Getting more high-net worth individuals to get together to fund start-ups is one important way that a country can encourage more businesses with good ideas to take off. But, is this form of investment – know as “angel investment” – suitable for developing countries in Africa?
Since the first such network – a Band of Angels – was set up in Silicon Valley in 1994, the idea of angel investment grew quickly. Today the US has more than 300 angel investment groups, and Europe more than 350, while in the last decade a number have arisen in emerging economies too.
South Africa has only one prominent angel group, AngelHub, which was formed in 2011.
However, in February this year, after having made five investments, it was converted into a Venture Capital (VC) fund and renamed AngelHub Ventures, following the injection of capital by former FNB executives Michael Jordaan and Kevin Harris.
The conversion to a VC fund may be indicative of the problems that angel networks face.
AngelHub Ventures founder Brett Commaille said the transformation to a VC fund is proof that the start-up space is interesting enough to attract such investment.
“The only reason you don’t see more angel groups is because of the lack of angel investors who make frequent investments and so are willing to commit the significant time required to keep a group operating,” he said.
In July, the South African Revenue Service (Sars) revealed changes to the VC tax incentive which is hoped will stimulate more investments by VC companies in small businesses.
Commaille said the introduction of tax incentives was one reason why there were more angel investors in developed countries.
“When you change that landscape through the right tax incentives, the numbers grow rapidly and you then naturally have groups of investors forming. Most importantly, a successful group is usually organised and driven by the angels themselves,” he said. The government could play an initial role and then exit. In Malaysia the state’s venture capital agency Cradle Fund helped to set up an angel association – the Malaysian Business Angel Network – and funded it for two years before exiting in April. The association represents angel groups and help train investors and create awareness of angels.
In Chile, the government’s Corfo agency began subsidising the operation of angel groups, paying for managers and operating costs, and funding training.
While eight angels networks in Chile were set up under the programme between 2006 and last year, the groups made just $17.8 million in investments. However in July last year Corfo suspended its angel funding.
A recent combined US and Chile study argued that while Chile’s government had focused on developing a risk capital industry similar to that of the US, it had failed because certain preconditions were not in place to counter Chile’s lack of experienced entrepreneurs and shortage of high-growth potential ideas.
Its small and rather closed goods market also limited the chance of angels seeing a successful financial exit.
Developing countries such as in Africa, and including South Africa, therefore need policies that are designed specifically for the unique environment. Still many question the need for the state to back angel funds, which they liken to helping rich people invest more of their money. But, a 2012 report by Jeffery Sohl indicates that start-ups funded by angel investors provided about 274 800 new jobs in 2012, or about 4.1 jobs per angel investment – not too bad. South Africa, then, should look to foster more business angels.