African startups raised $5.2 billion in 2021. That’s about the same amount raised between 2016 and 2020 combined. But early-stage funding remains a drop in the billion-dollar bucket. Only about $29.5 million went into early-stage deals—about 1.48% of the total $2 billion raised—in 2020. In 2021, early-stage deals were reported to be $23.6 million, which is less than 0.46% of the total amount of funding that was raised.
This indicates a gap that has become persistent as a chunk of the investment is going to the series rounds—A, B, and C. But there’s a group of investors called angel investors working to bridge this gap by finding, funding, and following through with early-stage startups.
What does it take to be an angel investor and what does angel investing entail?
To answer this question, Tomi Davies and Biola Alabi, 2 renowned Africa-focused angel investors, were hosted on a TechCabal Live session on June 3. Davies, who made his first angel investing in 2001, when he had no idea what the phrase meant, now wears a lot of hats in the investment world: he is chief investment officer at GreenTech Capital Partners; co-founder of Lagos Angel Network; chairman of Diaspora Angels Network, and the CcHUB’s Syndicate; founding president of the Africa Business Angel Network; and a board member of the Global Business Angel Network.
According to Big Cabal Media CEO Tomiwa Aladekomo, who moderated the session, if you scream Angel Network twice, Tomi Davies will appear.
Alabi, on the other hand, is a media veteran and currently runs Biola Alabi Media, an outfit that provides strategic consulting and advisory services on media. She is also deputy chair of the Lagos Angel Network and co-founder and general partner of Atika Ventures, a women-led venture fund providing early-stage capital to startups in West and East Africa.
What does angel investing mean?
Angel investing is when an individual funds a promising early-stage startup in exchange for a piece of the business, usually in the form of equity or royalties. This definition only gives credence to money, but Davies—without ignoring the importance of funds—thinks angel investing is more than just writing cheques.
“You should also invest your time, expertise, and network [in the startup],” Davies said. “It’s true that the ecosystem needs more funding, but If money is the only thing you invest, which is also good, you’re not an angel.”
Angel investors are often business professionals; C-level company executives; founders and entrepreneurs who have already launched successful companies and know how to recognise startups that have a bright and profitable future; investors who make financing small companies a professional pastime; and crowdfunding platforms that raise pools of money in groups, with each person investing a small amount in exchange for a small share of any eventual profits, if the company proves successful—like Kenya’s Raise and Nigeria’s GetEquity.
How to approach angel investing as a beginner
Davies thinks the first thing to do is to get educated about the ecosystem you are willing to invest in. And, to this effect, he mentioned angel networks across Africa have started building academies to help high-networth individuals become qualified angel investors. For example, in South Africa, there is the African Angel Academy; and in North Africa, HIMangel, efino, Hivos, and the GIZ in 2020 joined forces to launch Angel Investors Academy in Egypt. The Lagos Angel Network which Davies co-founded is also said to be setting up an angel academy in Lagos.
“So I would strongly suggest that the first thing is to educate yourself and understand the fundamentals of angel investing, understand the ‘5 truths about startups’. And once you’ve done all of that, find a group of people or network to co-invest with. Don’t go alone,” Davies said.
Alabi, who wrote her first 3 angel cheques without understanding the “first thing about angel investing”, corroborated Davies’ opinion. Even though 2 of those investments turned out to be good, she recommended education and leveraging angel groups and networks before writing your first cheques.
Due diligence is very important, but beginners often don’t even know where to look. Alabi believes that getting proper education will cover how to conduct proper due diligence.
The risk of being early in angel investing
Angel investing is risky because startups fail. A recent report shows that 90% of new startups fail and 75% of venture-backed startups fail. Bearing this in mind, how and why should anyone invest in a pre-product or pre-revenue startup? For the most part, it’s the promise of the reward that could come from those that go on to succeed. Other times, it’s the fear of missing out.
“It’s a relationship,” Alabi said “If you back great founders and you are good to them, even if the first company fails they are likely going to bring you on and give you a share of their company. And most repeat founders have a higher rate of success.”
You can watch the full conversation here: