Animating (and negotiating) the angel investment scene in SA

Angel investors generally get involved at the very early stages of a start-up's life. Unlike venture capital and private equity providers and banks, angel funders are willing to accept a comparatively higher risk of business failure.

Typically, they are willing to accept a viable business case, while certain VCs or banks may require a proven trading history, say Realmdigital CEO Wesley Lynch, and Brett Commaille, co-founders of MyTrueSpark.*

Angel investors may fund ventures to produce a working prototype, or launch their product into the market, while most VCs will only fund from the commercialisation phase of the enterprise - including driving growth, arranging launch into foreign markets, arrangements of any mass production and the finalisation of its business models or routes to market.

Angel investors play an important part in making funding available to businesses at an early stage. In the UK, angels provide about £750 million in annual funding (R8.2 billion) to SMEs - the single largest source of early-stage capital in that country.

Early-stage funding can have a great impact on the recipient. High-growth industries in particular, such as technology, can benefit from it on a large scale. While the US lost 1.3 million jobs from 2009 to 2011, a star turn of funding-backed tech start-ups swelled their ranks impressively - LinkedIn added 79% of its 1 300 current employees, Groupon 99% out of a total of 7 100, and Zynga 92% out of 2 200.

But angel investment requires an environment that encourages its activities. In the US state of Louisiana, a law offering tax credits to angel investors spurred investments of $62 million in 57 companies between 2005 and 2009. The UK tax regime sees angel investors receiving immediate deductions of 30% of their investment, with no tax on investment gains for investments held for more than three years. Many UK angels quote the incentive as a key initiator of their investment, and the UK government is currently in consultations to increase incentives to ensure even further support to the very early stage businesses.

Add to this the British Business Angels Association (BBAA), which, together with the UK Regional Growth Fund, launched a £50 million angel co-investment fund, whereby government directly supports angel investment.

On the opposite end of the scale, the South African early-stage investment scene is not nearly as conducive, with no formal incentives, either tax or other, yet in place. As a result, only about eight angel-funded deals are reported each year. While certain incentives are being considered, the government would do well to see the impact that angel investment into SMEs and high growth potential businesses has had globally, and create far-reaching incentives to drive private capital into this investment sector. The recently launched jobs fund specifically excluded start-ups, missing a clear opportunity to provide much-needed support in a very promising sector. Clearly, resolving the problem at national policy level will help stimulate angel investment deals in SA, going a significant way towards achieving some of the government's growth objectives.

Meanwhile, what can start-up enterprises do to increase their chances of success? In truth, many do not appreciate the amount of research and information needed to support their applications, and are genuinely surprised when they're rejected by the few sources of funding out there.

Very often, their failure has little to do with the product, and much more with the way it is presented. A crucial component to include in the case for funding is an indication that the applicants have a thorough understanding of their target market, the opportunity, the competition and the business model, backed by adequate research and experience.

Entrepreneurs should get help with their applications, from someone who has represented investors successfully before, in order to increase their likelihood of success. The right consulting partner will assist the business with a realistic business strategy to enter and grow in its target market, and, where appropriate, raise funding to further this process.

In the latter regard, it is advisable to find a partner with the right VC and angel investor networks. Of critical importance here is the ability to help match business objectives to investor expectations.

Many firms support start-ups with various offerings, all of them playing an important role. Most, however, struggle with obtaining funding for their charges, due to the limited number of funders willing to invest in early-stage businesses, and the highly specific mandates of those that do provide it.

Ultimately, what is needed is more angel investors to build a mature ecosystem for start-up funding, which caters for applicants at all the different stages of business development, including seed stage, start-up and growth phase businesses.

There have been repeated calls for new blood among SA's angel funders, namely benefactors who are willing to invest small amounts at a very early stage, thus helping to build the experience needed to qualify for later-stage funding from VCs and growth capital funders.

For now, angel investment remains under the radar, difficult to access and, at best, ad hoc in their funding.

But entrepreneurs shouldn't despair. The market for early investments received a much-needed boost with recent exit deals brokered for SA start-ups by PoweredbyVC (HBD's fund managers). This again proves that start-ups with the right support and investment have it in them to attract the right exit partners - including Fortune 500 companies.

More help is at hand, with other recent additions to the angel investment scene. These include AngelHub, a new angel investment group currently being finalised.

Start-ups should take advantage of these new opportunities, while also considering some of the aforementioned guidelines. SA's angel investors may yet fulfil their potential for boosting high-growth industries and significant job creation.

* Co-founders of angel and early-stage investment advisory firm, MyTrueSpark.