The angel funding issue

OVER the last few weeks, I have had some quite interesting discussions around the concept of "angel investing" and the expectations different entrepreneurs have when introducing this into a business.

This is quite an important discussion which needs to be held, because angel funding in South Africa is in its absolute infancy - until we understand where this unique form of funder fits into the entrepreneurship ecosystem, it will not be possible to build a base of willing funders.

There are a lot of (unfair) parallels drawn between this country and the US when it comes to funding entrepreneurs. I suspect this has a lot to do with the prevalence of US business and technology media; also, many of the role models SA focuses on come out of the States.

According to research from Wharton,the US is expected to have 6 529 commercial banks and 1 128 savings institutions by the end of 2011. By contrast, South Africa has 12 banking groups and two registered mutual banks, excluding the Post Bank which should be registered in the next 12 months.

Let's be honest, these local banks are pretty risk averse when it comes to funding entrepreneurs. If you're looking at venture capital funding, you're probably looking at funding costs of 22% to 26% once it is all in, so that's a pretty unattractive route for those looking to raise capital.

We have started getting an incubator culture going in SA which is a positive, but the really early stage stuff – things which should raise money through angel investors or crowd-funding - remains weak.

Devil is in the detail

While I see a lot of discussion about what entrepreneurs expect from angels - normally money and then contacts - I don't see much in the way of talk about what angels can expect from entrepreneurs, and to me this is the bigger topic.

There will never be a shortage of people with ideas - but there is a chronic shortage of investors with risk appetites to back early stage ventures, and a big part of this debate is how to make this risk more appealing.

A simple example is the company bank account. If I as an angel investor put R50 000 into your business, does that mean I can peek into your bank account at will or must I depend on you to provide me with the information?

Does R100k buy me the right to take control of the company finances? And a quarter of a million rand mean that I can install my own CEO or financial director?

Do angel investors get tax benefits for making early stage investments?

A lot of people dismiss the details that can be worked out at a later date, but the reality is that the devil is in the detail and if you get this wrong, you can scare off potential investors very quickly.

Nobody argues that we need angel investors in the country, but the discussion does need to mature beyond a desire for a bit of money to those who can't get it anywhere else.

 - Fin24