THE ADVENT OF ANGEL INVESTORS

As mentioned earlier, the failure rate of start-ups in Nigeria and the world over are on the high side. Though, the rate varies in different regions and countries. Whichever way we look at it the failure rates are high. Many studies have stated that only one in five new businesses survive after about five years of operation or even less. That’s a 20% success rate. There are many reasons why new businesses fail, even though some are properly funded. In a recent online poll conducted by the popular blog; www.vc-4africa.biz, it found that the foremost reason why start-ups fail in Africa is “poor business execution” by the entrepreneurs.

The second major cause is “lack of funds”. In that list also included unwillingness to adapt to changing market conditions, attributed to lack of experience and qualified staff. Also, is the excuse that the business is going too fast, the prepotency of single founders, no viable market and unfair competition among others are the common excuses. Typically, in Nigeria, the high cost of production could be caused by poor infrastructure. A number of these problems could be overcome if the founder of the start-ups had some form of guidance at the early stage. Someone or a group of people to provide advice, contacts, expertise and of course, finance, but who are these set of people?

The Angels:

Angel investors or business angels, whichever, refers to a group of individuals who have “free cash”, have been successful in their businesses and are looking for opportunities to make investments in start-ups or early stage companies.      They provide not just capital, but also their networking business mentoring and guidance to young management teams, hence the term “angles”. They play key roles in several developed economies of the world, because they serve as a bridge between when the business owner is starting, with little experience, capital or assets, to when he or she has perfected his/her business model and has started generating some cash flow. The angels get in early enough, and take a risk on the start-up company in return for a stake in the company when or if they become successful. However, because of the great amount of risk they are taking, they will be expecting above average market returns.

The phenomenon of angel investment actually started in the 1900s in the USA as a number of Broadway plays were financed through this medium. In the late 1900s the concept of angel investment became organized with the brand of angels in Silicon Valley. Since then institutional angel investment is becoming prominent the world over. This form capital needs to be taken seriously because even when bank and private equity firms scaled back their support to companies during financial crises, angels still kept on investing, thus angel investors are less sensitive to market cycles.

The small business association (SBA) of the USA estimates that about 250,000 angel groups fund about 30,000 companies in a year, investing $20-50 billion per annum. This amount is actually higher than the estimated funding that comes from the venture capital industry annually. At times angels do not usually know the individual companies they are investing in, but do see the prospect of a strong business, and want to help that the company get ahead.

Nigeria and Angel investments:

Whiles they are few formal angels net-work in Africa, some people have been supporting firms or companies on individual basis, example, the “Nollywood” movie industry in Nigeria. Though not formalized, movie producers approach wealthy individuals who provide them with money, distribution net-works and sometimes dictate the movie stars they want to see in the movie. This process worked for both the producers and the angels. The movie producer was able to get funding for his project which he couldn’t get from any other source, even the banks. And the investor gets above market returns for his investment. This practice exists in various industries and countries in various forms and guises.

However, in order for Nigeria to get the best out of this frame work, there is the need to put some structure to angel investment. One possible reason for the lack of growth or openness about this form of investment in Nigeria could also be that the traditional angel investors have been private about their investments. Be that as it may, there is the possibility that this asset class offers numerous advantages for Nigeria and other African countries, investors and the overall entrepreneurial ecosystem.

90% of the USA investment resources are from the private sector. There are private investors ready at all time and willing to fund new projects. Unlike in Nigeria, we see on daily basis young Nigerians showcasing stereo-type inventions and brilliant ideas of new products that can command market customers in the news media, you see the broadcasters compelling investors to invest in the ideas, all to no avail. The media companies in their efforts also televise the programs often, compelling investors and even the government to buy into the young ideas. But unfortunately many young talented brains in Nigeria with their innovations have gone down the drain for many years, mainly for lack of start-up funds. Eventually, and of course, the invention will be silenced after no one offered to come forth to invest in their new ideas and products. Unlike in the USA, the government had already made provisions for funding start-up businesses of all sorts.

CHALLENGE OF THE ANGELS IN NIGERIA:

The challenge for policy makers is to device ways to spur this asset class for the benefit of investors and entrepreneurs in Nigeria. The angels do often worry about getting the right kind of deals or entrepreneur to back. If there are no budding start-up firms to support, then there is no need for angels. Some countries or region suffer from the lack of entrepreneurial culture. Another problem could be appropriate valuation from both the prospective investor and the entrepreneur’s point of view.

Further, because the angel’s investing space are loosely organized and a bit secretive, entrepreneurs have little remedies for angels that have turned to devils. There are cases of rogue investors, who have tried to scheme of muscle out the start-up companies when there is the prospect of a success in the company. Also, because of the limited information about angel investors in Nigeria, prospective entrepreneurs struggle to locate these angels, and worse still they don’t know what these angels are looking for, or how to make themselves attractive to these prospective investors.

Various entrepreneurs would need to find which problem they are up against and come up with appropriate measures to tackle them. An added benefit is that this creates a whole new industry on its own. There would be the emergence of a financial advisors focused on angel investments. There would also be lawyers working on due diligence for angels. There would also be incubators and accelerators springing up to make these start-ups investment ready. It will spur the venture capital and private equity industry as they will be looking to snap up companies that angels have already assisted and established.

THE FUTURE OF ANGEL INVESTMENTS IN NIGERA

Whilst there is a role for the government to play in ensuring that the appropriate frame work is in place, the future and growth of this class of investment is depended on the angels themselves by making themselves available.  Because angel investors are not much interested in making profits, they realize the social benefits of what they do. By their nature, angels are individuals that have attained some form of success and are looking to give back to society, but would like to give back in a structured manner to support entrepreneurs who might be in an industry they’ve played in before or in a different industry. They have free cash, and are bored with just sitting down on their experiences and money, but would like to mentor others, offer advice, allow people to learn from their mistakes and experiences and hopefully create strong companies in the process. The benefits of this sort of investment are both economic and social in nature. Practiced professionally, angel investment will offer a longer term return above inflation, and help to reduce some of the unemployment problems ravaging our society. As private capital begins to build up in the Nigerian and African economies, and more people are interested in making social impacts, we should see the growth of angel investors who will provide both capital and offer board management and support. Then with appropriate government support, there should be an explosion such that budding entrepreneurs do not need to look to heaven for angels but can be sure that there is an angel around the corner willing to help them on their entrepreneurial journey. A stock broker or banker could be contacted to get access to an angel investor.

Then comes the Nigerian factor, as some Nigerians would say. It is a common issue that Nigerians are good in outsmarting others once there is an opportunity. However, the Nigerian factor or schemers are those people who are still looking for means to attain a success level without proportionate input, and those whose kind of successes are not gotten in a proper means with its integrity. Angel investors are real. We can find some of them in the movie industry in Nigeria today. All we have to do is get the real angel investor so as to get that which they can offer to your businesses.

 ANGEL INVESTORS AND NIGERIAN START-UPS

A lot has been taking place, especially in the Nigerian technology innovation sector. Youths and young talented brains in the technology industries in Nigeria and Africa as a whole are currently making waves in technology innovations.

The Nigeria youths and other African countries are rising up to the challenge the technology world poses today by creating different payment platforms and other areas of development and innovation which has attracted millions of dollars as investors  funding for their innovations.

The opportunities the Nigerian financial institutions failed to exploit are now being exploited by foreign investors. The dividend of such investments are seen over the few years back till date, that these foreign investors are still looking for more opportunities and start-up businesses in Nigeria and Africa as a whole to invest their funds.

The Nigerian innovators have developed different platforms of payments basically on different aspect of our economy and institutions of work. These to mention but few are found in the payment platforms in Insurance companies, payment platforms for retirees, payment platforms in the communication sectors, and platforms in the banking systems, trans-border payment platforms, on online securities and a host of others.

Some few years ago, it was rare for African businesses to raise money, and venture capital investment were infrequent, if not completely absent. The common practice was to save for years, before starting a business, and it was very difficult to get a loan from a bank or family and friends, especially, when you are looking for a large sum of money to start a big project.

However, that has change, and in 2021, African start-up businesses raise approximately $5b from investors outside the shores of Africa, and it increases as the year goes by.

But why do these start-ups raise money?

A significant reason is to facilitate growth. By their nature, start-ups are designed to be fast-paced environments, but that’s not all, every one involve expects a start-up growth to be quick.

Between marketing, product development, and having a team, start-ups often need more money than the founders can put up. In exchange for an investor’s money, they give up a part of their company. This is equity financing and means that the investor co-owns the business. However, unlike a loan, the investors could lose all their money if the company fails.

Pre-Seed funding

The pre-seed funding round is considered as unofficial by many people, especially outside Africa. However, it is common to see African start-ups refer to the first round of funds they raise as a pre-seed round.

Your start-up probably still’s an idea at this stage, usually in its first few months to a year. You may not have evidence to prove that there’s a market for your product or even a team.

Investments gotten at this stage is often use for market research and building a minimum viable product (MVP). Unless you’ve previously succeeded at a start-up, the type of investors you’ll get at this point will often be limited to friends, family members and investors. MVP is when your business is first introduced into market system, to determine how customers will react to the new product.

Pre-seed rounds are typically below $1m, but numerous African start-ups recently have raised pre-seed rounds that are above $1m.

Seed Funding

At the seed funding stage, your start-up is ideally more matured than at the pre-seed stage.  By this time, you’ve moved from just an idea into a product with some traction. Traction here is when customers have started appreciating the product in the market by making some purchases.

The level of traction will often be determined by the industry where your start-up plays and could be anything from revenue to the number of users. Most start-ups will raise a seed funding round within their first three years of operation.

A report by Briter Bridges and Catalyst fund; puts the average seed round of African start-ups at $1.7m compared to $4.6m and $5.7m for Indian and Latin American start-ups respectively and recently.

Series A Funding

Many start-ups do not go beyond the seed funding stage as the founders may believe that what they raised is enough to get them started. There’s no specific stage at which start-ups raise series A, but most will do within their first 5 years.

At the series A stage, you’ve proven that people like your business and that your business model works.  Now, it’s time to scale, and you may be looking at expansion into new territories or significantly increasing your customer base.

Consequently, you’ll like to raise large amount of money. From recent findings, series A deals in Africa ranged from $225,000 to $200m, while the median deal size was $8.3m.

Series B Funding

From series A onward, there are very little difference between the rounds. The funds are raised for growth and usually involves plan for expansion outside their primary market. Start-ups frequently fund their intending to acquire other start-ups as part of an expansion strategy.

However, we have seen African start-ups make acquisitions even before raising series A round. The sized of the round is also large, and for African start-ups it ranges between $2.3m and $110m. Start-ups are ready for their series B rounds at different times, which could be determined by their industry. Often start-ups will be ready for a series B within 7 years of opening up.

Series C Funding

Very few companies get to raise beyond a series B round. Ideally, a start up at the series A round has proven its business model and hit specific milestones that show progress. A start up is ready to go public or even get acquire from series C onward.

At series C stage, investors make decisions based on available data provided by the business. It is also common to see bigger investors, private equity firms, and hedge funds get involve.

In some cases, a startup may still raise beyond series C. One reason for this is that, they have discovered new opportunities for growth and need some injection of capital to get there. Another reason could be that they have failed to reach certain miles stones, in which case they may raise funds but at a lower valuation than they would have ideally gotten.

What kind of investor do you need?

If startups are vehicles, investors are the filling stations providing them with the fuel needed to drive growth. However, different types of investors exist for different stages of a start ups funding journey.

Some investors choose to invest at the early stage (pre-seed to series A), where there’s greater risk  but also greater reward, while others only invest in later stages, (series A and above). Generally, you’ll have friends, family, angel investors, venture capital firms, private equity firms, hedge funds, and development organizations worldwide to choose from.

Angel investors usually invest at the early stages when the start-up is probably just an idea on paper and are usually individual investors. There are also angel groups that invest together, and super angel investors who can put up significant sums, often tens in millions. It’s also crucial to understand that most investors have a thesis that guides their activities. Some investors are driven by a gender or industry lens, and you’ll boost your chances of success by understanding an investor’s thesis.

To be Continued