To incorporate in Africa, or not, that is the question.

More and more African founders are choosing to incorporate their startups outside Africa. Which raises the question: Can a startup founded and operating in Africa but domiciled abroad be called an African startup? Tom Jackson explores this issue in an article published in DISRUPT-Africa.

Follow the money…to Delaware

Delaware is a favorite destination for African founders for domiciling their startup babies. Around 70% of African startups choosing to locate abroad pick the State of Delaware in the USA.

The reasons are fairly obvious. Delaware offers competitive tax rates, easy and quick incorporation (no lawyer required; incorporation in 24 hours; fees only $500), a modern and high-quality judiciary, and IP protection and property rights.

But most importantly, the reason is funding. Founders are drawn to America because it is the deepest capital pool in the world says Iyinoluwa Aboyeji, co-founder of Andela and Flutterwave,

One crucial point is that many American incubators, angel investors and institutional investors, especially Y Combinator, must invest only in the US by mandate.

Problems at home

Many African startups wing it outside Africa because of infrastructural problems at home. These include a paucity of venture finance and political interference. Other problems are inadequate exit options and a lack of a payment system that can efficiently handle international remittances.

For example, Truzo, a South African escrow platform, is setting up in the UK and Singapore. The reason: To facilitate multiple currency transactions without the foreign exchange restrictions imposed by South Africa.

Even perceptions, though unfair, of color or honesty force founders to domicile overseas.

“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,” says Aboyeji.

Other advantages of going abroad

Freedom from exchange controls, investment incentives, more convenient time zones, language barriers, and lower taxes compared to the home location are other, very serious advantages.

Perhaps another powerful reason is valuation. “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,” says Truzo’s Terence Naidu.

Conclusion

The ultimate decision may be determined by the startup’s product-market fit.

Will locating in the US (or elsewhere) help solve customers’ issues with the startup’s product or service?

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