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SA is losing tech intellectual property, Startup Act can stop the leak

Graphic from Start-Up City by Gable Klein shows some of his ideas for making cities better places for both humans and autonomous vehicles.

Graphic from Start-Up City by Gable Klein shows some of his ideas for making cities better places for both humans and autonomous vehicles.

Published Apr 3, 2022

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OPINION: SA-born tech founders are registering their businesses in America to access international investments. This has prompted a group of concerned technology entrepreneurs to propose a startup act, writes Wesley Diphoko.

South African-born Elon Musk is one of the world’s most successful entrepreneurs, however his business has brought nothing to his country of birth.

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In his defence many have argued that had Musk built his business in South Africa he would not have reached the billionaire status and his level of success.

Elon Musk unveils Tesla Energy, his plan to fundamentally change the way the world uses energy on an extreme scale. Picture: Patrick T Fallon

Sadly South Africa is likely to see more SA-born entrepreneurs building their businesses in the US.

Musk had different reasons (one of them being to avoid participating in the military) for immigrating to the US when he was younger.

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Today SA-born tech founders are registering their businesses in Delaware, USA, to access international investments.

This scenario has prompted a group of concerned technology entrepreneurs to propose a Startup Act to stop the intellectual property leak from SA to the US.

According to the Startup Act position paper, its purpose is to outline ways in which to accelerate the success and contribution of startups and high-growth firms to the national economy, by removing and/or reducing those burdens that are keeping such firms from playing a larger role and having a greater impact in the national economy.

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According to the Startup Act, position paper “South African Exchange Control impacts startups mainly on two fronts, being the repatriation of offshore movement of South African intellectual property, and secondly, limitations placed on the amounts of money moved offshore”.

The Startup Act movement is calling for automatic approvals, and amnesty from current and future ExCon regulatory actions or pursuits against the start-up that may impact negatively on the legal status of the assets in question; and through granting amnesty, maximise the portability, commercialisation and investment into South African intellectual property.

In addition, the Startup Act movement is also calling for the extension of permissible loop structures for startups and high-growth firms to allow them to raise international capital by creating a non-cash-settled share swap at market value that would not require pre-approval from the South African Reserve Bank, but rather reporting after the transaction.

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In simple terms, the Startup Act movement is trying to ensure that international investors can easily move in their investments and get returns when necessary.

Currently, this is a complicated process in South Africa and as a result, some international investors view other countries on the continent as ideal environments for investment.

South Africa is not only losing out from international investors to other countries, local tech startups with potential are choosing to register their businesses in the US to access international investors.

The Startup Act proposal is not perfect, it needs to review its position on B-BBEE and employment in the startup ecosystem. Currently, it makes the following call:

“Small enterprises must be allowed fair access to markets including through removing barriers to entry at wholesale and retail levels.”

The Startup Act proposes automatic relaxation in the extent of B-BBEE scrutiny for procurement and supply chain grading, enabling quicker access to the supply chains of corporate South Africa and the public sector.

This will directly benefit qualifying startups “by (i) radically increasing the opportunities for market access, (ii) without the restraints and costs intrinsic to obtaining and maintaining B-BBEE points and schemes, as well as (iii) enabling capital raising from offshore investors without risking the loss of B-BBEE status when local equity is taken up by non-South African investors”.

Having said that, such a call should not delay the implementation of this proposed act.

The loss to the South African economy is immense when considering the intellectual property leak currently. South Africa can no longer afford to lose people like Elon Musk who are starting impactful tech businesses.

Understandably, economic decision-makers in South Africa may be trying to protect the country from capital flight. What does not make sense is what is taking so long to move on some aspects of the proposed Startup Act.

One can only assume that the economic cluster in the Cabinet is not fully aware of the fact that South African tech startups are moving their companies to the US.

It has to be said that part of this is influenced by some of the so-called local investors who are just not interested in truly building African tech giants. Founders of local tech companies need to be aware of the hidden agendas of some investors.

Founders need to realise that even though they may need funding they have the power to build the African digital economy.

At the same time, SA economic authorities need to look into this issue and prevent the potential of losing another entrepreneur like Elon Musk.

* Wesley Diphoko is the Editor-In-Chief of Fast Company (SA) magazine.

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