SA startups need less red tape, more green shoots

The Red Tape Reduction Unit of the Western Cape Government in South Africa commissioned Genesis Analytics to conduct a study on the regulatory barriers and opportunities for startups. The brief was to analyse the regulatory environment as well as the costs and benefits associated with potential reforms related to exchange controls and taxes that affect startups and investors in the province.

The report found that the economy would benefit from loosening exchange controls related to the offshore transfer of intellectual property and money. It would also benefit from the reintroduction of better-designed tax relief for startup investors (relative to the Section 12J tax incentive that ended in 2021). However, the costs of introducing additional tax incentives for startups would probably outweigh the benefits.

Alongside Nigeria, Kenya and Egypt, South Africa is considered to be one of the “big four” destinations for startups in Africa. The South African Startup Act Movement defines startups as newly established (less than five years old) operational entities in innovative sectors with an annual turnover under R100 million that show a strong commitment to research and development. Despite growth in the startup sector, there is a widespread perception among startups and investors that a number of regulatory and operational barriers make establishing, growing and investing in South African businesses difficult, particularly in comparison to other African countries.

For this reason, in November 2020, startups, investors, incubators and accelerators at the AfricArena Summit, an annual networking conference hosted in Johannesburg, raised the idea of drafting a Startup Act to create a better enabling environment for high-growth startups.

The movement went on to publish the 2021 Startup Act Position Paper detailing four possible areas of reform to overcome regulatory hurdles faced by startups:

• Providing tax breaks and incentives to encourage investment in qualifying startups.
• Removing barriers that inhibit access to skilled talent.
• Removing regulatory barriers that hamper globalisation and investment into qualifying startups.
• Exempting qualifying startups from preferential procurement limitations.

Genesis’ 2023 report shows how South Africa can boost its startup sector by easing exchange controls and tax rules, which are key for attracting investment, talent and innovation.