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Q3 2021 - (released November 2021)

SA's quarterly Private Equity & Venture Capital magazine

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Four Quick Fixes to Spur SA’s Entrepreneurial Growth & Job Creation

by Alison Collier

The recent meeting between President Cyril Ramaphosa and representatives from the South African entrepreneurial community, including start-ups, to discuss issues relating to enabling entrepreneurial growth, holds potential.

By proactively reaching out to the community, our government is taking a positive step towards the goal of making South Africa a place where entrepreneurship is celebrated and encouraged, rather than being tangled up in red tape. It could also be the antecedent to unleashing latent growth potential and job creation in the economy.


While expectations regarding the implementation of a complete Start-Up Act should be managed – gazetting a new Act is a multi-year process – prioritising a few of the policy amendments proposed in this will achieve the majority of the impact and are implementable in a few months.


Indeed, government has proven that quick and radical change is possible. June’s announcement that the threshold for private power generation is increasing from 1 MW to 100 MW caught the sceptics off guard, and a hopeful sign of more actions to come. Similarly, there are four interventions that the government could make that would constitute quick wins and big impact.


These four amendments are by no means the only   remedies needed, but they could quickly mediate a number of problems that entrepreneurs and start-ups are experiencing, specifically those in the high growth, high impact, tech space.

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1. Provide tax breaks and incentives to all VC investors – making SA the most attractive VC destination globally
Current macros aside, South Africa is far from the preferred destination for venture capital (VC) investors. One of the main reasons is because other countries offer investors massive tax breaks and incentives. South Africa needs to do the same to make us more attractive for VC investors, relative to the best start-up locations globally, such as the Netherlands, Ireland and the US (Delaware). Global VC liquidity is abundant, but South African VC has not been a prime recipient. Provide favourable tax incentives, and it will come. 

2. Remove barriers that inhibit skilled talent nationals
These days, few countries can boast all the talent needed to build a company of international standards, especially in the tech space. While the vision is there for exceptional products, South African start-ups often require the skills and expertise only available from foreign nationals. By allowing a small number of highly skilled visas per company, South African start-ups can tap into international know-how from markets   that are far more developed than our own. We need a global ‘ubuntu’ mindset when it comes to talent.


Also, if a business is investing in local digital apprenticeships, then that business should be given a tax break. These digital apprenticeships are already happening on a small scale, and are helping to correct the digital skills gap in our country. Incentives can be a powerful way to address both youth unemployment and the digital skills shortage. 

3. Right size the threshold for B-BBEE level 1 status to R100m
Under current circumstances, small businesses that surpass a revenue of R10m and/or R50m need to adhere to many of the B-BBEE codes, slowing their growth due to increased administrative complexity, amongst other burdens increasing their costs. This is particularly challenging for small businesses in their growth phase. To boost entrepreneurial growth, and thereby job creation, we propose that the government increases the revenue limit to R100m turnover for automatic Level I B-BBEE status.

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4. Remove regulatory barriers that hamper globalisation
Currently, for many high-growth start-ups, there comes a time when the company’s intellectual property needs to be moved overseas in order to maximise investment and growth. Recent loop structure reforms to exchange control have helped, but two concerns need to be addressed further.


Firstly, the length of the process to find out if your company qualifies for the move takes too long – anything from three months to up to a year. Many VC firms that are contemplating investing simply cannot wait that long, which leaves many South African start-ups unfairly out of contention.   The waiting period for qualifying start-ups must be no more than 30 days.


Secondly, when moving IP overseas, the asset is revalued after transfer, which triggers a capital gains tax. The revaluation doesn’t mean that the founder is now cash rich, but it leaves him/her with   a burdensome tax bill that is barely payable. This capital gains tax needs to be deferred to when the investment is eventually sold.

 

With these interventions noted by the Presidency during the meeting, alongside the open reception displayed in initiating the meeting, there are grounds for hope. The private sector must continue to organise itself to work with government and come up with very clear goals for the short, medium, and longer term. And whilst these suggestions may be quick fixes, the reality is that they can provide the medium and longer term secret economic ingredient – business confidence. 

Collier is Managing Director, Endeavor South Africa.