Contributed by Tomi Davies, President of the African Business Angel Network
The African Business Angel – An Early Stage Investment Opportunity
Last year everyone was curious about Mark Zuckerberg’s visit to the African continent, wondering why he was there and what he meant when he said “The future will be built in Africa”.
Well first it’s the people. According to a report by the African Development Bank (AfDB), UN Development Programme (UNDP), UN Economic Commission for Africa (ECA) and Organization for Economic Cooperation and Development (OECD), with 200 million people aged between 15 and 24 (a figure expected to double by 2045), Africa has the youngest population in the world.
Then there’s the economy. Conventional wisdom documented by the Economist and Time Magazine now has it that Africa went from a “hopeless continent” in 2000 to “Rising Africa” in 2012 and an economy with a 5% GDP growth rate in 2016. The continent’s changing economic fortunes have been in a large part due to its rich natural resources and youthful human capital driving the private sector in spite of historic public sector challenges.
However, it’s really the entrepreneurial spirit that’s driving the changing narrative. The African early stage investment ecosystem today is a dynamic cocktail of young entrepreneurs, hubs & accelerators, angel & venture capital investors, development institutions, professional service providers, networking & demonstration events. The recent emergence of local angel investors, syndicates and networks is a key addition and notable contributor to this ecosystem.
A 2016 study by VC4Africa the largest online community of venture capitalists, angel investors and entrepreneurs in Africa showed that early stage African companies are securing increasing amounts of investment with both revenue and team size continuing to increase. As these enterprises formalize their operations they are creating meaningful employment opportunities for their fellow citizens and contributing to the tax base of local governments, which in turn increases their ability to invest in infrastructure and social services. This becomes economically critical when considering the fact that over 40% of the Sub-Saharan African population is under 14 years old. So, in more ways than one, the future of the continent will be shaped by the continued success of its entrepreneurs and their enterprises.
The African entrepreneurial base and early stage ecosystem has dramatically grown over the last few years, and the quality of the ventures being created have also improved. These key factors have resulted in some key trends that are considerably influencing the African early stage investment landscape.
The first of these trends is a growing interest from African diaspora to invest in startups in their country of origin. African Diaspora entrepreneurs who run businesses in their destination countries are increasingly setting up businesses in their countries of origin as well. In addition, a significant number of people who are not entrepreneurs in their destination countries are using their experience and skills to start up new commercial ventures in their countries of origin. In each case, there are multiple motivating factors.
Setting up business in their countries of origin enables Africans in diaspora to profitably transfer the knowledge, skills, experiences and opportunities gained in their destination countries. These businesses also provide vehicles through which the diaspora are starting to make substantive contributions to innovation, production and development in their countries of origin. In addition to the jobs being created in the local economies, the profits accumulated enable these investor entrepreneurs to lead a better quality of life than they would otherwise be able to in their destination countries.
Another key trend is the increasing number of business professionals in Africa that are turning into angel investor locally and contributing to the development of their respective countries. While there is still much work to be done to educate potential angel investors on the concepts and best practices of early stage investing, according to the African Business Angel Network (ABAN) “2016 was a firm step in the right direction for angel investing across Africa, and the level of activity suggests the angel investing landscape has come-of-age on the continent” as the number of angel groups in Africa almost doubled from 25 at the end of 2015 to 40 spread across 25 African countries by the close of 2016.
This growth in business angel activities was highlighted by the Lagos Angel Network (LAN) of Nigeria introducing syndicated “Deal Days” and launching of the South African Business Angel Network (SABAN). Discussions of the “African Opportunity” at key global events and support from critical global institutions such as AfDB, World Bank and EIB for early stage investing in Africa have also increased.
African policy makers are yet to introduce incentives for angel investing but when compared to the Europe and US, angel investors in Africa need relatively little capital to become notable players in the early stage investment market. This presents a real opportunity for new and small players from the US and Europe who relocate to or focus on the African early stage market to have a superior market position.
However, these international investors must be cautious as making investments in unfamiliar environments can be extremely risky. It is strongly advised investors co-invest or at least get the support of trusted local partners when making investments in early stage African companies. Local partners especially active business angels, syndicates and networks will be aware of the prevailing business environment and can help oversee the structuring, management, diligence as well as the closing of investment deals. They will also be critical resources in the subsequent monitoring and evaluation of the investments performance and growth leading to exit.