Funding small businesses, particularly technology start-ups have become a growing exercise of many people. The reason is simple, technology has become the way we live our lives. The digital world is no longer a place we go to, but the place we live daily. Hence, technology start-ups designed to provide services that are convenient and affordable have become the toast of many investments.
Over the years, a significant part of funding for tech startups has come from a segment known as Angel Investors. An angel investor refers to an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels. The term was originally used to describe investors in American Broadway shows.
Angel investing has grown in recent times as an increased number of individuals seek better returns on their money than they can get from traditional investment vehicles. An angel investor is not necessarily a millionaire; they could be middle income earners just looking for better returns on their money. Across Nigeria and Africa, there has been an increase in the number of these individuals under different umbrellas including Lagos Angels Network in Nigeria, South African Business Angels Network, Viktoria Business Angels in Kenya, Cairo Angels in Egypt, Kampala Angel Investment Network in Uganda, Angel Investors of Mauritius and over fifty others.
Tomi Davies, President of African Business Angel Network (ABAN), a pan-African association that promotes the culture of angel investing on the continent, recently shared strategies that will help new angel investors seeking to invest in African tech start-ups.
Educate yourself personally
To make any successful investment requires a lot of information. Hence, the importance of education cannot be overemphasised for any potential angel investor. Davies says there is a lot to learn at every process of angel investing such as “evaluating entrepreneurs and assessing pitches, carrying out due diligence, valuation, setting your expectations for an investment round, term sheets and deal negotiations all the way through to managing your startup portfolio and exiting.”
Investors do not need to worry as there are loads of learning materials available and people willing to share their knowledge.
Other opportunities exist outside technology
Technology is yet to penetrate the rest of the continent, hence an angel investor may not be able to see all the potential if he or she is strictly looking for technology services for investment. Other opportunities exist that may not necessarily be connected with technology.
Spend less time analysing deals
Davies says too much time spent on a deal can lead to indecision and the risk of missing other “fantastic prospects.”
“Your focus should be on how comfortable you are with the start-ups leadership team and their ability to deliver the results you expect,” he says. “Studies continually show that the three keys to startup success are team, team, team.”
Do not let government disinterest deter you
The authorities in Nigeria and in most parts of the continent are very slow to intervene financially in the growth of small businesses. As a result, most small businesses operate without expecting some form of help from the government. However, the government may start to respond once the company has made measurable level of success.
“A key aspect of Angel investing in Africa is about accept responsibility for this gap in support and providing it to your start-ups when and where required,” Davies says.
Think long term and exit
It is important to think of your investment as a long term adventure but equally critical to consider an exit strategy. Davies describes start-ups in Africa as “gazelles that yield 20 percent month on month growth year after year, not Unicorns.” Investors should never underestimate the amount of follow up and future capital their startup will need.
“Always be thinking about the next round,” he says.
Don’t go it alone
Never undermine the power of local co-investors, especially if they belong to groups, syndicates or networks as investment collaborators. These individuals can provide you with guidance on where to find good venture opportunity and help monitor and evaluate post-funding.
“Join a group, syndicate or network yourself – hunting in packs is always much better as you alone cannot hear, see or know it all,” Davies says.