Angel investing is on the rise in Africa
Turning big dreams into reality through entrepreneurial finance
African early-stage investing has been growing tremendously in the last five years. Of the 22 Africa-based venture capital funds, 41% were launched after 2016.* African start-ups raised more than $725 million in 2018 alone across 458 deals from early stage investors**. Recent initial public offerings like the one by Nigeria-based e-commerce company Jumia, catalysed world interest in the African start-up ecosystem and managed to attract more capital for high-growth local businesses than few years ago.
However, this capital is mostly dedicated to venture capital and does not fully address the funding needs of many African startups. More than $133 million was invested by venture capitalists in Nigeria, the top continent’s investment destination, in 2018. In the same period, Lagos Angel Network, the country’s most active network, invested only $1.5 million.***
On one side, promising businesses across the continent keep mentioning lack of access to adequate capital as one of their main challenges during their start-up phase, putting budding ventures in a difficult situation when the lack of seed capital hinders growth and ultimately kills the company. On the other side, venture capitalists and impact investors complain of the lack of an investable pipeline.
Angel investment could solve this problem by bridging the gap between the idea phase and the growth phase of a venture and by helping enterprises fulfil their mission of creators of jobs and innovative solutions for local social challenges.
Angel investments are generally made by high net worth individuals (HNWIs) investing their own time and money in start-ups. Usually they invest as part of a local network of angels. Luckily, Africa does not lack for HNWIs; South Africa alone has more than 40,000 millionaires.**** That number increases if we consider diaspora-based Africans investing in their home countries.
However, there are two main reasons that prevent such people investing in start-ups.
First, most investors already obtain solid financial returns from more traditional asset classes. Second, most of the wealth in the continent does not come from innovative businesses - only one out of the 10 richest Africans made their fortune in a tech-related space.
So, what would be the reasons for HNWIs to consider investing in early stage start-ups with unproven operations, new technologies and limited exit opportunities?
Start with the premise that angels do not have the same time constraints of traditional fund managers. Venture capitalists must return their capital back to their limited partners by strict dates. By investing their own funds, angels can be more flexible and patient. This is very important across all emerging markets as businesses take on average longer to grow and timeline for exits do not adapt well with venture capital funds’ traditional life cycle.
Next, angels cover a wide geographical footprint while venture capitalists tend to invest in urban start-ups. Many venture capitalists in Africa focus on Johannesburg and Cape Town in South Africa, the Nigerian capital Lagos and Nairobi, Kenya. On the other side, angel investors are bringing needed capital to start-ups in smaller capital cities such as Kampala in Uganda, Accra in Ghana and Banjul in the Gambia, helping entrepreneurs build successful ventures and creating pipeline opportunities for larger funds.
Lastly, angel investors are often more comfortable taking huge risks in the short run because they know that in the medium term they will achieve higher returns than those from less risky asset classes. An investor who put just $1,000 into Facebook Inc. at its seed stage would have made $2 million when the company was listed in 2012. This is not an isolated case. Successful African start-ups such as Jumo, Kobo360 and Jumia also generated great financial returns to their angel investors.
The combination of investor education and public incentives for angel investors could drastically increase the number of HNWIs investing in start-ups. This is definitely an area where public- and private-sector actors and international organizations could collaborate.
The International Trade Centre (ITC), African Business Angel Network (ABAN) and the Gambia Investment and Export Promotion Agency (GIEPA) have worked for the past year to establish the Gambia’s first angel investors’ network. The initiative brings together 15 local and diaspora-based HNWIs with a common goal of investing in high-potential local businesses.
The network was launched in July 2019 with a pitch session and a masterclass on angel investing delivered by Adrame Ndione, its new managing director, and Tomi Davies, president of the ABAN. Gambia Angel Investors Network is the latest West African angel investor network, following those established in Mali, Benin and Senegal.
The network provides investments of up to $300,000 and helps develop the nascent Gambian start-up and investment ecosystem by empowering hubs, incubators and accelerators and providing an entry point for international investors interested in investing the country.
* Forbes (2019), Africa Needs More Angel Investors
** AfricaNews (2019), Fanning Africa’s glowing embers of angel investment opportunities
*** Forbes (2019), Africa Needs More Angel Investors
**** AfrAsia (2019), Bank, South Africa Wealth Report