Angel investing in Africa (case study part 2): Screening and structuring the angel investment

Recently M-Kazi closed their seed round with angel investor Jerome Kisting. This interview is the second installment in a three part series (see part 1) and abbreviates from an interview held with Jerome Kisting on Thursday the 22nd of November 2012. 

What is your mindset as an investor going into this process?

“For me it’s about people and about interactions and sometimes things don’t work out. Even when they don’t work out it is still about people and their ability to execute. Sometimes you work on a business model and it just doesn’t work. Luckily it looks like m-Kazi’s model is working and Lino and Nancy are the right people to execute this.”

What triggered your interest in m-Kazi?

“Lino, Nancy and I spoke a lot via Skype and we discussed many things like their vision for m-Kazi, how they plan to execute, and of course the valuation they’ve placed on the business.. It was still very early stage, but they had done a couple of tests where they went out on the street to talk to possible consumers and that was looking positive. So I liked their idea, also because their mobile job search tool is focusing on people at the bottom of the pyramid and trying to provide them with information about jobs. Because I have some understanding of the Kenyan economy, I understood what this could mean as often there’s asymmetric employment information that adds to the whole unemployment issue. There were a lot of compelling issues that made me decide to get involved.

When I look at people I look at the kinds of experiences they had and the kinds of people that they are. I was really impressed by the fact that both Nancy and Lino had done things previously, they had run their own businesses before and that was important to me. It shows that they can persevere, as they have gone through the different stages of setting up a business – and that is usually a very good sign to me.”

The success of any venture falls on the shoulders of a good team. What do you see in the team?

“When I talk to entrepreneurs for the first time I look at the kind of people that they are, I look at what kind of chemistry I have with the entrepreneur. If you don’t have the chemistry, then it becomes very difficult when you end up in difficult situations and there’s for instance little trust between you.

Once I read about m-Kazi, and I had spoken to them in person, I read the business plan and was intrigued. But the conversations I had with them, where they explained the business model and their plans that sealed the deal for me. They also showed a real openness and a flexible attitude to trying things. And now that m-Kazi has launched, there’s a lot of learning going on. They look at things to see if they work or don’t work and then move on to the next thing very quickly. I prefer talking to entrepreneurs compared to reading a lot of information that may or may not translate very well from the page. The business plan provides only a first screen.”

How did you come to terms with the team?

“I had good chemistry with Nancy and Lino from the first Skype call, we hadn’t even met when I invested the first amount. My big philosophy is that I don’t have a problem being a minority shareholder. I don’t need to have a majority stake in an enterprise, in order to feel that I have an influence. I bring in a lot of startup and business understanding and experience and a network to help enterprises scale-up, especially for raising capital.

It is part of the old way of thinking that you as an investor need a majority stake. I believe that if you structure the shareholder agreement in a certain way, and you have good entrepreneurs that are really focused on trying to get the business where it needs to go, you need to keep them incentivized in a big way. They have to feel ownership so they will do what it takes to ensure that the business succeeds. That’s the reason why I don’t like to take a majority stake.

When Lino and I met in Washington we discussed further involvement in their seed-stage fund Innovation for Africa. I’m very interested in what companies they are looking at and what they might propose to me.”

How did you structure your funding?

“I phase the investments based on certain milestones. I’m blending impact-investing principles with some Venture Capitalist principles in the sense that I like to see the approach to burning cash. If your burn-rate is low, then you give yourself a lot more runway.  I saw how Lino and Nancy manage money, how they manage staff and how professional and dedicated they are and then it was easy for me to do the follow-on investment.

Investors should look at businesses in a holistic way, if you are only thinking about making 10x return on your investment, especially in Africa, you are not on the right track. It is a good thing that impact investors and their more favorable term sheets, are forcing traditional investors to take a more holistic approach to investing.”

See the third part of this interview where Jerome speaks about scouting new opportunities and finding companies to invest.