While still a niche way to fund a startup in South Africa, angel investors are an important part of the country’s startup ecosystem. These type of investors typically invest in early-stage businesses that are riskier than most funders have an appetite for. As a result, angel investors help to bring to life companies and innovations that would otherwise never be able to secure other forms of financing.
Angel investors are usually high network individuals with an interest in business. Most are former entrepreneurs or business executives who use personal funds to provide capital to startups in exchange for equity.
Angels came in very early in the startup journey and provide support to founders taking their first steps. In effect, they incubate early-stage businesses, not only providing capital, but also market access and mentorship. Angels will often also share their industry connections and their skills and experience.
In return, the startups they invest in must be able to deliver a good return on investment. Investors will expect around 30-40% annual return on investment over a three to seven year period. They will exit a business in three to seven years.
One of South Africa’s most well-known and prolific angel investors is Vinny Lingham. The Silicon Valley-based techpreneur is behind tech companies Yola, Gyft and Civic. Lingham has invested in over 40 companies as an angel.
On his website Lingham gives insight into how he makes his investment decisions and what he has to offer as an angel.
“I look for high quality teams tackling really hard problems in high growth areas. I’m based in Silicon Valley and I get access to deal flow through my relationships with people on the ground. I like to get in early and help founders think through their business from an execution perspective.”
As South Africa’s startup ecosystem has grown, so has the number of active angel investors, said Christopher Campbell, co-founder of the South African Business Angel Network (SABAN) in the article ‘Everything You Have Always Wanted to Know About Angel Investors in South Africa’. Even so, funding from angel investors is still relatively unknown in the country. The practice is more common in developed markets such as the US and the UK. This is mostly because of a lack of awareness among entrepreneurs and perceptions of angel investors, says Campbell.
“Angel investing in South Africa has, for a long time, been viewed as a private club for the wealthy but there are many angel investors out there who support entrepreneurship.”
The practice of angel funding also remains somewhat limited because it’s suitable for a small number of entrepreneurial businesses. It’s therefore important that entrepreneurs understand the funding model, specifically that it’s not charity and that investors will want to see their money back with some returns.
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While both angel investors and VC firms expect significant growth and return for their investment, they differ in a number of key ways. Firstly, VCs are portfolio companies that invest in a number of businesses, with a team making investment decisions. Angel investors are more independent and the individual holds all the power which often means a quicker decision-making process.
Angel funds are often also smaller than VC funds, so they typically invest less money than a traditional VC would. Lastly, angel investors come in at a much earlier stage of business development compared to VCs who wait to see traction and obvious growth potential before they invest.
Below are the biggest benefits that angel investors have to offer to startups.
Ideal for high-risk businesses – Angel investing is especially well-suited to high-risk businesses that are in the very early stages of development. An angel investor who is investing their own funds won’t have the same extensive list of requirements that a VC or traditional bank will have. Additionally, if the venture fails an angel will usually not require any repayment.
Keep control of the business – Angels usually invest small amounts of money compared to VCs, as a result, a startup won’t need to give up much equity ownership. This means a founder gets to keep more control over their business, making this a more attractive investment option for startups in the early stages.
Access to business expertise – Most investors have a business background and often other portfolio companies. This makes them an invaluable source of knowledge and skill for new founders. In addition to money, startup founders should also expect strategic and business development guidance, as well as access to investors’ extensive network.
Read: The Big Questions You Have to be Able to Answer to Get That Funding
Despite the various advantages of angel investing, it’s crucial that startup founders be aware of the following potential risks.
Loss of control – As a startup founder you never want to give up more equity than you have to. Sacrificing too much equity could result in you no longer being the primary decision-maker and losing controlling interest. Giving up too much equity early on can also make it harder to attract other investors further along the line.
Wrong angel investor fit – Getting an angel investor who adds little value to the business besides funding is another potential drawback of this type of funding. The real value of an angel investor is the added benefits they come with such as their network and expertise, which can support your startup’s growth.
The key to accessing funds from an angel investor is to demonstrate that you have a good product, a solid business model and product-market fit.
Investors also want to back a founder who is fully committed to the venture with a strong management team behind them. They need to trust that you have a team that can build a successful business that can deliver a solid return. Some angels will look into your track record as a founder, and any experience with previous startups established.
The team at Angel Hub Ventures, an angel seed fund, advises founders to carefully consider the following before partnering with an angel investor.
“When considering yourself for investment by an individual angel or angel group, ask yourself: are you willing to give up some amount of ownership and control of your company?
“Can you demonstrate that your company will produce a significant return for investors? Are you willing to take the advice from investors and accept board of director decisions you may not always agree with? And lastly, do you have an exit plan for the company that may mean you’re not involved in three to seven years?
Lastly, it’s a good idea to give your angel investor a reason to invest in your startup beyond just money. For example, highlight how your innovation aligns with their personal or professional mission, show off the exciting technology behind your startup or mention if the business can make a difference to the community.
The general investment process differs across investors but founders will generally first have to make their pitch. The pitch needs to explain your startup idea and provide an overview of your business model. The proposal should also outline your monetisation model and show how you plan to scale. Finally, it must provide a viable exit strategy for the investor.
It’s crucial that following your pitch the angel has a full understanding of your business and the opportunity for success. To do so you might have to include supporting documents such as executive summaries and business plans.
During the pitching process business owners should be careful to protect any intellectual property that has not been patented, warns the Angel Hub Ventures team in a previous SME South Africa article.
“It is best not to disclose [your intellectual property] to the angel group when you are first submitting your company for investment.”
Founders can require angels to sign a non-disclosure agreement to protect their confidentiality.
As mentioned above, angel investors remain a rarity in South Africa, despite some growth in the sector. Most introductions to angel investors are still made through professional and personal networks, says Campbell.
“Angels and angel groups are more likely to invest in firms that are recommended by people they know and trust, it is important to network in your community to gain a referral”.
More organisations have launched that connect entrepreneurs, without access to such networks, to angel investors. Below are three angel investor platforms operating in South Africa.
The South African Investment Network
SAIN connects entrepreneurs with angel investors across the globe through a paid membership platform. To raise capital on the platform founders must pitch their startups and outline the investment amount they require.
Their process matches startup founders with the right investor that fits their criteria and needs across all stages of development and sectors. According to its website, over R4 billion has successfully been secured for its members
South Africa’s first female focused angel fund, Dazzle Angels, was founded by Alexandra Fraser, Adi Zuk, Lee Zuk and Charlotte Luzuka. Its mission is to “solve the radical gender inequality in early-stage investment management and deployment”.
According to the website, the organisation consists of a group of 20 angels. They not only invest money, but also “their time, skills and networks” to help build early-stage businesses.
The group’s first investment was in the startup Sorted, a vehicle-licencing platform. Sorted automates the process of licence renewals for both individuals and businesses. The startup was founded by Daniela Morris and Loyiso Bikitsha in 2017.
South African Business Angel Network (SABAN)
SABAN is a pan-African professional association that represents the angel investor community in South Africa. The organisation supports the development of early stage investor networks across the continent. The group considers the angel investor to be vital in helping to launch new startups. Additionally, they see the sector as critical to driving the economy through the creation of wealth and jobs.
SABAN objectives are: