Online technology has made the world smaller, enabling tech-driven startups to scale and look beyond local markets for funding and business expansion.
In today’s world of business, you don’t necessarily have to be where your customers and investors are. You could operate in Cape Town and do business with people in Europe, or service clients in Asia or North America from your offices in Johannesburg, while being funded by investors from the United States.
Card payment service provider Yoco, opinion mining company Brandseye, online event ticketing provider Quicket, and property rental agency HouseME are four of the many South African tech companies that are in the process of scaling their operations. Each of those companies has learned their share of lessons along the way.
“There’s certainly a lot more to international expansion than meets the eye. You have to think about exactly what you’re trying to achieve. For example, if your business is a high-tech business, IP becomes very important and the place where you have the core skills needed to build that technology becomes relevant,” said Yoco co-founder Bradley Wattrus.
“On the other hand, if you’re a software-as-a-service (SAAS) business, you would need to consider where your customers will be. When you want to raise capital, you also have to consider the different jurisdictions investors are comfortable investing in.”
In order to access those investors, whether local or international, startups need to work harder than their incumbents and competitors to get visibility.
“There’s significant work involved, but all founders can enter competitions, sign up for conferences, and execute on legal guerrilla marketing tactics. Of course, you have to balance your brand’s credibility with making an impact, but in the beginning, you have no brand to protect, so you can take bigger risks,” said HouseME chief executive officer (CEO) Ben Shaw.
An important aspect of that involves tapping into mentor networks. Shaw’s advice is to establish relationships.
“Particularly in Cape Town, there’s a very good network of businesses that help build each other up,” he said. “I’ve never met a founder or angel investor who hasn’t been willing to provide introductions or been a helpful guide. Build on your mentors and leverage their relationships.”
Quicket co-founder James Tagg said the best investors are those that provide more than just funding.
“It’s important to find an investor who can also open new doors – whether that’s through introductions, trade exchanges, meet-ups, training or networking. And since you’ll be working with your investors on regular basis for a long time to come, you also want to make sure that you get along well,” he said.
The same is true when it comes to selecting international partners.
“Working with partners requires an entirely different model of cooperation, including channel management and channel admin, to opening a local branch with local employees,” Tagg said. “This in turn requires different MoU’s, agreements and so forth, which need to be done the right way upfront.”
The legal and structuring issues can make or break a tech company’s international expansion plans. Technical legal challenges like exchange control regulations, transfer pricing and cross-border intellectual property (IP) issues have to be understood and overcome.
“If you think that your startup is going to be international, even in part, it is best to set up internationally as soon as you can,” BrandsEye founder Craig Raw said.
“Generally, foreign capital has not wanted to invest in a business operating under South African law, which they don’t understand and don’t have a strong desire to understand. To access that capital and those foreign markets, you’re much better off with a business that’s based in a more well-known jurisdiction, starting there or moving there while the business is still small. BrandsEye is the exception to this rule, in that we have done it much later and managed to achieve something that has historically not been possible. Still, we wish we’d done it sooner, because it can become very difficult to do at a later point.”
Aalia Manie, a partner at Webber Wentzel, agrees, but notes that the legal environment for South African businesses looking to expand offshore is slowly but surely becoming friendlier – particularly from an exchange control perspective.
“There are certainly challenges that must be carefully managed, but these are generally not insurmountable. The regulators are increasingly more willing to listen and engage. There is good reason to feel positive,” she said.
Wattrus said it is eye-opening to see the complexities behind it all.
“As a startup, it’s to your benefit to spend time upfront thinking about where your customers and opportunities are going to be, where your business and your investors will be based, and how those elements will all fit together. That means working with the right legal team, who can see the long-term potential of your business and work with you based on that,” he said.
“We were fortunate enough to be introduced, through our investors, to the right people at Webber Wentzel who were able to facilitate a painless exchange control approval,” said Tagg. “So, for us, it was not too much work, but should be noted the whole process can take time.”