Small policy changes offer big start-up rewards for SA
Onerous restrictions are limiting the potential of high-growth companies and diverting investment into countries such as Kenya and Nigeria
With mounting evidence that high-growth founder-led companies are growing faster and creating more jobs than the established industries against which they compete, it is increasingly critical for policymakers to remove barriers to their expansion.
The good news is twofold: a few small policy changes can boost South Africa as a start-up-friendly location; and there is alignment and strong support from the relevant government departments to proceed with the changes.
The good news is twofold: first, is that a few small policy changes can boost South Africa as a startup-friendly location; and second, that there is alignment and strong support from the relevant Government departments to proceed with the changes.
These key policy reforms, as proposed by Endeavor and the Startup Act Movement, are designed to make it easier for SA startups to raise capital from the global VC market. The three key reforms are: adjusting intellectual property (IP) legislation related to transferring IP offshore; easing exchange control restrictions on establishing global company HQs; and easier access to work visas.
South Africa has a wealth of talent creating innovative solutions in fintech, healthtech, edtech and marketplaces and solving real life problems. Freeing up these entrepreneurial companies to do this at scale and grow faster, increase competitiveness and employ more people will have a compounding effect on the wider economy. The policy changes will mean SA startups will continue to house their operations in South Africa given the strong local talent and our relatively lower staff costs, creating more jobs locally, and set up their HQs offshore to hold the IP to attract capital from global VC investors.
To illustrate the growth potential, 60 of the high-impact startups working with Endeavor SA have grown at an average rate of 70% a year, collectively delivering close to R12bn revenue, growing headcount by 42% (majority SA youth), and raising over R8bn in capital in 2022.
Endeavor SA’s Harvest Fund II invested in 17 tech-enabled companies that are growing revenue by 123% a year to a collective total of 5.6bn, raised R7bn and employed 9,600 in 2022. Endeavor SA’s R500m Harvest Fund III, which is aiming for first close in 2023, is targeting 25 to 30 investments from its existing pipeline of 127 Endeavor companies across Africa, indicating the sheer numbers of growing and investable companies ready for VC funding to ramp up their solutions.
Many of these types of companies reach a stage where they need to scale and play on a global level, with the requisite risk capital required from globally-mandated VC funders. It is here that they face barriers in terms of red tape and high costs associated with moving their IP and headquarters offshore — both necessary requirements to attract this capital.
These onerous restrictions are limiting the potential of high-growth companies and diverting investment into countries such as Kenya and Nigeria with startup-friendly policies that welcome entrepreneurial companies. The result is a loss of economic competitiveness and the opportunity to augment economic growth and create jobs for our youth. Most worrying is that it is also leading to an increasing number of high-growth businesses leaving SA.
It’s clear that these adjustments to IP, exchange control, and visa regulations can be made quickly and with limited budgetary implications for government. Our calculations indicate that these amendments would lead to 1.1 million jobs and an additional R910bn GDP contribution over a five-year period.
IP is the principal asset of high-growth companies that need to monetise and transfer IP. A small policy adjustment would allow startups to simply report their IP transfer offshore at market or fair value via an Authorised Dealer and to pay the requisite taxes, rather than seek prior approval from the South African Reserve Bank (SARB) for IP transfers, which is the current situation. The Authorised Dealer network is well established and this amendment would result in startups transferring their IP in under 30 days compared to the 90 to more than 180 days that it takes currently.
Startups also need to set up foreign holding companies to house their IP to drive global expansion. Larger-scale investments are secured from international investors that only invest in companies with HQs in the US, Europe, UK or Singapore. SA exchange controls currently require the SA startup founders to buy back their shareholding in their newly-established global HQ with cash that’s outside of SA. Very few up-and-coming SA founders have the cash to do so.
The proposal is that SARB implements exchange control relaxations to allow SA startup founders and SA investors in startups to do a share-for-share transaction, rather than buying back their shareholding with cash. The SA tax-resident shareholders of the SA startup would remain SA tax residents of the startup’s global HQ, so there would be no tax leakage.
The departments of Science and Innovation, Small Business Development, and National Treasury are all aligned with and supportive of these changes. Currently, our teams are actively engaged with National Treasury to address this.
There is also a proposal for a startup and remote worker visa to attract international high-growth startup founders and enable the hiring of skilled foreign workers. This facility is present in many African countries including Tunisia, Kenya, Nigeria, and Rwanda.
Over the past three years, several African countries have moved towards global norms for startup-related policies and have implemented startup acts. We are proposing a handful of policies be amended, which we believe is far simpler and will produce quicker results, while in parallel initiate drafting SA’s startup act.
What is most attractive about these policy changes is they have little or no fiscal implications or budget requirements.
We have been advocating for these reforms for many years. It’s heartening that there is general support from various government departments, as well as indications that government is considering the introduction of new visa categories for remote workers and startups. We believe that it is in the best interests of the nation to implement these reforms expeditiously. Globally, high-growth entrepreneur-led companies are leading economic growth and development. Our chance to create jobs and support young entrepreneurs and help develop the next generation of SA’s leading companies is now.
*Alison Collier, CEO of Endeavor South Africa.
