SA needs to nurture ‘unicorns’
A Start-Up Act that changes exchange control, tax and labour laws will help SA’s innovation-driven tech start-ups thrive
COMMENT Melvyn Lubega. Melvyn is an Endeavor South Africa entrepreneur and board member and co-founder of Go1, an ed-tech start-up that has achieved ‘unicorn’ status
Our country’s greatest asset is its people — we have talented professionals and business people. But South Africa’s largest export is also its people — many of our greatest minds contribute their talents abroad rather than at home. Without a meaningful change in our policy landscape, the story of South Africa’s fastest-growing businesses, and the entrepreneurs behind them, may follow them.
Much has been said in recently about the potential for small businesses to contribute to economic growth and job creation. This is true, and they must be supported, but so too should tech-enabled, high-growth start-ups — businesses with the potential to grow exponentially and reach unicorn status (the term coined to describe an unlisted start-up with a USD1bn valuation).
Out of more than 900 unicorns in the world, nine are from Africa — six from Nigeria, one from Egypt, one from Senegal, and one from South Africa, Go1. Go1 is an ed-tech startup that we started in 2015 with my Australian born co-founders. Go1 achieved unicorn status a few months ago following a raise led by Softbank Vision Fund 2, Salesforce Ventures, and Airtree Ventures.
A good segue is understanding that the traditional brick-and-mortar business needs a specific environment to thrive. This is created by accommodative policies that recognise the unique nature of these businesses. To its credit, Treasury made important commitments to support these businesses in the last budget.
But there’s another type of business — the high-growth tech-enabled start-up. These differ from traditional brick-and-mortar businesses and need specific policies to catalyse their growth. More so, since each of these start-ups has the potential to create thousands of jobs (at scale), the need to create a supportive environment for these businesses is urgent.
What we are lacking is imagination. What if South Africa became a hub to develop unicorns? Other African countries such as Tunisia, Kenya, and Ghana are prioritising the participation of start-ups in their economies by introducing Start-Up Acts. Why shouldn’t South Africa? And why aren’t we leading this charge?
Endeavor South Africa has partnered with SiModisa, SAVCA, the Digital Collective Africa, Wesgro, i4Policy, Silicon Cape and other start-up players with an equally burning desire to see the tech start-up sector in the country thrive. We are working together, with the primary funding support coming from the World Bank, to engage with government to create an enabling environment for entrepreneurs leading high-growth businesses.
The premise is built on enablement so that we trigger new, highly effective, and powerful job-creation opportunities through effective policymaking.
Our suggestion is that innovation-driven tech start-ups with a turnover of less than R100-million be exempted from the limitations of existing policies and that the red tape constraining their growth and ability to create jobs be removed or relaxed. These are bold but smart suggestions.
What does this mean? Currently, it suits a South African tech start-up, with compelling and globally applicable intellectual property (IP), to leave South Africa to swim in the fertile global waters that have fed the world’s unicorns, rather than hacking through the inordinate amount of red tape and costly legislation that currently limits potential unicorns in the country.
Those with great IP need to move this away from South Africa to make themselves more attractive to foreign investors. It is expensive to move IP offshore given the burdensome Capital Gains Tax, Transfer Pricing obligations and the additional cost to set up and run an offshore. This necessitates a more sophisticated team, which comes at a substantially higher cost.
But most successful SA tech high-growth start-ups have been forced to take this difficult and costly off-shoring task to drive their international revenue growth.
Foreign investors would rather invest in a country where the legislation is clear and supportive of the entrepreneurial value creation and where they are able to freely realise this value creation from their investments. In the real world, there is a push-back against South African investments — not because of quality but because of onerous regulatory burdens.
And so, we — along with the other start-up ecosystem stakeholders — advocate for several relaxations to current legislation, including exchange controls and capital gains tax. Other relaxations include simplifying procurement policies with which to scale up the involvement of start-ups in the national economy; direct funding of start-up businesses through the automatic reinvestment of PAYE and VAT; and the easing of labour and immigration laws to make hiring and movement of talent easier.
The premise behind the Start-Up Act is that the success of a start-up will ultimately benefit the country of origin. We will ask the government to improve the odds of our collective success to the benefit of the country. The start-up environment has evolved a long way from when the policies supporting small businesses were first developed. Is it not time for change?
On this point, the government has shown itself to be receptive to engagement and has already made a highly encouraging move in January this year when South African Reserve Bank announced the revising of loop structures.
A loop structure is when a South African resident holds a South African asset indirectly through a non-resident entity. Before this, loop structures were only allowed in very limited circumstances, which counted against high-growth potential start-ups, we’d like to see more of this progressive action.
Let’s not limit ourselves and the imaginations of talented South Africans. A Start-Up Act would set out to enable economic policy through an amendment or a standalone Act.
This kind of Act is vital to allow our entrepreneurs to unleash their imagination and true potential so that they can trailblaze a path to success and on a global stage. It’s South Africa and its people that will benefit. What are we waiting for?
Mail & Guardian, page 27, 8 October 2021
