Angel Investing?

As an African Angel Investor often asked what I do, I thought I should share a quick intro to “Business Angel Investing” which is a high-risk, high-reward endeavour, that requires industry expertise, due diligence and venture engagement for returns. I touch on the core aspects of Angel investing, highlighting its potential benefits and the unique dynamics between startups and angel investors.

Business angel investors (called Angels for short) are individuals providing knowledge, business connections and cash to startups in exchange for equity ownership or sometimes debt. These individuals are often experienced business leaders from corporate, professional services or entrepreneurial backgrounds.

Just like in the US, angel investing in Africa is on the rise and while the total investment amount is still significantly lower, our ABAN 2023 Angel Investment Survey Report shows that Africa’s angel investment landscape is growing with 68 angel networks spread across more than 34 African countries and the diaspora. “In the first and second quarter of 2023, 2058 angel investors invested more than $22.5 million across 408 deals, out of 5,743 applications received, at an average ticket size of $55.2k with average individual investments ranging from $1,000 to $100,000 dependent on country and sector. This suggests an evolving angel investment scene with a growing number of deals and an increasing average ticket size , as noted in the Catalytic Africa model where the average ticket size for early-stage investment has risen from €10–20k to €50–100k due to market changes.

Angels like me typically invest at the early stages, post-minimum viable product or MVP (aka proof of concept) when the startup is just getting its first set of customers. Equity and Convertible Debt were the two most common forms of angel investment agreements until Y-Combinator a few years ago introduced SAFE Notes: a simpler alternative for future equity agreements which is seeing increasing use in various modified forms.

Angels often actively participate in guiding the startup by providing mentoring or advisory services for the founders development and are typically easier to approach than VC firms that are also increasing in number on the continent. Angels working styles with startups vary from hands on Advisory or NED roles providing business advice, recruiting, and fundraising guidance to a totally hands-off approach with infrequent updates on the startups progress.

The average angel return on investment on the continent is about 2.6 times the investment over 4.5 years with only 7% of investments yielding more than 10 times the initial investment. These returns are typically achieved through a successful exit (mostly by acquisition or merger of the startup) or having to write it off as a loss which occurs more often than most would like. Occasionally, buyback of shares by the startup can be an option.

An Angel Investing Syndicate (like our Angels@TVC Labs Syndicate) is a group of angel investors pooling resources for larger investments using a structure that is managed by a syndicate leader who sources the investments in collaboration with members. Unlike the US, not all African angel investors are accredited, but TVCLabs Angels are all self-accredited while ABAN continues the crusade for continental accreditation.

For Startups the benefits from angels is access to the expertise, business networks and funding required for their customer acquisition, growth, and expansion. For angels, the learning from engaging with startups and the potential for significant returns if the startup succeeds are compelling enough benefits in addition to the exposure and satisfaction of giving back.

For founders, Angels are also a lower risk funding option as unlike business loans, there are typically no repayment obligations if the startup fails. Angels also invest their own money, usually in earlier stages and smaller amounts than Venture Capitalists who invest other people’s money, typically in later stages and larger amounts.

Here’s a a quick guide to the angel investing process, which I hope founders will find useful:

Find the Right Angel!

Channels: Use your personal networks, professional networking platforms, and attend startup-focused events to discover potential angel investors.
Considerations: Prioritize investors who provide financial support and also bring relevant industry expertise, mentorship, and networking opportunities with them.

Do Due Diligence!

Background: Investigate the investor’s track record, including past investments, success stories, and areas of expertise.
Alignment: Ensure the investor’s vision, risk appetite, and involvement expectations align with your startup’s goals and needs.

Pitch Effectively

Presentation: Clearly articulate your business vision, value proposition, market opportunity, business model, founding team capabilities and venture growth strategy.
Term Sheet: Aim is to secure a non-binding Term Sheet that outlines preliminary investment terms, such as the amount of investment, equity stake, voting rights, and liquidation preferences.

Negotiate Win Win

Funding: Negotiate a balance between equity and debt funding, considering the implications for future fundraising and control over the business.
Exit: Discuss and align on potential exit strategies, considering the investor’s expected timeline and return on investment.
Board: Clarify the extent of the investor’s expected involvement with the Board (Advisory or Directors) and day-to-day operations.

This guide offers a structured approach for startups to engage with angel investors like yours truly effectively based on established practices in the startup and investment community and emphasizes the importance of alignment between the startup founder’s objectives and the investor’s expectations, ensuring a mutually beneficial relationship.

It is worth noting that each angel investment transaction is unique, and founders should adapt their approach to their specific circumstances, the nature of their startup and the personality of the Angel investing.

I trust this helps and welcome all feedback, questions or comments.

TD