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Press: 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.
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.
Press: How (not) to attract Internet investment to SA
The approach that South African lawmakers take to regulating Internet businesses could make or break the growth of the country’s digital economy, a report from Fifth Era, a Silicon Valley-based investment and advisory firm, has found.
If digital technology is going to have as profound an effect on industries and economies as research suggests, then South Africa should worry about whether tech entrepreneurs choose to launch their businesses here, and whether domestic and foreign investors choose to back internet businesses here, said Matthew Le Merle, managing partner at Fifth Era.
“If domestic and foreign capital is scared away, the tech entrepreneurs will leave,” Le Merle said.
He was presenting the South Africa findings from the report, which surveyed 475 investors in 15 countries to assess how potential regulation might positively or negatively impact capital investment into internet companies.
The “Internet investors” surveyed needed to have a net worth, excluding their primary residence, of $1m or annual income of $200 000.
The survey found that 89% of global investors view the legal environment as having the most negative impact on their investing activities, while 75% said they are uncomfortable investing in business models in which the regulatory framework is ambiguous.
As lawmakers consider how to regulate areas such as copyright and intellectual property, liability, censorship and privacy and security, they will have to carefully consider not only what to regulate but the pace at which to regulate, Le Merle said.
The challenge for lawmakers is to regulate the “10% bad” while not losing the “90% good”, he commented.
For example, investors said they would be deterred from investing if the law allowed for site blocking for alleged copyright and IP offences or where websites would be obligated to remove content upon a government request without a court order.
Speaking after the launch of the report, Le Merle suggested that South Africa could develop a competitive advantage over other countries in the area of Internet regulation if regulators moved slowly and so derived the benefit of assessing what works and doesn’t work elsewhere.
“I don’t know of any country in the world that does a good job at engaging tech entrepreneurs and the people who back them. If South Africa did this it would put you ahead of other countries,” he said.
He highlighted that, often, large firms give input into regulatory policies when “they can cope with regulation in a way that tech entrepreneurs can’t”.
Press: South Africa's Financial Mail on Investment
INNOVATION, particularly in developing countries such as SA, is held hostage by regulatory ambiguity. And it’s causing investors to shy away from pouring funds into new Internet businesses.
A study by Silicon Valley-based investment and advisory firm Fifth Era (commissioned by Google and released at a press conference in Johannesburg last week) says governments in developing countries need to do more to ensure that regulation does not inhibit investment in the information and communications technology (ICT) sector.
The rise in Internet access has created a platform for entrepreneurship. Traditional economic sectors have been substantially transformed by this rapid and unprecedented expansion.
The Internet is enabling rapid development and is driving GDP growth and job creation. Consumers also use it more and more to gather information and network socially.
Rapid technological change is not always met with the right response, however. Regulators have a hard time keeping up with the state of innovation, Fifth Era says. It can be difficult for them to “foresee the unintended beneficial or adverse consequences of their decisions”. Yet it admits that “inaction can also have negative impacts on innovation”.
Fifth Era managing partner Matthew Le Merle says SA businesses acknowledge that their future is a digitally enabled one. However, investors cannot operate in a grey area.
“Internet investors are concerned about regulatory ambiguity. Investors fear regulations the most,” he says.
Fifth Era interviewed 30 SA-based investors and all said the current policy environment in the technology sector had a negative impact on their investment activities. Of those surveyed, 87% said they would increase their investment if SA adopted anti-piracy laws similar to those in the US.