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South Africa’s tech startup performance plummets


Entrepreneurs urge government to take action as Africa’s former “wonder child” loses its lead

South African innovators have called on the country’s government to relax regulations stifling technology startups, as fresh data show the nation’s performance in this area has dipped below the level of several African competitors.

South Africa, “once the wonder child” of African startup funding, saw its performance drop last year, according to the African Tech Startups Funding Report 2022, published on 6 February by the tech startup news site Disrupt Africa.

The country’s “78 startups to raise funding represented a decline of 12.4 per cent on the previous year, and the US$329,707,000 they netted was down 2 per cent on the total of US$336,405,000 achieved in 2021”, the report states.

This places South Africa at odds with Africa as a whole, which saw both investments and number of startups grow to unprecedented levels in 2022, bucking a global slump in the tech startup investment landscape caused by a deteriorating financial climate.

“It has been a disappointing year for South African funding, and [this] reflects a general dwindling in the ecosystem of late which has seen the country nosedive from the leading market on the continent to fourth place,” the report states.

South Africa is being “truly overshadowed” by Nigeria and Egypt, whose “vibrancy and enthusiasm” are attracting investment, it adds.

Exchange rules ‘chief culprit’

The South Africa Startup Act Movement, a collective of South African startup investors, incubators, accelerators and founders formed in 2020, is calling on the country’s government to relax its red tape for emerging businesses.

The collective says the chief culprit holding back South Africa’s tech startup growth is the country’s restrictive exchange control system, which requires prior permission for raising foreign capital for local companies.

“South Africa’s perseverance with Apartheid-era exchange controls [and] restrictions on offshore holding companies and intellectual property transfers make it challenging to attract international investors, and so our entrepreneurs are physically moving their businesses into investor-friendly jurisdictions to raise funding,” Adrian Dommisse, a lawyer and member of the SA Startup Act Movement’s steering committee, told Research Professional News.

As a result, investment flows not into South African companies but into offshore companies, explaining the drop-off in South Africa’s ranking, he added.

The SA Startup Act Movement wants the government to relax exchange controls and other cumbersome rules for emerging companies with an annual turnover smaller than 100 million rand (US$5.7m).

Without reforms, South Africa “will lose technology talent, lose investments, lose jobs and one of the few avenues that can revive our ailing economy”, SA Startup Act Movement chair Matsi Modise writes in a report published by the collective this month.

All is not gloom, the Disrupt Africa report notes. South Africa “does have its merits”, including a higher prevalence of late-stage investment funding than in other parts of the continent. “But the country’s ecosystem could do with a renewed burst of energy that is unlikely to be forthcoming given prevailing macroeconomic conditions within the country,” it says.