As I recently published an article about the upcoming Angel Fair Africa in Mozambique (READ: Alternative Investments: Angel investors are coming to Mozambique, October 24, 2018), I got readers asking questions about “Angel Investors” – Some were wondering how they are different from Private Equity and Venture Capital outfits. I believe to an extend equity could be one of the answers to fund young entrepreneurs in Africa, hence the decision to write a brief “Understanding” article on the subject.
Angel investors, sometimes referred to as “business angels” are in fact equity finance providers. An Angel investor is a private citizen looking to invest some of his personal wealth or disposable income in “alternative” opportunities. Almost always these opportunities come in the shape of startup companies at early stages of development, between seed funding (friends and family or founder funding) and a more robust stage when the company can go after the conventional Venture Capital or Private Equity funding.
As individuals in control of their own capital, Angel investors tend to make their own investment decisions, in some cases in association or in partnership with other like minded investors – often referred to as a “syndicate”.
Generally speaking, an Angel Investor takes equity (shares) in exchange for financial backing to the business, since this is a private investment, other arrangements can be made (i.e. royalty schemes, private debt, etc). While in some developed markets regulation can limit Angel investor equity (in the UK for example, Angels cannot take more than 30% equity in your business) however, they are not regulated in most countries in Africa.
There are many differences between Angel Investors and Venture Capital (VC) or Private Equity (PE). For instance, an Angel Investor would usually provide limited funds that could range from as little as US$5,000 or US$10,000, all the way to US$500,000. While Angel Investor syndicates could reach higher tickets, they seldom would go over the US$2 million (that would usually enter Venture Capital or Private Equity territory). Those investments are usually more adequate for Venture capitalists who professionally manage the pooled money of others investors, typically trust funds, other businesses, limited liability companies, investment fund, etc.
Another difference is that Angel Investors are actual individuals, who usually bring a more personal approach to their investment – often they get involved in opportunities that they feel their own professional experience and knowledge could add value to the growth of the business – this particularly applies to Africa and other emerging markets.
Now, let’s not take away from the extraordinary skills that Private Equity funds bring to assist companies on their portfolio with their growth (Although typically reflecting the investment judgment of individual professionals), but by my own account and experience, professionals in these funds usually manage a range of business in their portfolio, almost always with a more general management oversight. Angel Investors on the other hand, tend to get involved in businesses that they are connected with, personally or emotionally. It is usually an opportunity they believe in or trust they can make a return based on their conviction rather than exclusively by looking at forecasts and performance numbers.
Nevertheless, Angel investors take extremely high risks from the very nature of startup businesses and as such require a very high return on investment. In developed markets, statistics show that most angel investments are lost when early stage companies fail, so seasoned angel investors seek investments that have the potential to return at least ten or more times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition.
However, in African countries as in most emerging markets where stock exchanges and acquisitions are far less common or structured, an Angel Investor could be involved with a business for as long as 8 years or even more, assisting the business to procure further capital with other stronger investors (perhaps a Private Equity fund) in order to take the operation to the next level while being diluted as a shareholder in the process – nevertheless participating further in the lifespan of the investment seeking a large return at a later stage.
When evaluating an opportunity, Angel investors look at a number of different aspects. Human capital tend to be a key aspect for angel investors deciding to make an investment. Their experience, skills, drive, and how they come across.
Obviously, they will take a careful look at the business itself and the core aspects of the business plan.
Whereas not all businesses can satisfy these considerations, being able to address 5 or more of the items below would be considered a very good start:
- Solving a problem – is the business addressing a real challenge? – what is it solving?
- Disruptive – is the business capable of disrupting a sector or perhaps establish a new niche?
- Protected – does the business have identifiable intellectual property? Can it prove ownership?
- Competitive – What or who is the competition? Does it have a first mover advantage?
- Revenue – how is the business making money? What are the revenue streams?
- Scalability – Is it a scaleable model? Can it reach explosive growth?
- Market – what is the market size? Can the business achieve a realistic potential market share?
Last but not least, are the owners prepared to give up shares for investment and to have an investor on their board?
While there is a number of different associations in or focused on Africa, the variables of this type of investment are specific to each country therefore, I would strongly recommend attending events such as The Angel Fair Africa that originated this article whenever they are visiting your country of interest to gather an understanding of the inner works of that particular market and meet the right players.