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.
These policy reforms, as proposed by Endeavor and the Startup Act Movement, are designed to make it easier to raise capital from the global venture capital (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 headquarters; and easier access to work visas.
South Africa has a wealth of talent creating innovative solutions in fintech, health-tech, 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 start-ups will continue to house their operations in South Africa given the strong local talent and our relatively lower staff costs, create 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 start-ups working with Endeavor South Africa have grown at an average rate of 70% a year, collectively delivering close to R12bn in revenue, growing headcount by 42% (mostly young South Africans) and raising more than 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 R5.6bn, raised R7bn and employed 9,600 in 2022. Endeavor SA’s R500m Harvest Fund III, which aims for first close in 2023, is targeting 25 to 30 investments from its existing pipeline of 127 Endeavor companies across Africa, indicating the number of growing and investable companies ready for VC funding to ramp up their solutions.
Many of these 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 start-up-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 South Africa.
These onerous restrictions are limiting the potential of high-growth companies and diverting investment into countries such as Kenya and Nigeria
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 start-ups to simply report their IP transfer offshore at market or fair value via an authorised dealer and pay the requisite taxes, rather than seek prior approval from the Reserve Bank for IP transfers, which is the current situation. The authorised dealer network is well established and this amendment would result in start-ups transferring their IP in under 30 days compared to the 90 to more than 180 days that it takes now.
Start-ups 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. South African exchange controls require start-up founders to buy back their shareholding in their newly-established global HQ with cash that’s outside the country. Very few up and coming founders have the cash to do so.
The proposal is that the Reserve Bank implements exchange control relaxations to allow start-up founders and South African investors in start-ups to do a share-for-share transaction, rather than buying back their shareholding with cash. The South African tax-resident shareholders of the start-up would remain South African tax residents of the global HQ, so there would be no tax leakage.
Over the past three years, several African countries have moved towards global norms for start-up-related policies and have implemented start-up acts. We are proposing a handful of policies be amended, which we believe is far simpler and will produce quicker results, while in at the same time initiating drafting South Africa's start-up act.
Collier is CEO of Endeavor SA
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