Internet proved that most sources concur with the following statement.
“Depending on what you’re selling, the standard gross-to-rent percentage can range anywhere from less than 1 percent all the way up to more than 13 percent, with most industries paying below 10 percent.”
I fear that in Addis Ababa this percentage might average as high as 70%.
One particular business type I am familiar with, Internet cafes, are major victims of these phenomena. The Internet cafe business is quite unique in that one can, with a strong degree of certainty, calculate the expected revenue. This is possible because you can calculate the revenue based on the number of seats and the going rate you can charge customers for a minute of Internet usage.
Since major expenses - rent and Internet - are already known, one can create an excel sheet and tweak the numbers to see whether such a venture would be viable or not. Sadly, the answer, with current rental rates is, no! Not unless you own the location.
This brings me to the other but related point, which is, lack of uniformity in rent between privately owned and government-owned locations. This bestows unfair and undeserved advantage to government-owned location leaseholders and skews the market greatly. The same lack of uniformity in the application of VAT is also wreaking havoc on the market with devastating effects on small and medium scale businesses.
Bootstrapping is one of the best ways of getting a business off the ground with very limited resources. It is especially common in the tech sphere as all one usually needs is a good idea and the proverbial “garage” where he/she would apply their programming skills to create a revenue-generating product/service.
Case in point, when we founded the company, we only had to put down my home address on the form and did not have to rent an office until after we secured our first job a couple of months later. If we had to rent an office and furnish it from the get-go, as is the rule now, we could not have afforded it and might never have gotten off the ground.
As things stand now though, one is required to rent (landlords usually require an advance payment of three or six months) or own a location, furnish said location, have a certain number of employees (as per the “competency” rules and regulations of each sector), have various types of equipment, purchase an expensive cash register machine, have the cash you claim as capital etc. When you sum it all up, it runs into the high thousands, which not everyone can afford to come up with. This basically locks out a big part of the population from being able to bootstrap a business from the ground up.
Forex or the lack of it is probably to blame for the demise of thousands of businesses in Ethiopia. My company was no different. If the dollars were available to carry out imports, it might have changed the course of the company.
Sadly, every inefficiency and shortfalling of the government leads to more problems because these, in turn, have opened up infinite avenues for corruption, graft and rule circumvention.
Infrastructure is obviously important for development. However, the lack or shortfall of it does not affect all businesses equally. You simply can not create a tech business if you do not have reliable and affordable Internet and electricity to power it.
At some point, our monthly broadband Internet bill was more than double the rent! Would you believe such a thing if you weren’t Ethiopian?
A forbidden until permitted mentality and modus operandi totally permeates most governmental bodies and even the general public in Ethiopia. Looking at our tech sector, you would get an eerie feeling like you have traveled back in time to the early 90s.
I have learned and grown an immense amount over these 13 years. Although not all the lessons can be listed down, I will enumerate a few that I think could be beneficial to others.
- Product life cycles are important. Pay attention to the phases and plan ahead.
- Build an ecosystem around a product/service. This will allow you to up-sell, cross-sell and in general, maximize your revenue from the product/service.
- Take care of your customers. Do not always go for the money, most times, choose customer happiness. It pays dividends in ways you might not be able to perceive at the time.
- Try to create businesses that create recurring revenue so that you will have a continuous and predictable means of income.
- Your employees, as great as they may be, will never be/replace you or will never feel like you do towards the business.
- Add as much value as you can. Every additional value you provide matters, even the seemingly insignificant ones. Leverage your most important added values.
- Start with problems and come up with solutions. Don’t try to hoist your product on to the market.
- Try to avoid products/services that do not scale. If a service depends on you or on your presence for its successful delivery, if a product can not easily be created/manufactured, if a business process is not replicable then you should rethink it.
- Pay attention to your finances and expect the unexpected. Expect to be hit with unfair taxes and penalties. Minimize your recurring costs.
- Location isn’t everything. The old adage, “Build a better mousetrap, and the world will beat a path to your door” does hold, at least for now. In general, I think it holds in a seller’s market like Ethiopia. If you build an important/valuable/revolutionary enough product, people will indeed come to you.
- Good talent is virtually impossible to find in Ethiopia. Feel free to blame this on the country’s misguided educational policy of the past decades, the despicable work ethic of the youth, poverty, etc. You might hear some people spout off about how Ethiopia will become the next outsourcing destination - let me tone it down and say that they are wrong!
- Advertisement, unless it is in traditional media, does not work here in Ethiopia.
- Never sell on credit! While we’re at it, don’t even have credit sales receipts printed to avoid the temptation.
- Don’t get into price wars with competitors. Don’t have competitors to begin with. Be in a class of your own.
In all honesty, if I had taken a reasonably good job in a mid-sized company or non-governmental agency 13 years ago, I would have been financially better off by now. This is the ultimate revelation, supported by the numbers, that finally led me to decide to liquidate.
An equally important factor that probably contributed hugely to this outcome is my unwillingness to engage in mediocre projects. Most of the avenues I have tried to follow in all those years are, I dare say, unique. I like to create new trends, come up with novel solutions and be creative in general. If it weren’t for this inclination, the company could have pursued more mainstream businesses and possibly thrived.
This has also led me to the realization that the market might not be quite ready for innovative solutions just yet and the business environment just doesn’t afford you the luxury of taking time to educate and grow a market for your solutions.
I would like to reiterate that I am not trying to blame the demise of my business on taxes and the like. For that matter, if I had decided to carry on, I could have made a living consumed with dwindling savings and worry. Once again, it’s not bankruptcy but the realization that I would be better off that led to the decision to liquidate.
My main claim is that there are structural problems/obstacles to establishing an honest and successful business here in Ethiopia.
These issues are many, the main ones being:
- the tax code,
- nonsensical licensing rules and regulations,
- ridiculously expensive rent stemming from misguided economic policies,
- sourcing problems,
- lack of Forex,
- corruption partly fueled by too much regulatory bureaucracy as indicated by the dizzying number and variety of ministries, directorates, authorities, agencies, etc.
All of these collude to render the hard work one has to put into a business moot. This is what leads me to say that you are better off engaging yourself in other endeavors; especially if you have marketable skills or good education.
Small and medium businesses are supposed to be the backbone of the economy and yet, here, they are treated like enemies of the state. Although most Ethiopians regard business owners as rich and successful individuals, the truth couldn’t be any farther. Most do not really have a clear insight into their businesses and usually cannot tell you if they are profitable or not over the long term. Most spend many sleepless nights worrying about the next whammy to come out of nowhere and blindside them.
I certainly do not regret my original decision to strike out on my own. The experience and technical knowledge I have accrued are priceless and I am better off now for having them. Let’s compromise and call it a very long Master’s degree :-)
It is hard to imagine it has been 13 years but looking around, I can probably count double-digit-aged tech companies on a single hand. If you were to start paying attention to the various businesses you come across in your daily comings and goings, you would notice that there is a huge turn over rate. It is very hard to find a shop at the same location (or even in existence) after one or two years.
It is no secret that many businesses continue to exist and thrive not by dedication, creativity, and quality of service but by graft, malpractice, corner cutting and every other trick in the playbook. Be that as it may, I would not advise anyone to embark on the entrepreneurial journey here in Ethiopia, at least not just yet!
For now, you will find me in the independent contractors’ corner of the market!
Please feel free to get in touch. My twitter handle is @nahomt
P.S: Someone, please undertake a comparative study of the longevity of businesses, per sector and analyze the various reasons for their demise. That would be a good start to understanding the Ethiopian business environment and its problems.
Edited, Nov 22, 2018:
This article ended up garnering some interest and discussion on twitter (@nahomt) and I decided to write a follow-up article listing some policy “recommendations”. Here is the article: