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