An angel investor is any affluent individual who invests their own money into early-stage startups. Compare this to a venture capital (VC) investor, who is employed by a company to invest the money invested in them by other people and institutions.
Despite their deep cash reserves, institutional financiers in the developed world have traditionally been unwilling to invest in early-stage African startups, because they think that their future, and potential to scale, is uncertain.
In comparison, early-stage investors face two kinds of fear: investing in startups that fail to launch, and the fear of missing out on startups that really take off.
The root cause of this fear is exactly what makes startups such an attractive asset class. Startups that take off do so very fast, so investors cannot afford to wait. By the time an early-stage startup has become a success, it’s already too late to make a significant profit.
International investors often overlook the intricacies of Africa, as well as the richness of its diverse business ecosystem. For this reason, local investors are crucial for those early-stage startups that are not yet making headlines in the international tech media.
Africa’s entrepreneurs live in a less mature and less supportive ecosystem than their counterparts in San Francisco, London, or Tel Aviv, resulting in longer times for financing. “No doubt, Africa has potential, especially with its attractive markets,” writes investor Maurizio Caio, “but local funding is crucial to boost the confidence of international investors.”
The typical local investor is taking bets on entrepreneurs with checks of $25K to $50K. In addition to understanding the motivational why, we should talk about how angel investors position themselves and operate.
Most angel investors are committed to mentoring up-and-coming entrepreneurs towards success. Angel investing requires time, effort, resources, and networks, Their genuine desire to see your startup take off is aligned with their opportunity to make an outsized return from a bet traditional investors wouldn’t make.
Local investors typically seek opportunities in their sectoral and geographical fields of expertise, allowing them to be “hands-on” and provide guidance, resources, and networks to help your startup succeed. It is essential for an angel investor to understand the applicability of your product to your chosen market.
Startups should expect angel investors to open doors to corporate finance, but also insurers, banks, telecommunications companies, retailers, manufacturing firms, or whichever companies are able to help startups overcome limits to growth.
However, due to the small ticket sizes compared to VCs, an angel should not expect to receive many rights other than their name on the cap table. Angel investors shouldn’t demand a spot on the board of directors, nor voting rights for their shares in the company. This is why investing through a larger “angel syndicate” can often be a more practical way to approach early-stage investing. It’s the best of both worlds: the power of an institutional investor, with the risk-tolerance and local knowledge of individual angels. A number of such networks exist in Africa under the umbrella of ABAN, the Pan-African network organization for angel investors.
Lastly, early-stage investors and syndicates of all sizes should be able to open doors to later-stage institutional investors, once certain milestones around revenue, transaction volumes etc. have been met. The ability to add value – both financial and non-financial – at the critical early-stage in a startup’s life is a distinguishing feature of angel investing.
On a continent in which startups are fast becoming empowered, founders are learning to say no to local investors that do not bring more than money to the table. For this reason, investing in African startups is no longer a game of “first come, first served”. Good early-stage companies need good investors, which is why we work to match up founders with the investors who’ll take them to the next stage on their journey to growth and scale.