How can government support South Africa’s startup ecosystem?

South Africa’s National Development Plan hopes to see 11-million new jobs by 2030. That’s a hell of a lot considering the country currently sits at an estimated 25.2% unemployment rate.

One way of dealing with this staggering statistic is developing a playing field where small businesses and entrepreneurs can flourish.

A recent fireside chat at SiMODiSA StartupSA conference on the topic of “Government as an enabler for Start-ups” provided some much-needed insight on government’s role and responsibility in building an ecosystem.

The panel consisted of Professor Barry Dwolatzky, who’s currently responsible for the ICT development programme Tech In Braam, the Democratic Alliance Shadow Minister of Small Business Development Toby Chance, and Claire Busetti from the Technology Innovation Agency.

Busetti pointed out that while government is spending an approximate R1.2-billion per year in an effort to fund small businesses, it’s not being implemented as effectively as it should be.

Chance noted that similar to how business people have customers, so do politicians. “In the case of businesses they want to sell their products in exchange for cash. In politics, they are looking for votes in exchange for services.”

He further argued four sectors that need government attention:

Cultivate culture of entrepreneurship

Chance reckons there needs to be move toward building a culture of leadership. Whether this refers to encouraging a tech startup in Braamfontein or a merchant in Soweto, a vibrant culture for entrepreneurship is critical.

Eric Ries, Silicon Valley entrepreneur and pioneer of the lean startup methodology, says a change in such mindset is needed:

A lot of countries have really poor public policy when it comes to bankruptcy. If we want people to take a risk, then we have to think through what are the consequences of what would happen if they would fail for their families and for their future.

Ernst & Young (EY) punches South Africa’s culture of entrepreneurship in at 14th out of the G20 countries surveyed last year. The US sits at the top.

The EY report relied on three critical variables to rank participating countries’ entrepreneurship culture. This includes the Gross Domestic Product spend on R&D which is 0.9% compared to a 1.6% total average between 2007 and 2009. Patent applications, also fell by 24% in South Africa between 2008 and 2011 — a massive dip and one that needs to be addressed.

Christine Strutt — who is partner at intellectual property law firm Von Seidels — tells Ventureburn that registering intellectual property and the additional cost of enforcing these rights, locally and abroad, are some of the biggest issues local small businesses face.

“The process of registering a patent, design or trademark can be laborious, but South Africa is generally in line with international best practise and efforts are being made to improve e-filing facilities and modernise document submission”, she says.

She argues that offering subsidies or tax breaks for startups is perhaps the only way government can alleviate this burden. Strutt exemplifies the Indian government, which reimburses up to 50% (or up to US$28 000) of foreign patent processing costs (which includes legal fees, search, filing and prosecution fees) to encourage local Indian companies to register their patents internationally. She does however caution such a system against excessive bureaucracy and corruption.

Shorten the long, long, red tape

Adding to the point mentioned above, the second area in dire need of sorting out is red tape and regulation at a municipal national level. Registering your business, permit or VAT is too difficult in South Africa, Chance says.

According to a report by the World Bank, it’s easier to start a business in Rwanda than it is in most countries. In fact, in 2013 it was ranked the ninth friendliest country for startups in the world. This is mostly due to electronic processes introduced which (now mandatory) see businesses register online.

Kenya similarly enabled new businesses to register using their phones in June 2014. Not to mention physical fatigue, this initiative is said to cut the time of registering your business from two weeks to only a day.

remove suffocating labour laws

The third point Chance notes looks to irrelevant labour laws. Due to tight labour laws and regulation, South African businesses trying to set up are often put off by the process hiring people and letting them go.

The landscape report by Ernst & Young noted last year that out of the 144 countries tracked by the World Economic Forum, South Africa is 143rd on hiring and firing practices, 140th for flexibility of wage determination and last on the measure of cooperation in labor-employer relations.

This means companies struggle to shift and shape in an industry in constant flux. Not to mention finding the right crop of talent for their team.

Should Small businesses be exempt from some of these laws?

adopt successful capital generation models

The last important point put forward by Chance is that of a private/public venture capital fund.

Busetti notes that government is currently providing funding based on input — i.e. how many little agencies is it funding and how much funding is it giving up? Whereby the private sector always looks for a return on investment. The latter is what the Israeli model is currently driving.

Referring to the successful Yozma model, Israel for instance uses US$100-million and leverages another US$100-million from the private sector which were then given to fund managers from the private sector.

Since inception, the group has managed more than US$220-million from a mixture of both national and international investors as well as the local government and have made direct investments in about 50 prominent portfolio companies. The British government is also said to be flirting with this concept to boost job creation and innovation.

“I do believe that entrepreneurs can make it no matter what but funding definitely helps a lot,” says Busetti.

In December this year, Namibia Financial Institutions Regulatory Authority is implementing a regulation that will see pension and insurance companies invest between a minimum of 1.75% and a maximum of 3.5% of the market value of their investments locally in unlisted entities. Whether this will be a success or not remains to be seen though the initiative should be applauded.

These are just a few examples the South African government can work to incentivise and open up more room for funding in the private sector.

It should be noted that the South African government has definitely made strides in this arena. Section 12J under Income Tax Act in 2009 having become the spearhead example of less restricted flow of investments. The provisions in the Income Tax Act allow a full tax deduction to be claimed on investments into qualifying 12J Venture Capital companies.

The ultimate problem is language, metaphorically of course. The team argues that the private sector needs to clearly state what is needed, as well as why it would be attractive for government.

“We, the tech ecosystem, need to meet the government halfway by making clear of what we want from them. At the same token, government has to hear us,” says Dwolatzky.

Which areas do you think need government’s utmost attention and how can they be implemented?

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