This article was contributed to TechCabal by Rossie E. Turman III, Deangeor Chin, and Waleey Fataiof Lowenstein Sandler, Africa Practice.
Startup funding in Africa increased steadily from 2016 until the pinnacle in 2022. After that, deal volume and deal size decreased significantly. Although the funding picture in Africa was consistent with the global downward VC funding trend, the currency volatility and high inflation in Africa have prompted investors to prioritise "safer investments;" i.e. companies with established track records and/or a US base over African startups, leaving many emerging Africa companies without the capital needed to grow.
Despite the venture capital funding market recoil, early-stage founders in Africa still have options when looking for capital to operate and grow their businesses, including Africa-based incubators, venture debt loans, friends and family rounds, family offices, and angel investing. In this article, we will focus on angel investing, and discuss our views on ways to increase angel investing in Africa's venture ecosystem on a macro-level— while also dispelling some myths about angel investing on the continent.
What is angel investing?
Angel investment is funding made by an individual to a promising startup with high growth in exchange for a piece of the business, often in the form of equity ownership or royalty payments. Although many angel investors are high-net-worth individuals, angel investors may or may not be accredited investors. They are commonly business professionals, C-level company executives, or successful small business owners who have already launched successful companies and typically prefer to invest in the very early stages of a company.
Angel investing differs from venture capital in a few ways:
- Venture capital funds are run by managers who invest other people's money, in addition to their own dollars, while angel investors invest their own funds.
- Venture capital funds most often want proof of concept before investing, while angel investors are more likely to invest in the ideation phase of a company.
- Venture capitalists will often want a board seat and other operational involvement in the company, while angel investors may provide advice and counsel but do not typically require operational control.
Becoming an angel investor in Africa: How to do it?
For those looking to become angel investors in African emerging companies, here are a few ways to get started:
- Get smart about the potential investment. Having a strong educational foundation and knowledge base about Africa, including the specific regions and industries where a blossoming angel investor may intend to invest, can improve one's ability to navigate the business of early-stage investing. This entails staying abreast of emerging trends, recent funding transactions and key terms, recent company exits, and current market dynamics to strategically evaluate startups with worthwhile proposals. Successful investors make trips and spend time on the continent, developing relationships with people and monitoring progress.
- Develop relationships. For new angels, joining angel networks focused on the regions, countries, or industries (i.e. tech or agriculture) in which they intend to invest. Meeting with like-minded investors provides diversified insight into evaluating companies and allows for sharing the considerable due diligence work that large investments require. Further, angel networks have visibility and access to more deals to which most individual investors would not customarily be privy; by joining an angel group, a new investor can vastly expand or diversify their options for investment.
Dispelling Myths: Africa Angel Investing
With the recent drop in Africa's venture capital funding, angel investing is particularly valuable to the continent's ecosystem. Below we dispel a few myths about angel investing in Africa.
- "I cannot be an angel investor because I am not rich."
Angel investors do not have to be high-net-worth individuals; investing in Africa does not necessarily require substantial wealth. Africa offers investment opportunities across different sectors such as agriculture, technology, renewable energy, and real estate. These opportunities come with different capital requirements, many of which are accessible to less wealthy investors. There are many investor groups and angel networks focused on African startups that allow individuals with all levels of assets to pool funds and invest in growing companies.
- "Investing in Africa is only for impact (not financial returns)."
While it is true that funding Africa's venture ecosystem has a positive effect on the related communities in Africa through such benefits as job creation, economic growth, and social development, it is also true that investments in emerging African companies can be extremely profitable. Some examples include Lagos' startup Paystack and Kenya's Sendwave.
- "I can't invest in Africa because I do not live on the continent."
Approximately 140 million Africans live abroad. With its growing population and accumulated savings, this African diaspora represents a significant potential source of investment for the continent. This group's deep understanding of both African and global markets positions them uniquely to bridge gaps and foster economic growth.
The African Development Bank (AfDB) also recognises the critical role of the diaspora in investing in Africa. The continent's lack of financial capacity to build new infrastructure underscores the necessity of attracting investors, particularly those from the diaspora. The diaspora's investment can contribute significantly to the continent's structural change and development in several ways:
- Bridging and building: By leveraging their unique position, the diaspora can build trust and understanding between African startups and global markets.
- Pooling resources: Diaspora funds and syndicates can amplify the impact of investments.
- Mentorship: With global exposure, the diaspora can mentor African entrepreneurs, sharing insights and business best practices.
- Policy advocacy: The diaspora can influence government and corporate policies to create a more favourable investment climate.
- Utilising remittances: A diaspora-ed macro channelling a portion of remittances into startup investments offers a large, novel. and consistent source of funding.
Conclusion
Angel investing offers rich opportunities for both founders and investors to reap ample benefits, as well as make significant and positive impacts on the continent's economic development. More important than the level or value of investment is the willingness of all parties to conduct research, develop relationships, and collaborate with other innovators throughout the startup economy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.