SA’s regulatory noose stifles start-up investment

South African exchange control regulations are among the factors that affect inflows of foreign investment capital into the local start-up ecosystem.

This came to light during a panel discussion at the Sentech-sponsored Africa Tech Week 2022 conference, held in Cape Town last week.

Discussing investing in Africa’s Silicon Valley, and scaling up tech entrepreneurs and start-ups, the panellists, which included JSE chairperson former MTN chair Phuthuma Nhleko, agreed the regulatory net around capital flows sometimes poses a challenge for foreign investment.

The sentiments on the regulatory environment echo those previously expressed by Naspers SA CEO Phuti Mahanyele-Dabengwa, who stated that one of the biggest obstacles faced by South African tech entrepreneurs is limited access to international funding, as a result of SA’s stringent regulatory and trading laws.

At the time, Mahanyele-Dabengwa encouraged government to introduce regulations and legislation that support and encourage international investments in the tech start-up ecosystem.

According to Nhleko, capital funding looks at the opportunities, but over and above this, it looks at the environment from a regulatory perspective, in terms of the flow of funds in-and-out – how easy it is and so on.

“We absolutely need to attract the venture capital kind of finance and start-up capital that is missing in SA, as well as the rest of the African continent. As much as SA has a pretty sophisticated financial sector, that layer of capital is completely missing. That’s something we need to work on.”

Commenting on her experience as a foreign investor, Sarah Dusek, investor and founder of investment fund Enygma Ventures, said exchange control is one of the most frustrating things about investing in Africa.

Dusek stated it would ease the flow of capital to the continent if exchange control rules were not so complex and difficult to navigate. “It’s very off-putting, from a foreign perspective, to think about ‘you’re going to control where my money can come in and go out’. It’s difficult to wrap your head around it and the rules are complicated.

“The easier we can make it for foreign money to flow, the easier it will be to attract foreign investment for some of the most amazing start-ups that are here.

“I really believe the opportunity the continent has for growth over the next decade, the next 20 years, in particular, is extraordinary − and we won’t capitalise on that if we don’t bring more money to the table.

“Last year, we saw a total of $4 billion invested in Africa, up from $1.3 billion the year before. The comparable amount being invested into the US for the same year was $134 billion, so we have a very long way to go. Even Latin America was at about $15 billion last year.

“We are at the bottom of the pecking order in terms of capital being deployed, and we’ve got to take that seriously if we want to advance the continent and if we want to leverage technology to really leapfrog ahead. I believe the opportunity, technology and talent is here.”

Lucretia Chopera, senior investment associate at Knife Capital, stated capital inflow is one issue, but intellectual property (IP) registration is also of concern.

“It [IP registration] is so complex and makes it so expensive for start-ups to register and protect their IP. They then start to look at structures outside the South African jurisdiction to try and make sure they can scale and go global.

“Even thinking about Pan-African expansion, once your IP is registered in SA, it becomes very complex. If you think about bringing and partnering with investors in the US and Europe, trying to move that IP registration overseas is also very complex.

“I think we need to collaborate with our policy-makers to make sure they are looking at all the barriers that are discouraging investment flow to SA in an intentional way.”

Responding to questions as to whether other African nations can emulate jurisdictions like Mauritius or Delaware in the US − which are known as being low tax, no regulatory and no exchange control environments − the panellists were divided.

Nhleko pointed to smaller countries like Rwanda, Swaziland [eSwatini] and Botswana as being possible contenders. “I think they should be leading the charge of creating the Delaware kind of environment.

“Ultimately, the ambition is to try and make as much of Africa integrated and regulated in a manner that is consistent. For instance, if I’m running a telecoms business in Uganda, I mustn’t go into Kenya and find something completely different as far as regulation is concerned.”

Dusek does not believe countries like eSwatini or Botswana are going to take the lead in this regard because they follow SA in almost every way.

To illustrate her point, Dusek explained that her company has an investment in eSwatini, adding that it’s difficult to do business there.

“We are encouraging our founder there to move her headquarters to the US, to make it easier to plough more money into her company.

“We shouldn’t have to be advising start-ups to take their companies outside of Africa because it’s going to be easier for them to invest.

“I believe SA has to lead that and I believe if SA does that, we’ll have the possibility of leapfrogging Nigeria, in terms of making capital flow easier to Southern Africa,” she concluded.