Debate rages over what constitutes an “African tech startup”, and one of the many reasons why an exact definition is so hard to agree on is a very simple one. Many of Africa’s most innovative tech startups are not actually incorporated on the continent.
From Andela and Flutterwave to Paga and Paystack, Africa’s quickest-growing companies, especially fintech ones, are choosing to domicile elsewhere. But where are they choosing to go, and what are the factors, both push and pull?
Around seventy per cent of startups that incorporate outside of Africa choose the United States (US) state of Delaware. Like all US states, Delaware tried to keep its corporate tax rates low and competitive, but its modern corporation statute and high quality courts and judges set it apart. Registering a business in Delaware, or most of the US in general, is easy and affordable, and your business is protected going forward.
Iyinoluwa Aboyeji, co-founder of Andela and Flutterwave, says he has incorporated every successful tech venture he has built in Delaware, and will continue to do so. There are both push and pull factors here. One of the main pull factors is access to capital.
“America is the deepest capital pool in the world. If you want to raise capital, it makes sense to domicile in America to increase your chances of fundraising success,” Aboyeji told Disrupt Africa.
“If you do intend to raise venture capital and be a globally relevant company, especially in the world of technology, I don’t really see any other viable way to do it. Most American incubators, angel investors and institutional investors, especially Y Combinator require this of you in any case. Their mandates restrict them to investing in American companies because their LPs are large American universities and pension funds.”
There are other reasons Delaware appeals, however.
“Delaware companies literally take 24 hours and US$500 to form online. No lawyer required. It’s deceptively easy,” Aboyeji said.
“You can be generally assured of property rights and a fair court system in America.”
Zachariah George, co-founder and chief investment officer at Startupbootcamp AfriTech and an angel investor in African tech startups, agrees with Aboyeji on all this.
“Although there is nothing wrong with incorporating an entity anywhere on the African continent, Delaware provides the least “risky” option from an investor confidence and assurance standpoint. Several now multi-billion dollar tech startups have incorporated themselves in Delaware. There are very simple “mirror-structures” that allow a local company to move shareholding up to Delaware. But perhaps the most important reason to do so is IP protection,” he said.
Those are the pull factors of Delaware, then. But what pushes African startups to leave their home markets? A Nigerian, Aboyeji says in his case there are many reasons why he will not register a business there.
“Not only is it a very shallow capital pool with little to no options for more investment or exit, ownership of your company can be subject to political interference. Also being Nigeria it’s very difficult to do business across Africa or globally with a Nigeria-incorporated company. Unfortunately it basically screams fraudster,” he said.
“Much better to be introduced as an American company. Especially given the reality is my skin colour and passport are already two strikes when it comes to global business, at least I have a fighting chance as an American company. Even in my home country, I’m treated better as an American parent company “investing in Nigeria” than as a local Nigerian company, so go figure.”
The difficulties with making and accepting payments are another reason African tech startups leave home. Blessing Ijoma registered her recruitment startup Hourspent in the US for exactly this reason.
“Back then, the fintech industry in Nigeria was still asleep, it was a bit difficult to wire money. All our clients know Stripe and PayPal. To process a payment with any of them, your startup must be registered in one of the countries they operate in with a bank account domiciled in any of their operating countries. Nigeria wasn’t among their operating countries,” she said.
Our talent base is made of Nigerians, Americans, and Estonians. With our local freelancers, the mode of payment isn’t a problem. How to easily pay our international freelancers was the problem.”
That problem was overcome by registering outside of Africa, in this case the US. But there are other options available.
Where else can you go?
Those options are spread across the world. Terence Naidu runs South African fintech startup Truzo, which is in the process of launching in the United Kingdom (UK) and Singapore. The decision not to register in South Africa was taken to allow Truzo, an escrow platform, to facilitate multiple currency transactions without the restrictions associated with South Africa’s restrictive exchange controls.
Naidu explained the reasons behind domiciling in the UK and Singapore.
“For the UK our choices were influenced by the fact that UK has no exchange controls, and the incredible support we’ve received from the UK government following our participation in the UK/SA Tech Hub’s Go Global Programme,” he said.
“It made sense in terms of being in a similar time zone to London with no language barrier. There is also lower corporate tax rate than in South Africa, while the developed nature of the UK tech ecosystem affords us the ability to achieve a higher valuation for our business should we look to do a capital raise.”
With Singapore, the decision was again assisted by the lack of exchange controls or language barrier, as well as the support offered to tech entrepreneurs by the Singaporean government, lower tax rates and a more developed local ecosystem.
There is also, of course, a viable option on the African continent.
“For African startups, Mauritius is also a very attractive option. Mauritius has no foreign exchange control, no withholding tax on dividends or interest. In addition, capital gains realised by a non-resident or resident shareholder on disposition of its shares/units in a Mauritius entity is not liable to tax in Mauritius,” George said.
When you shouldn’t do it…
For many African tech startups, then, incorporating in Delaware, or the UK, or Singapore, makes perfect sense. For many, though, there is no need.
George said companies that do not foresee scaling outside of just one primary operating country, need not look at a dual listing.
“In that case, having one single holding company in just the local jurisdiction is good enough. But they would have to be okay with limiting their capital raise to just local investors, or international investors willing to take a punt on a locally registered entity,” he said.
Aboyeji agreed it is better to incorporate locally if you are a family-owned business or do not intend to raise institutional funding.
“Also if your business is politically exposed – your backers are politicians, or you do a lot of business with government, or ethically challenged – it is definitely not a good idea. The Americans take their securities and compliance laws very seriously and you risk being arrested for what might just be considered poor business practice in your home country,” he said.
The answer as to whether or not you need to incorporate overseas will emerge as your business grows, Ijoma said.
“Often, startup founders, especially from Nigeria, ask me if they should incorporate in the US. I tell them once they find their product-market fit, they’ll clearly see the answer. While working on your product-market fit, you will discover some real customers’ pains and worries, and know if it’s something a US presence is needed to solve,” she said.
“I learned about a startup making plans to register in the US, their core operation is to transfer money from China to Cameroon. How does registering in the US help them transfer their customer’s funds from China to Cameroon and vice versa?”