Strict regulatory compliance challenges have hindered South Africa's tech ecosystem. In recent years, South African legislation has not provided a supportive environment to its tech startups. As a result, Nigeria and Egypt arguably have an advantage when it comes to attracting venture capital from local and foreign investors. It's even possible that Ghana or Tunisia will oust South Africa from its position in the "Big 4" of the African tech ecosystem. Restrictive visa requirements, lack of tax benefits, and exchange controls are all contributing factors in this decline. But things are improving with the implementation of the Startup Act and AfCFTA.
To successfully build your tech startup in South Africa, you must understand the major challenges and opportunities it presents. Let's explore South Africa's legal and regulatory compliance challenges and how you can overcome them to thrive as a tech startup.
B-BBEE requires startups to collaborate with local partners when working with large companies or government agencies. These regulations and visa challenges make it difficult for startups to attract pan-African or global talents.
B-BBEE compliance is not a direct legal obligation for private sector participants. Yet, startups may face indirect legislative and commercial pressure. Maintaining B-BBEE compliance requirements can be crucial to remain competitive in the market. Foreign tech startups operating in South Africa through a branch office or subsidiary must know their obligations under the B-BBEE Act.
Compared to an ecosystem like Kenya, South Africa makes it hard for foreigners to get work visas.
This keeps investors from bringing specialised overseas professionals for jobs like project management. As a result, local talents miss out on job opportunities.
Eimear Costigan, Investment Portfolio Manager at Wesgro, the investment promotion agency for Cape Town and the Western Cape province, says, "You have investors going through situations where local companies want to bring in critical skills from overseas to manage a project that is maybe going to employ 200 local employees for example. They would sometimes need one foreign highly skilled person to run it. Through just how the visa regime works, the whole project goes away and the 200 people don't get jobs. The frustration is here, and we could do a lot better in terms of having a more enabling regime that welcomes foreign investment and workforce (1)."
Exchange controls limit the flow of capital and IP in and out of South Africa. As a result, the ease of doing business for startups is restricted. Stringent regulations like these could discourage international investors from investing in the country.
Exchange controls can create challenges for startups looking for funding from non-resident investors. There are limitations on externalising IP owned by South African exchange control residents. Startups with loop structures set up before January 2021 must report these to the South African Reserve Bank (SARB) and regularise them under the current policies.
Tech startups conducting qualifying research and development (R&D) activities in South Africa can get a 150% deduction on certain R&D costs. Capital assets used for R&D could also qualify for depreciation allowances.
Startups based in approved Special Economic Zones (SEZs) can benefit from a lower corporate tax rate of 15%. They could also qualify for a 10% allowance on the cost of new buildings or improvements to their facilities. Companies focused on energy efficiency can claim an income tax deduction of ZAR 0.95 for each kilowatt hour saved during the assessment year. This incentive has been extended until 31 December 2025.
The Startup Act helps startups launch and scale by offering financial incentives and support.
Among the "Big 4", South Africa has made the slowest progress in implementing the Startup Act. This Act addresses visa limitations for foreigners and exchange controls. The Act aims for automatic approvals and amnesty from exchange control regulations. This makes it easier to move intellectual property offshore and attract investment into South African IP. The Act also seeks to extend permissible loop structures, allowing startups to raise international capital without pre-approval from SARB.
The AfCTA free trade area covers most of Africa.If fully adopted, AfCFTA will harmonise the market for tech startups across 55 countries. The integration across countries will help startups expand and attract more funding. Fifty four countries have already joined the agreement, making it successful. A unified African market provides citizens with better access to affordable digital content and services, promotes skills development, and increases revenues for startups, investors, and government agencies.
In February 2023, the Financial Action Task Force (FATF) added South Africa to its "Grey List" of jurisdictions under increased monitoring.
The Grey List indicates compliance concerns about anti-money laundering and counter-financing of terrorism (AML/CFT) standards. This listing may harm South Africa's financial reputation. It could lead to reduced investor confidence and increased scrutiny from international financial institutions. The regulatory environment could become more stringent.
Meeting data and cybersecurity regulations in South Africa can put additional strain on your resources. Navigating regulatory challenges could increase funding diversions from other critical areas of business. Compliance with data and cybersecurity regulations can be complex and time-consuming. This could put startups at a disadvantage compared to bigger competitors with more resources.
Investors are increasingly aware of cybersecurity risks. They prioritise startups with strong security practices that meet compliance requirements. Startups that fail to address these concerns may face challenges securing funding or receiving lower valuations. Compliance violations of data and cybersecurity laws can lead to legal consequences and penalties.
Power outages are common in South Africa. Provided you rely on electricity and digital infrastructure, a lack of stable power supply could cause downtime, productivity loss, and service interruptions.
Maintaining operational resilience during power disruptions can be expensive. Investing in backup power systems and alternative resources could strain your limited budget. Power disruptions can impact supply chains, delaying the receiving of essential resources and materials. To avoid penalties and legal issues, startups must prioritise compliance with all operational regulations.
The 2024 South African general election is expected to be the most competitive since the dawn of democracy in 1994. A coalition government at the national level is a possibility. Such a coalition could affect your tech business through changes in market and economic policies.
Coalition rule has its pros and cons. They can hinder efficient public service and accountability due to competing interests among parties. They may also lead to stricter enforcement of regulations and legal compliance. That said, coalition governments could reduce corruption. These create a fair business environment for Tech Founders to compete based on their innovations.
On a global scale, the invasion of Ukraine by Russia caused disruptions in energy and food markets, leading to higher prices and inflation. International relationship changes, trade policies, regulations, and Rand's fluctuating exchange rate (which can move several percentage points in a week) could all affect your business.
South Africa is changing the benchmark interest rates from the old Johannesburg Interbank Average Rates (Jibars) to the more reliable South African Overnight Index Average (ZARONIA).
This transition involves using ZARONIA in financial markets, replacing the old rates. Though this directly impacts the financial services industry, it can also affect your financial planning. The interest rates you rely on for loans or investments might change. Adapting to these changes is essential for obtaining accurate financial projections. The adoption of ZARONIA could influence funding and investment decisions. It can also bolster market stability and improve financial predictability. As a result, more investors are willing to contribute to a healthier startup ecosystem.
To handle regulatory compliance challenges, consider seeking external guidance, adopting regulatory compliance technologies, and staying updated on regulations. Founders Factory Africa can provide the legal and regulatory compliance support you need for your tech startup. You'll get access to essential early-stage startup funding, and our dedicated team of experts will assist with tech, product, investment, administration, and partnerships. With our vast understanding of market trends, our experts are here to support you in all aspects of your business.
Apply now and make your startup dreams a reality!
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