Once an entrepreneur has exhausted their personal funds, they frequently look to family or friends for additional money. This process is always fraught with tension due to the personal dynamics, as well as the challenge that even if the business is successful, such funding will rarely help it grow to the next level. This is the point at which angels are usually called upon as a way to create additional funding. Angels are typically high net-worth individuals who invest part of their capital in seed and early-stage ventures. Such individuals usually prefer to invest in an industry and geography in which they have expertise, thereby reducing their risk. As the numbers of angels have increased, they have recognized the power of organizing in groups. Such groups meet on a frequent (usually monthly) basis to select businesses and then review deals presented by pre-screened entrepreneurs. The decision to invest can be taken quickly, with some angels transferring cash to the entrepreneur within days of the initial meeting. The speed is aided by the dynamics of the group, with angel members typically having a diverse business background and wide range of investing insights.
Entrepreneurs are also attracted to such groups as they can make one pitch and leave with substantially more funds than if they were to have approached each angel individually. In addition, angels will frequently help with business introductions, or serve as advisory board members to the business. Such guidance by people who have a financially vested interest in the success of the business can be much more valuable than highly paid external consultants (which a start-up could not afford in any event).
This angel group model has proven very successful in the United States. According to the Kauffman Foundation, there are now about 300 angel groups in the USA. The average angel group has 43 member angels (per the Angel Capital Association), so attractive start-up businesses can harness the power of multiple investors. Angel group-funded ventures have been shown in recent studies to have a higher probability of success, in terms of both survival and growth rates. Angel group-funded ventures also have more success in finding the additional sources of capital they need as they grow.
In Africa, though there is usually a sufficient pool of high net worth individuals in local business hub cities (professionals, business owners, etc), such groups have not yet taken hold as a credible source of start-up funding. Individual angel investors and small private equity groups are present in many African countries, but this hybrid of structured angel groups deploying funds appears to be part of the “missing middle”. It would seem that the establishment of such groups in business hub cities such as Accra, Nairobi, Johannesburg and others could help close the SME funding gap. Furthermore, a model for matching angel investments by members of such angel groups (by local or foreign non-profits or for-profit seed funds) could achieve a powerful multiplier effect. There are numerous ways to make such angel groups more effective, from deal flow sourcing through due diligence and investment structures. Exploring these options using best practices from the developed world may help create a model for such groups to form and operate. Preparing entrepreneurs by developing a business plan and making practice presentations could also be a role filled by local and foreign organizations that encourage entrepreneurs.
African angel investors organized in such groups would decrease their own investment risk due to the pooling of resources and insights of other group members, as well as have access to more deal flow. African entrepreneurs would also benefit from having an additional funding source and business guidance that is hard to find for many start-ups. Angel groups have also been successful in the developed world in working with universities and colleges in aiding entrepreneurial students with promising ventures, such as the Angel Investor Forum collaborating with the Yale Entrepreneurial Institute on funding for start-ups. This model could be of interest to Africa’s leading educational institutions that encourage entrepreneurship, making it an accessible path for a country’s brightest students.
Creating angel groups in key business locations across Africa could be an effective way to help fund the missing middle and drive a new wave of African ventures for lasting economic growth on the continent.
About the Author: Craig Mullett, a South African & US citizen, is President of Branison Group (a corporate finance firm) and a member of the Angel Investor Forum, based in Connecticut.