Why African Startups are Incorporating in Foreign Countries
A long list of African startups were not domiciled on the African continent. The list includes some of the fastest-growing African startups like Paga, Paystack, Andela and Flutterwave. These companies were incorporated in places like San Francisco, Delaware and other non-African countries.
A recent report by the African Private Equity and Venture Capital Association (AVCA) shows that about 21 percent of the total number of VC deals between 2014 and 2019 went to startups incorporated outside of Africa, with 53 percent of those startups based in the United States.
The report further shows that foreign-based African startups find it easier to raise funds than those in Kenya, Egypt, Nigeria and Ghana. This brings the questions: Why are these startups domiciling in other countries?
A close observation of this trend and opinions shared by several startup founders have provided the following reasons.
Low cost and ease
It is worthy of note that 70% of African startups that are incorporated outside of the continent choose Delaware in the United States. This is because it is very affordable and easy to establish a startup in Delaware – it literally takes 24 hours and US$500 to establish online with low corporate tax rates and no lawyer required. The General Corporation Law of the State of Delaware makes it affordable to register a business and provides adequate protection for businesses.
Better Investment opportunities
Recent AVCA data reveals that 40 percent of the total number of investors involved in Africa’s VC deals between 2014 and 2019 are based in the United States of America ( USA).
Incorporating in the US helps to get more exposure for investments from American angel investors and institutional investors, particularly Y Combinators. This is because their mandate restricts them to invest in American companies because their Limited Partners (LPs) are large American universities and pension funds.
Iyinoluwa Aboyeji, co-founder of Andela and Flutterwave disclosed in talk with Disrupt Africa, that almost all of the successful startups that he has ever founded are incorporated in the US.
“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” He said.
Flexibility for Structuring Startups
The corporate laws of Delaware are very versatile when it comes to structuring the members of the team and board for a startup. For instance, shareholders, directors and officers of the startup don’t have to be residents of Delaware. The state requires a single person to be a corporation’s sole owner, shareholder and officer. In other states, you may need a minimum of three people to hold the officer and director positions.
Cushion Bad image
African startups are usually being perceived as being fraudulent by foreign countries. The frequent case of fraud by Africans has built a negative image for the continent with international bodies.
In a bid separate themselves from this bad image, African founders incorporate their startups in foreign countries that already have the goodwill of the business world. This way they don’t have to struggle with suspicions arising from a bad reputation of their origin countries.
To Bypass Restrictions on Transaction
African startups also leave home due to restrictions in transactions faced by the continent. Some years back when the fintech industry in Africa was still taking off, it was quite difficult to wire money. African startups had to incorporate in foreign countries to facilitate smooth financial transactions with clients only deal with startups domiciled in the countries where they operate.
Blessing Ijoma, the founder of Hourspent, a recruitment startup, disclosed to Disrupt Africa that this was the exact reason why she incorporated her startup in the US. She explained that when it comes to startups with staff in a foreign country, being incorporated in that country can make the process much easier.
Incorporating abroad is not always necessary
The perks of incorporating in a foreign country will continue to be a huge attraction for African startups, however, care needs to be taken when deciding whether to domicile in a foreign country.
Startups who do not have any plans for international expansion, there is no need to incorporate abroad. In this case, it is safe enough to have one single holding company in the local jurisdiction. But this will restrict their capital raise to only local investors, or foreign investors willing to take a chance on a locally registered company.
It is probably not a good idea if your company is politically exposed – your investors are politicians, or you do a lot of business with the government or are ethically challenged. The Americans take their securities and compliance laws very strictly and you risk being prosecuted for what might simply be considered a poor business practice in your home country.
African startup founders who are looking to incorporate in the US should act upon this goal only when they figured out the product-market fit, it is only at this point that they can see clearly whether incorporating in the US or any other foreign country is needed to solve the real pains and worries of their prospective customers.
All things considered, Africa is advancing and regulations geared towards improving the operations of startups are starting to arise – one of these is the controversial Sandbox recently introduced by the Central Bank of Nigeria to facilities development and testing of fintech products in the country. Until the continent can measure up to more favourable foreign ecosystems, the trend of African startups incorporating in foreign countries is bound to continue.
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