One of the latest trends adopted by African startups is domiciling in the West. In most circumstances, African startups set up a holding company in the West and only a subsidiary back home even though the majority of their operations might be African. There are even startups like Sidebrief and Norebase that help founders with the incorporation. In this article, we will talk about this phenomenon and why is it a staple of the African startup ecosystem. But first, what is domiciling?
Domiciling refers to the process of establishing the legal headquarters or place of incorporation for a company. This is the location where the company is officially registered and governed, and where it will be subject to the laws and regulations of that jurisdiction. For example, a company that is domiciled in Delaware would be incorporated and registered in that state and would be subject to the laws and regulations of Delaware.
When it comes to African startups, there are a variety of options for domiciling, including Europe, Singapore, and Mauritius. However, Delaware has become the most popular option for a variety of reasons. One of the main reasons is that Delaware has a well-established legal system and a long history of supporting and encouraging the formation of new companies. Additionally, Delaware has a reputation for being business-friendly, with relatively low taxes and minimal red tape.
Y Combinator, a well-known startup accelerator, requires all of its portfolio startups to domicile in Delaware. This is because Delaware has a robust legal system, which provides startups with a high degree of legal protection and certainty. Moreover, Delaware has a large number of legal precedents that are favourable to startups, which can help to mitigate some of the risks associated with starting a new business.
There are a number of reasons why African startups may choose to domicile in the West. One of the main reasons is access to funding. In many cases, African startups may find it easier to secure funding from Western investors, as these investors may be more familiar with the startup ecosystem and may be more willing to take risks on new and untested companies.
The local capital markets in Africa are still young, despite commendable growth in the past decade. But even the locally based investors write small checks, and so when startups are raising bigger funding rounds for example Series A and above, they turn to international investors. These investors prefer to invest in startups that are domiciled in the West.
Additionally, many African startups may choose to base themselves in Western countries in order to gain access to larger and more established markets, which can help them to scale their businesses more quickly and effectively.
Another important reason why African startups domicile in the West is access to talent. In many cases, African startups may find it difficult to attract top talent within their own countries, as the talent pool may be relatively small and not as well-developed as it is in the West. By domiciling in the West, African startups can access a larger and more diverse pool of talent, which can help them to grow and develop their businesses more effectively.
Furthermore, African startups may also domicile in the West for other reasons such as ease of doing business, political stability, better telecommunications and internet infrastructure and access to the international market.
In conclusion, domiciling is the process of establishing the legal headquarters or place of incorporation for a company. Delaware is the most popular choice for African startups due to its well-established legal system, business-friendly environment, and a large number of legal precedents that are favourable to startups.