Regulation is seriously harming investment in SA’s online startups

Regulating the internet in South Africa could have serious consequences for investment in the country, potentially damaging its prospects for growth.

That’s according to a new report from investment advisory firm Fifth Era.

As the report notes, internet businesses require capital to fuel their growth, and that capital comes both from local in-country investors, as well as from international investors in the form of FDI.

Thing is, those investors are almost always put off by ambiguous regulatory environments.

That’s a stark warning for South Africa, where legislators are trying to introduce a raft of new online regulations, ranging from cybercrime to taxation and copyright, but which is struggling with low levels of growth.

The report saw Fifth Era survey 475 investors in 15 countries in order to assess the degree to which the future legal environment might impact their investments in Internet companies. The research company surveyed thirteen countries in Asia, Africa and the Middle East (Australia, India, Indonesia, Israel, Japan, Korea, Nigeria, Saudi Arabia, South Africa, Thailand, Turkey, UAE and Vietnam) representing a spectrum of more to less developed Internet economies. The UK and US were also added to the survey respondents provide a perspective on overseas investors.

According to Fifth Era researcher Matthew C. Le Merle, most governments understand how important a driver of investment the internet is and have robust innovation policies in place, those policies are often at odds with the regulatory frameworks they put in place.

And when those regulations are too tight, investors tend to look elsewhere, as will the innovators and entrepreneurs they’re looking to court.

“The notion of an innovation-based strategy always collapses down to the fact that we need entrepreneurs and venture capital and both are scarce,” Le Merle comments. Entrepreneurs have a choice of whether or not to build a business, and where to build a business. If you make it difficult for entrepreneurs to do business in your country they will choose to go elsewhere, he says.

If the report is anything to go by, things aren’t great on that front right now.

Thirty-one investors in South Africa were assessed for the Fifth Era report, all of whom said that the current legislative / policy environment in the sector has a negative impact on their investment activities.

Here are some of the more serious findings of the report:

• Seventy-four percent of those surveyed said that they are not comfortable investing in business models where the regulatory framework is ambiguous.
• Eighty-four percent said the risk of secondary liability and exposure to large damages was of concern.
• Conversely, 87% said they would likely increase their investment if South Africa adopted anti-piracy laws similar to those in the US.
• Eighty-one percent of those surveyed would not be comfortable investing in Internet companies if South Africa applied tax rules that make Internet companies liable for double taxation.
• Eighty-seven percent of investors surveyed said they would not be comfortable investing in internet businesses if intermediaries could be held liable for third party content or actions (for example internet service providers or user-uploaded content hosters).
• Fifty-eight percent of investors said they would be uncomfortable investing in internet or mobile businesses if regulators apply traditional telecom regulations and tariffs to mobile messenger and free online content services such as Whatsapp or Viber. Conversely, 77% would be interested in investing more in internet businesses if South Africa adopts policies that reduce regulation in the mobile apps ecosystem.
• Ninety percent said they would be less inclined to invest if country user data is retained and disclosed to law enforcement on request, unless international baseline standards are followed. Allowing security agencies to install their own equipment on ISP networks would deter 77% of investors.

According to the report, investors would invest more in internet businesses if the government adopted policies that indicate it is supportive of new business models (eg the sharing economy) and protect freedom of expression online, if government invests in education and digital skills, in internet and mobile infrastructure, enables policy that reduces taxes and fees for internet and mobile end users, promotes open data use, liberalises mobile payments, enables access to backhaul and spectrum, and releases transparent regulatory roadmaps and holds public consultations on all new internet/mobile-related legislation and regulation.