Management Consultant Carol Musyoka examines the Regulation on Angel Investment in Turkey. Could African governments support angel investors in the same way?
In June I attended the G-20 Global Partnership for Financial Inclusion, which held a workshop on Financing Entrepreneurship Innovative Solutions in Izmir, Turkey. Turkey currently holds the G20 Presidency and therefore its government played a pivotal role in the organization of the successful workshop. One of the panelists was a well-known Turkish entrepreneur, angel investor and author – Baybars Altuntaş – who impressed the audience with his vocalization of tax incentives that the Turkish Government provides to angel investors. I pulled Baybars to the side during a coffee break and asked for more details.
Once a person has registered as an angel investor in Turkey, they are allowed to net off up to 75% of their investments in start up companies against their income tax payable in the year. In other words, a tax holiday of up to 75% of your investment! Baybars added that angel investors tend to get together and pool their funds to reduce the risks as the success rate for their investments was only typically 10%.
“Why would one invest money in start ups if only 1 in 10 initiatives succeed?” I quizzed. Baybars smiled the smug smile of the wealthy and responded: “Because the returns from that 10% will make you more money than the losses on the 90%!” I walked away, scratching my head and realizing why my risk aversion would leave me a pauper for the rest of my life.
Angel investment support in Turkey
Angel investment is the provision of financial capital to newly established or growing companies which have novel business models or technologies with high potential for growth and profit but are unable to find eligible financing resources to realize their investments.
Recognizing the inherent benefits that angel investors would provide through entrepreneurial seed capital support as well as stimulating economic growth through job and value creation, the Turkish parliament passed the “Regulation on Angel Investment” law in June 2012 and the Treasury promulgated the enabling legislation in February 2013. The rationale behind the law is to promote the financing of small enterprises and entrepreneurs by providing tax incentives to angel investors.
According to a PwC Turkey Asset Management Bulletin, in order to benefit from the tax reliefs provided in the law business angels first have to obtain a license from the Treasury. The business angel cannot directly or indirectly be a controlling shareholder of the qualifying company that it wishes to invest in, neither can the qualifying company belong to his relatives. A qualifying company should, amongst other criteria, be a registered company in accordance to Turkish company law with a maximum of 50 employees and net assets of not more than TRY 10 million (Kshs 354 million).
If the business angels participate in qualifying companies whose projects are related to research, development and innovations then the applicable tax incentive is 100% instead of 75%. This is where it gets interesting. In order to get 100% tax relief those activities have to have been supported in the last five years by the Scientific and Technological Research Council of Turkey, Small and Medium Enterprises Development Organization and the Ministry of Science, Industry and Technology.
The tax reliefs are applicable until the 31st of December 2017 making it a 5-year program, but the Cabinet can authorize the extension of the date by another five years. Shares acquired by the angel investor have to be held for at least two years and the minimum investment is TRY 20,000 (approximately Kes 700,000) and a maximum of TRY 1,000,000 (Kes 35 million) annually.
Angel investment support in Kenya?
So let’s bring this concept home. Imagine if the Kenyan government picked four key economic areas that they wanted to drive with the help of the private sector. Let’s say agriculture, health, technology and education. Then the government wakes up to the fact that they can’t be all things to all people, and that they need to leave the business of business to the best people suited to do it: businesspeople.
They then assume that it’s far better to allow a business person to take a risk on an entrepreneur, as the business person has 1) a much better nose for sniffing out and recognizing good opportunities, 2) years of experience in making and losing money, therefore an appreciation for and recognition of risk, 3) business experience – the kind of which they don’t teach in business school – leading to mentorship, and 4) his/her very own money, which defines their skin in the game.
The same Kenyan government would then ensure that the business angels’ interests are aligned to the strategic objectives of the relevant ministries for the four key areas. Rather than allocate funds in totality to the Women and Youth Funds, re-route a portion of those funds to backstop a tax incentive program for Kenyan business angels.
The benefits hardly merit articulation due to their sheer obviousness. The Government will distribute the risk of repayment from their annual budget allocations to the Women and Youth funds by providing an alternative mechanism for reaching those same stakeholders in a credible, efficient manner that provides the extra flavor of mentorship as well as stronger linkages between the existing business community, women and the youth. Finally, it allows for a wider tax bracket to be formed since, by requiring investees to be formalized legal entities, the investee companies enter into the taxation realm.
It shouldn’t take a little wisdom from heaven to permit business angel investing to become a government driven entrepreneurship initiative.
Carol Musyoka is Founder and CEO at Carol Musyoka Consulting and has over 10 years of financial leadership experience working in Kenya and the United States.