From our extensive conversations with entrepreneurs and investors, and supported again by our own research polls with the VC4Africa community, we know that access to finance remains a key challenge for unlocking innovation sectors across the continent. Where institutional investors shy from early stage companies we can do more to engage Angels, Seed Funds and early stage VCs.
Small, young and highly innovative firms require debt and equity finance. Institutional investors have a hard time reaching these entrepreneurs and prefer to focus on gains made by backing more traditional business, thereby avoiding the perceived riskiness of early stage companies that lack the required collateral. It can be argued that the ongoing financial crisis only serves to widen the gap as institutional investors consolidate and double down on later stage investments. And it isn’t only about the capital; more importantly entrepreneurs are missing the domain expertise, network and guidance often lacking when sitting across the table from a bank manager.
If there is one prediction for the coming year, it is that we will see more experienced entrepreneurs coming into the picture and getting involved. This is where the space will really start to change. It is precisely these individuals – who have found ways to successfully navigate the marketplace – that have the greatest potential to realize progress for others. And as the code of entrepreneurship follows, a successful entrepreneur turns angel investor when they look to give back with both their wealth and experience. In turn, we will see a growing number of entrepreneurs find not only partners that are willing to back their venture with capital, but the hands on support needed to help make the business a success.
While pension funds and government backed FDI schemes tend to attract the most attention from governments and policy makers, the most important source of external seed and early-stage equity financing comes from these angels, seed funds and early stage VCs. Closer to the business, these early stage investors are less sensitive to market cycles meaning less capital flight when a country or sector experiences political, social or environmental disruption. Moving forward, much more will have to be done to support these investor groups if we expect to successfully mobilize their capital, knowledge and network.
To further engage these individuals, as opposed to losing them to markets in other parts of the world, it is critical we further develop ourselves as a community of entrepreneurs. Without a community of unrelenting entrepreneurs there will be no start-ups or anything for anyone to support. Our partners like MEST, NaiLab, ActivSpaces, GrowthHub, CTIC, Mara Foundation (and the many other tech hubs, incubators and accelerators popping up across the continent), ensure local innovators have a place to develop their ideas and learn from their peers. They are important nodes in connecting communities locally and as part of a pan-African ecosystem. Initiatives like DEMO Africa work to further create the awareness that is needed to get even more people and organizations involved. It is important that stakeholders find a way to engage these efforts as they come online, this includes not only the entrepreneurs and investors, but the local companies, multinationals, academic programs, NGOs and governments as well.
In addition to growing the number of quality ventures, part of the challenge for Angels is getting the support structure in place i.e. what most VCs are able to finance by having a larger fund. Many Angels operate as individuals or in small groups. There is no secretary, in-house lawyer or someone to screen the hundreds of business plans. This is where VC4Africa works to improve the discovery process and lower barriers to investing in early stage companies. It is about organizing ourselves as a marketplace. As more members join the network it gets easier and easier to achieve efficiencies of scale. Already, firms have joined the VC4Africa community and can offer support in both due diligence and when closing a deal. Increasingly, angel investors are able to collaborate and pool their resources.
Two years ago, we were not yet able to talk about these things. Don’t get me wrong, there is an incredible amount of work to be done, but the space is changing faster than ever before. The coming year will bring many new developments, milestones and progress as Angel investing in Africa takes root 2013.