Africa’s startup scene is experiencing rapid growth, driven by a wave of innovation, youthful ambition, and increasing interest from global investors. African startups have attracted significant capital in recent years, with reports showing that startups across the continent raised over $1 billion by mid-2024 alone, according to Africa: The Big Deal. However, there’s a striking trend: Many of these startups are incorporating their parent companies outside the continent, primarily in the United States. In Nigeria, this figure reaches about 80%, as highlighted by U.S. Consul General Will Stevens, with up to 60% of African startups across the continent opting for U.S. incorporation.
This trend raises important questions. Nigerian startups alone raised an impressive $1.65 billion out of the $4 billion secured by African startups through seed and series fundings in 2021, according to Nairametrics. In 2022, that momentum continued, with reports showing that startups across the continent raised $1 billion in just the first two months of the year—25% of the total raised during the entire previous year.
But where is all this capital flowing, and why are so many African startups incorporating outside their home countries?
In this TechTalk Thursday article, we’ll explore the key reasons driving African startups to incorporate abroad, examine the implications of this trend for Africa’s digital economy, and discuss the need for stronger continental frameworks to better support local entrepreneurs.
Why Are African Startups Incorporating Abroad?
Incorporating outside of Africa has become a strategic move for many African startups. Countries like the U.S., particularly Delaware, San Francisco, and even offshore jurisdictions like Seychelles, are popular choices. Why?
Access to Global Capital and Markets:
One of the most significant factors driving African startups to incorporate outside the continent is access to global capital. Investors, especially those based in the U.S. and Europe, are often more comfortable funding companies based in jurisdictions with established legal protections. Being incorporated in countries like the U.S. gives startups a boost in credibility and trust, which can attract larger pools of venture capital. In fact, many international investors prefer to invest in startups that are domiciled in familiar territories with investor-friendly laws.
This trend is especially evident in programs like Y Combinator, a leading American startup accelerator, which has funded over 28 African startups to date. Y Combinator mandates that startups participating in its program must be incorporated in specific jurisdictions, like the U.S., Canada, or the Cayman Islands, to qualify for funding. This requirement speaks to the broader trend where many venture capital firms require overseas incorporation as a prerequisite for investment.
Legal, Regulatory and Fiscal Complexities
The inconsistent and often unclear legal and regulatory frameworks across African countries make it challenging for startups to scale and thrive locally. Business regulations can vary significantly from one country to another, creating a web of complexity for startups trying to navigate local systems.
The unfavorable fiscal regime in many African countries is also a major factor pushing startups to incorporate abroad. Startups in countries like Nigeria are burdened with numerous taxes, including corporate income tax, value-added tax (VAT), capital gains tax, and others, making it difficult for them to grow and reinvest in their businesses. These taxes are often applied uniformly to all companies, regardless of size or profitability, placing new businesses at a disadvantage compared to more established firms.
Also, navigating the complex tax codes and bureaucratic processes in African countries adds to the operational strain. This, coupled with inefficiencies in processing tax filings and approvals, creates unnecessary delays and confusion for startups that need to focus on growth rather than red tape. Many African countries lack meaningful tax relief programs for young companies, further compounding the issue.
In contrast, countries like the U.S. offer more favorable tax regimes for startups, such as Delaware’s tax incentives, which reduce costs and provide greater legal clarity. Some African countries are starting to introduce Startup Acts to address this gap, but these initiatives are still in early stages, leaving many entrepreneurs to seek out more predictable and supportive environments abroad.
Perceived Credibility and Stability
Incorporating abroad also offers startups the benefit of perceived enhanced credibility. Global recognition of other foreign legal systems is a significant advantage for startups looking to establish themselves as trustworthy players in international markets. A startup incorporated overseas may signal to investors and partners that it is operating under a well-regulated and stable legal framework, which can be a deciding factor in securing investments or partnerships. For African startups with ambitions to scale globally, being based in a globally recognized jurisdiction helps to position them for international expansion.
What Does This Mean for Africa’s Digital Economy?
The trend of African startups incorporating abroad poses significant threats to the continent’s digital economy, manifesting chiefly through capital flight, talent drain, and missed opportunities for local innovation.
Notably, incorporating outside Africa diverts critical tax revenue that could strengthen local economies. In 2021, African startups collectively raised over $4 billion but when these startups are incorporated overseas, they effectively shield themselves from local tax obligations, depriving African governments of crucial revenue that could otherwise be reinvested in infrastructure, education, and public services.
At a recent event in Lagos, Dr. Tijani Bosun, the Minister of Communications, Innovation, and Digital Economy in Nigeria pointed to the country, despite being one of the technological powerhouses in Africa (the big Four), ranked so poorly (the lowest) on the ECI trade index for technology, suggesting that the trend of startups incorporating outside Africa plays a significant role in this shortfall. This decision not only strips the local economy of potential tax revenues but also stunts the growth of its startup ecosystem.
Nigeria has been rated among the lowest countries for some time when it comes to the ECI trade index for technology. This is not supposed to be the case, especially since we know that there are a significant number of Nigerian companies operating in multiple countries. However, for some reason, they are not represented here at all, as many of them have been registered in the USA, specifically in Delaware, instead of in Africa. – Dr. Tijani Bosun, the Minister of Communications, Innovation, and Digital Economy, Nigeria
The relocation of operations and top talent to foreign markets exacerbates the issue of talent drain, further impeding Africa’s digital development. Many African startups, attracted by the allure of foreign investment and established legal frameworks, move their headquarters overseas, taking with them skilled professionals who could have contributed to local innovation. For instance, a survey by the African Development Bank revealed that over 30% of African professionals working in tech are considering relocation to countries with more favorable startup conditions, which diminishes the local talent pool. This exodus results in fewer opportunities for knowledge transfer, mentorship, and skill development, crucial components for building robust and sustainable innovation ecosystems. Consequently, the region faces a paradox where its most talented individuals are lured away, leaving behind a gap in expertise that stifles local entrepreneurship.
Moreover, the growing dependence on foreign markets leaves African startups vulnerable to external risks, which can destabilize their growth. As local startups increasingly rely on international investors, they become susceptible to global economic shifts that can abruptly alter funding landscapes. The lack of a strong local investor base further compounds this issue, hindering the establishment of homegrown innovation ecosystems capable of weathering global economic fluctuations. Without proactive measures to strengthen local frameworks and support homegrown startups, Africa risks losing its chance to cultivate a self-sustaining digital economy that can compete globally.
The Need for Stronger Continental Frameworks
To address the trend of African startups incorporating abroad, there is an urgent need for stronger continental frameworks that can effectively nurture local entrepreneurship. This begins with improving local regulatory frameworks, where clearer and more supportive startup policies can significantly enhance the business environment. For instance, countries like Rwanda have successfully created friendlier ecosystems for startups by simplifying business registration processes and reducing bureaucratic hurdles, demonstrating that conducive regulatory environments can spur local innovation.
Incentivizing local incorporation is another vital step in this process. By offering tax incentives, streamlining business registration, and providing robust investment support, African governments can encourage startups to remain within their borders. This not only ensures that tax revenues are reinvested into local economies but also fosters a sense of ownership and commitment to the development of homegrown businesses. Initiatives like the African Continental Free Trade Area (AfCFTA) can play a crucial role in promoting regional trade and investment. By facilitating cross-border operations and fostering collaboration between businesses across the continent, AfCFTA can help establish a more interconnected African market that is less reliant on external jurisdictions.
Additionally, strengthening support for African startup hubs is essential. Developing more robust local incubators, accelerators, and funding sources will reduce reliance on foreign incorporation while nurturing the entrepreneurial spirit within the continent. Building local funding ecosystems is critical, as encouraging the growth of local venture capital firms and public-private partnerships can help close the funding gap that many startups face. Strategies to build investor confidence in African markets must also be prioritized, focusing on instilling trust in local legal systems and regulatory bodies.
Finally, we call for collaboration across borders. African governments, the private sector, and international stakeholders must work together to build robust digital economies that empower local startups and create sustainable growth across the continent. By strengthening these frameworks, Africa can cultivate a thriving startup ecosystem that retains its entrepreneurial talent and resources, ultimately driving economic growth and innovation.
