African tech startups are still starved of early-stage funding in spite of the general increase in investment into the sector, but locally-based angel networks are quickly filling these gaps.
African tech startups smashed funding records in 2018, with 210 startups securing over US$330 million worth of investment, according to the latest African Tech Startups Funding Report compiled by Disrupt Africa.
Yet the amount of that funding that goes to very early-stage startups is still very low, meaning a sizeable funding gap is opening up even as investment figures on the continent soar. That is according to Tomi Davies, angel investor and president of the African Business Angel Network (ABAN), in a recent blog post.
“There is still a big gap when it comes to capital for getting started. Venture capitalists have minimum investment ticket sizes that can choke the life out of most newborn enterprises,” Davies said.
This is a gap that can be filled by angel investors, and ABAN is hard at work convening angel networks across Africa. The basic concept is to bring together high net worth individuals in different markets and have them pool funds and expertise to make investments in early-stage companies. The Lagos Angel Network, set up in 2012, was an early forerunner of a group of leading networks that also includes Cairo Angels in Egypt, Jozi Angels in South Africa and the Viktoria Business Angels Network in Kenya.
The impact of angels
One of the more active groups on the continent is the Johannesburg-based Jozi Angels, run by Abu Cassim. The network currently has 24 member angels, who in total have made 38 investments.
“We’ve invested across South Africa, primarily in tech solutions, but we have also invested in non-tech businesses that are pioneering their fields,” Cassim said.
It is about more than just money, however. Cassim believes angel investors bring three things to the table: knowledge, networks and capital, in that order of importance.
“Early discussions are often centred around capital, but it is important for any angel to contribute to a business non-financially. Experience has shown us that knowledge aids decision making in the startup, while the angel’s networks open doors and provide access to market. Angels also form part of the funding system and are a deal flow channel for later stage investors such as VCs,” he said.
Stephen Gugu heads Viktoria Business Angels Network, which has 30 members and has so far syndicated three deals, with a bias towards the tech space. He agrees with Cassim that angels have more to offer than just funding.
“As Viktoria we want to assist African founders get access to capital and the other benefits that come with angel money – business networks and mentorship. We invest in deals where we have an angel that can add value, either in terms of mentorship or connections to realise business and as such help our portfolio companies to grow,” he said.
Nonetheless, the primary input is cash, and angel networks across Africa are coming with different models when it comes to helping investors put money into startups. There are a number of models that can be used to set up an angel group, most of them detailed in a report by infoDev entitled “Creating Your Own Angel Investor Group”.
The report identifies broadly manager-led groups, and those that are member-managed. There are other forms that can be applied which would borrow from either of these two models.
“The most important item in my view is to ensure that the group has a model that makes it financially sustainable in the long-term,” said Gugu. “Angel investing is a long-term game and you need groups to be able to survive so as to build momentum and eventually play the role that is played by Western groups in their economy.”
Jozi Angels is membership-based, with a requirement on members to be active.
“Other networks are structured as clubs while some are set up as stokvels. Two international trends that I believe we’ll start seeing more of are syndication and full-time angel investors. Syndicates are groups of investors guided by an experienced lead investor. Backers tag along in the deal for investment gain and to learn from the lead investor,” said Cassim.
What does the future hold?
However, these groups are structured, they are clearly part of the future of African tech investments, filling a serious gap. New networks launch regularly, with the help of ABAN, with the most recent launches West Africa-focused, in Mali, Benin Senegal, and The Gambia, for example. There are also groups forming outside of traditional hubs, including the SSE Angel Network, which backs startups in the South-South/South-East regions of Nigeria. All-women angel networks are also launching, like the Lagos-based Rising Tide Africa and Cape Town’s Dazzle Angels.
Yet there is still plenty of room for more progress. Davies says more than half the countries on the continent do not yet have an angel group, something ABAN is working tirelessly to correct.
Cassim and Gugu believe the space will further develop as existing networks begin to mature and grow.
“Angel investing remains fragmented with individuals making investments privately. Diversification is critical in this space and to build a portfolio of 20+ startups angels will have to syndicate. Angel investing is a relatively new concept. As the ecosystem matures we’ll start seeing more people and more syndicates backing young startups,” Cassim said.
Gugu, who expects successful founders that have exited their businesses to start becoming angel investors themselves, agrees, saying the successful launches of the first angel groups will help catalyse the whole ecosystem.
“We believe these initiatives offer a way to get started for many angel investors through training, deal flow generation and networking. Many of the groups are less than three years old, as they mature they will catalyse angel investing across the continent,” he said.