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,” says Yoco co-founder Bradley Wattrus. “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. 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,” says HouseME CEO Ben Shaw, “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.” An important aspect of that involves tapping into mentor networks. Shaw’s advice: establish relationships. “Particularly in Cape Town, there’s a very good network of businesses that help build each other up,” he says. “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 adds that 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.”
The same is true when it comes to selecting international partners. “Working with partners requires an entirely different model of cooperation (including channel management, channel admin, etc) to opening a local branch with local employees,” Quicket’s James Tagg says. “This in turn requires different MoUs, agreements and so forth, which need to be done the right way up front.”
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.
BrandsEye founder Craig Raw agrees. “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,” he says. “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 law firm 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,” she says, “but these are generally not insurmountable. The regulators are increasingly more willing to listen and engage. There is good reason to feel positive.”