Times are certainly changing. Markets around the world are becoming more integrated, globalization is shrinking 3,000 miles to 30 miles, new fields in finance are offering investors financial and social returns, and T.V. shows like Shark Tank have made angel investing all the rage. While these changes on their own grab headlines, their convergence is creating some excitement in countries like Ethiopia.
In December 2015, the Renew initiated Impact Angel Network (IAN) closed their seventh investment in Ethiopia, and became one of the most active investors in the country. The network has lined up a good pipeline for 2016, and soon they will be launching into their next country. Here’s a look into why the IAN started and how three major trends are creating the perfect storm for a new era of African entrepreneurship.
Trend 1: Angel Investing is the New “VC”
High net worth individuals (HNIs) around the world are using their personal wealth in new ways. HNIs are increasingly making their own investments directly into companies, versus outsourcing the job to professional money managers. While professional money managers still oversee the lion’s share of the world’s wealth, the rise of discount brokers, legislation like the Job’s Act, and T.V. shows like Lion’s Den, The Profit and Shark Tank are alluring the wealthy and risk tolerant to venture out to make direct investments into promising companies. Angel investors and angel groups are on the rise, and they are starting to catch up to the deified venture capitalist firms.
According to Josh Lerner, a professor at the Harvard Business School, “one of the big changes in venture capital in the last decade is the rise of ‘personalized’ entrepreneurial finance.” This includes individual angel investors, angel groups, and even crowdfunding platforms, which are slated to account for more investment money than venture capital in 2016 (increase from $880M in 2010 to $34B in 2015). And while venture capital firms historically have invested larger amounts of capital than angel investors, they invest in fewer deals. For example, in 2014, venture capital firms invested $48B into 4,356 deals, or about $11M per deal. While angel investors invested $24.1B into 73,400 deals – which equates to approximately $328K per deal. Jeffrey Sohl of UNH’s Center for Venture Research states that “angel investments continue to be a significant contributor to job growth with the creation of 264,200 new jobs in the United States in 2014, or 3.6 jobs per angel investment.”
Trend 2: Impact Investing is on the Rise
In tandem with the increasing popularity of angel investing, the impact investing movement is gaining momentum among individual investors. For those who are unfamiliar with the term, impact investing combines attributes of philanthropy and investing. It operates under the philosophy of “doing well, by doing good”, wherein investors seek a double bottom line – financials returns and positive social impact, and sometimes even a triple bottom line – adding in environmental benefits.
Impact investing covers a broad spectrum of financial offerings, from Environmental, Social and Governance (ESG) screened securities, to donor-advised-funds, to direct investments in emerging economies. While the current impact investing market is growing – with more than one out of every six dollars under professional management in the U.S. invested according to sustainable, responsible and impact investing (SRI) strategies – this number is expected to grow in the coming years.
Trend 3: Africa is the Next Big Thing
It’s hard to deny that Africa’s economic outlook is improving. The continent is rich in natural resources, human capital and is home to some of the world’s fastest growing economies. In fact, Africa’s GDP is expected to grow at a rate of 5% in 2016, up from 3.5% in 2013 and 3.9% in 2014. Several of the continent’s countries have a growing middle class that is expected to continue to increase, just as real incomes (and demands) rise right alongside it.
During this time of expansion, small, mid-size and large companies across sub-Saharan Africa are sprouting up to meet said growing domestic and international demand. Per the IMF, “the same crucial developments that presaged the arrival of institutional financial investors in emerging markets in the 1980s are taking place in parts of sub-Saharan Africa today—growth is taking off, the private sector is the key driver of that growth.” Local companies are starved for capital as their financial markets scramble to keep up.
Bringing it Together – The Perfect Storm
At the intersection of these three trends we are seeing the emergence of a new financial actor on the continent of Africa; the Impact Angel. A swell of interest from HNIs, millennials, wealth managers and family offices is causing many to shift their charitable giving and philanthropic strategies into high impact investments. At RENEW, we believe these trends will continue to unlock opportunity for once capital starved companies in Africa to attract much needed growth finance from these investors.
But a word of caution. First, to companies seeking capital from impact angels; do not be fooled into thinking these investments will save you, or are just another form of charity. Investors worth their salt will expect you to deliver, and will likely take a board seat and closely monitor the company’s performance. If you want to bring on an equity investor, then you must understand the basics of private equity, read through the legal documents and become well acquainted with your investor. You should also realize that you are now a spokesperson for your country. The world is excited about Africa’s growth, but that excitement can quickly turn. When you join hands with an investor you are entering into a “business marriage” with someone. Your cultures may clash, your styles will be different, and there will be things about your investor that may make you crazy; but like any successful marriage, you must be dedicated and continuously work towards common goals. Trust will be the foundation of your relationship, so do everything in your power to build and protect that trust.
Next, we investors must also be wise and cautious. Investing in unfamiliar parts of the world, like Ethiopia, (where legal and regulatory systems are under developed and unpredictable) exposes us to considerable risks. Don’t let your heart leave your head in the clouds and your wallet in the gutter. We must perform careful due diligence (that can last weeks) on every investment, and should consider using a trusted local partner who understands the complicated business environment to oversee the diligence, structuring, closing and management of the investment. Or, you can always move to the country and do it yourself. Aside from either of these routes it’s Russian Roulette. Sure, there are some renegades – I have met a number of them on my travels – that are doing very well with a light touch. But, I consider this the exception versus the rule. Thankfully, frontier markets like Ethiopia, Kenya and Rwanda are becoming more accessible to investors through international firms that are opening offices in these opportunity rich countries. Also, be sure to manage your expectations. The statistics are against us – roughly 50% of angel-backed companies go out of business. So manage your expectations. In summary, do your homework and know what you are getting into – if you come in with your eyes wide open, then I believe being an impact angel can be very rewarding.
At RENEW, we believe that convergence of angel investing, the rise of impact investing and the African renaissance will continue to create impact angels who want to invest in and grow high quality entrepreneurs in Africa. We believe there are many hard working, ethical and determined entrepreneurs in Africa that not only want to make a profit, but strengthen their economies and help create a new story for their countries. We believe that Africa is filled with opportunities and, over the coming decades, Africa will emerge into a economic powerhouse. And we at RENEW, the Impact Angel Network and all of the other visionaries in this space can be a part of this chapter of history.
By Matthew Davis of VC4A