Angel investors in Africa – who they are and what they can offer entrepreneurs

By Guest Author - August, 1st 2014

Who are ‘angel investors’?

Typically, ‘angels investors’ are high-net worth individuals with considerable business experience. Of course, “high-net worth” is a relative term that varies from country to country. In the United States, Canada, and the UK most angels have “accredited investor” status as defined by law, although this is usually self-certified. Most countries, however, do not have such criteria for angel investors. The majority of high-net worth individuals in developing countries tend to invest locally, most commonly in real estate, agriculture, minerals or other natural resource extraction, and they tend to find opportunities and make investment decisions based on personal connections.

Some of these investors, however, test the waters of financing high-growth start-up companies that are not in the traditional sectors described above, contributing to the communities of new entrepreneurs and their support structures that make up new start-up communities.

Globally, most angels fall into two main categories:

– Successful entrepreneurs: These individuals have a close knowledge of the needs of start-ups and are crucial in driving the creation of angel networks. Many want to stay engaged in the start-up scene after cashing out of their own businesses, and help cultivate local entrepreneurial ecosystems in their own countries. Some angels may be members of the diaspora who want to give back to their home countries or communities.

– Business executives and other traditional investors: In many countries, wealthy business professionals from large multinational companies or government become interested in investing in start-ups. In some countries, these business heavyweights act like angels and draw on a tremendous amount of capital and business connections. They bring significant financial support to the table, but it can take some time for them to adjust to the scale of start-ups and to find time to connect with entrepreneurs to mentor.

In some countries it has taken time for traditional investors to warm up to high-growth, IT-based start-ups, which are relatively new and unfamiliar to most investors. This does not mean, however, that these investors cannot become very effective angels.

Source: infoDev. Data sources: OECD, 2011. Financing High Growth Firms: The Role of Angel Investors. OECD Publishing, pgs. 80-92. Angel Investor Networks in Latin America and the Caribbean. Private Investors Network and IESE Business School and the MIF, 2012, p. 17.

How much do angel groups invest, and in how many companies?

This is difficult to track, although some angel networks attempt to do so by polling members. Research from Australia, Europe, New Zealand, and the U.S. shows that in 2009, each angel group invested in 5 to 20 companies per year.

Established angel groups in the U.S. make, on average, 7.3 investments annually. Newer groups may do fewer deals or none at all, until they establish reliable deal-sourcing networks. Information on deal size is even more limited, although data on the U.S. market is available through the Angel Resource Institute and the Center for Venture Research. In 2012, most deals (67 percent) ranged from $150,000 to $500,000, with an average deal size of $341,800.10. Keep in mind that deal sizes vary from country to country based on start-up needs and local costs.

Research limitations

The demand for angel investment—especially syndicated deals where angels invest collectively—increased with the explosion of information technology in the 1990s. The angel industry began to formalize in the U.S. and Europe around this time, which has been well documented by researchers. Unfortunately, research has been limited in other regions of the world. Even though the practice of angel investing is found across Africa, Asia, the Middle East, and Latin America, much of it is informal or has low visibility, and angels are very private about their investments.

In what industries do they invest?

Angels typically invest in a wider range of sectors than VCs, not necessarily limited to technology intensive companies. Research from Australia, Canada, Europe, New Zealand, and the United States highlights the popularity of investments in information and communication technology (ICT) start-ups, which account for anywhere between 20 to 50 percent of all deals. This is due to the attractiveness of such deals: relatively low capital investments and high profit margins, which result in higher potential returns on equity.

Investments in biotech and health companies are also common (roughly 20 to 30 percent of deals), as well as investments in clean tech, manufacturing, and finance.

The angels interviewed for our research invest in similar industries, but also diversify into other areas such as tourism, agriculture, and social marketing. Many cashed-out entrepreneurs who became angels expressed enthusiasm to invest in industries such as ICT and clean tech, but commented on the low number of good deals in developing markets, leading them to explore other options.

What can angel investors offer entrepreneurs?

Angel investors are typically experienced professionals who can offer wisdom and guidance to the entrepreneur and have the patience to wait for normal company maturation. Research shows that entrepreneurs value the expertise and mentorship that angels provide as much as, if not more than, the financing itself.

Angels can facilitate new business connections that help start-ups grow, and they can offer insights based on deep knowledge of an industry. They provide support and motivation to entrepreneurs to persevere, when launching and growing a business becomes very challenging.

New businesses are an important engine for jobs creation. Angels play a significant role in helping new businesses get off the ground. Research in the U.S. indicates that start-ups funded by angel investors provided about 274,800 new jobs in 2012, or about 4.1 jobs per investment.

Unfortunately, the developing world has a much lower rate of business start-up creation and growth. In sub-Saharan Africa, the Middle East, and North Africa registrations are 15 percent less per capita than in high-income countries. However, the potential developmental impact of a more dynamic business start-up market could be … (READ MORE)

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This article originally appeared at VC4Africa. You can also follow them on Twitter. Copyright 2014. Author: Laura Catherine Baker