Getting more high-net-worth individuals to fund start-ups is one important way that a country can encourage more businesses with good ideas to take off. In this angel networks or associations can play a vital role – the question is how South Africa can help foster more such groups.
Around the world angel groups or networks are playing an increasing role in getting angels together, ever since the first such network – a Band of Angels – set up in Silicon Valley in 1994. Today the US has more than 300 such groups, and Europe more than 350, while in the last decade a number have arisen in emerging economies.
Because it is common that just one in 10 such investments will generate a significant return, grouping themselves together makes sense as angels can pool investments, contacts and expertise and can therefore more easily mitigate the risks and manage investments better.
'More will follow'
In South Africa between 2000 and 2010 the value of (46 known) local angel deals totalled about R100-million, according to a 2010 survey by the SA Venture Capital Association (Savca) and Venture Solutions.
South Africa has only one prominent angel group, Angel Hub, which was formed in 2011. However in February after having made five investments, the angel group was converted into a venture capital (VC) fund and renamed AngelHub Ventures, following the injection of capital by former FNB bank executives Michael Jordaan and Kevin Harris.
The conversion to a VC fund may be indicative of the problems that angel networks face – particularly those of working closely together for lengthy periods before closing any deals.
But founder Brett Commaille said the transformation to a VC fund is proof that the start-up space is interesting enough to attract investors prepared to commit funds upfront to a fund.
“The only reason you don’t see more angel groups is because of the lack of angel investors who make frequent angel investments and so are willing to commit the significant time required to keep a group operating,” he said, adding that as the sector is seen as more attractive, more will follow.
In July the South African Revenue Service (Sars) revealed changes to the VC tax incentive which it is hoped will stimulate more investments by VC companies in small businesses.
Commaille said the introduction of tax incentives was one reason why there were more angel investors in developed countries.
“When you change that landscape through the right tax incentives, the numbers grow rapidly and you then naturally have groups of investors forming. Most importantly, a successful group is usually organised and driven by the angels themselves,” he said.
Help them set up
So what role can government's play? One is to help set up angel networks and then exit quickly.
In Malaysia the state’s venture capital agency Cradle Fund helped to set up an angel association (the Malaysian Business Angel Network) and funded it for two years before exiting in April this year and handing it to a private sector organisation to run. The association represents angel groups and help train investors and create awareness of angels.
A 2011 study by the OECD says governments can stimulate angel investing by helping develop the entrepreneurial ecosystem by insuring such things as incubators linkages and an appropriate legal and financial framework are in place.
In Chile, the government’s small business agency Corfo began subsidising the operation of angel groups, paying for managers and operating costs, and funding training.
While eight angels networks in Chile set up under the programme between 2006 and last year, the groups made just $17.8-million in investments in eight years. In July last year Corfo suspended its angel network funding line, subject to an examination of the programme.
This has given time for many to ponder the role angel networks have played in Chile. Allan Jarry (pictured left), who runs angel network Dad Neos, admits that finding the right people to act as angels and to then convince them to reinvest can prove challenging.
He says most angels don’t know how to invest and don’t understand the value in investing a number of deals, and taking a low stake of 20% in each.
To assist, he is presently in talks with the US’s Angel Labs to get them to come to Chile to run a course on angel investing for local angels.
His network received $150,000 a year for six years from Corfo to cover the network’s operational and due diligence costs, including the angel network’s team of two as well as an accountant and lawyer.
Dad Neos today has 40 investors. In all 18 investors have invested in seven new companies, investing $400,000 in 2013 – at an average of $70,000 a deal and four investors to a deal. The group uses a hybrid fund into which investors invest to gain 20% of an investee firm.
Jarry who previously started and ran an angels group in Miami when he resided in the US, also runs Neos, an IP licensing and innovation support firm, set up the network at the end of 2011.
The network has already exceeded its conservative target presented to Corfo in 2011, of two or three deals a year investing $100,000 and growing its network of angels to 30. The start-ups that they invest in are all internet-based.
“That’s (the targets) what we offered Corfo. It’s not that Corfo asked you to, it’s what you promised them (you would do),” he explains.
Angel networks in operation longer than six years have already when Corfo cut funding to them. Which make it important to convince investors that ones network is something worth having and something that investors themselves should pay for ultimately.
A recent combined US and Chile study argued that while Chile’s government had focused on developing a risk capital industry similar to that of the US’s, it had failed because certain preconditions were not in place to counter Chile’s lack of experienced entrepreneurs, shortage of high-growth potential ideas.
Its small and rather closed goods market also limits the chance of angels seeing a successful financial exit from investments. Developing countries therefore need policies that are designed specifically for their unique environment.
Clear role to play
Still many question the need for the state to back angel funds, which they liken to helping rich people invest more of their money.
But a 2012 report by Jeffery Sohl indicates that startups funded by angel investors provided about 274 800 new jobs in 2012, or about 4.1 jobs per angel investment – not too bad. South Africa then should look to foster more business angels.
It's time that South Africa's Technology Innovation Agency (TIA), tasked with fostering innovation in businesses, stop dithering and use its over R500-million budget to begin incentivising entrepreneurs. A promising start is it's recently set up seed fund (although the budget was minuscule). Helping angel investor networks get started could also help.
The author visited Chile earlier this month to speak with various actors in the country's entrepreneurship ecosystem. A version of this blog article originally appeared in Small Business Connect, read it here. Read an earlier piece by the author on how the state can boost venture capital funding, here.
Stephen Timm is a