In the US alone, the average internal rate of return on investment funding from angel funding is 29%, assuming diversification and time frames of five to seven years.
Although South Africa is still a few years behind the US and Europe, it probably has the most developed angel investor culture in Africa with the total value of known local deals for start-up striking about R 100 million over the past 10 years. This is according to Mike Lebus founder of Angel Investment Network.
The highest reflected growth of investment has been in the mobile app sector with a boom reflected in the enterprises that create applications that help Africans make money and build community.Last year alone investment company World of Avatar- its offices in Stellenbosch – made waves with its numerous investments in technology companies ARC Telecoms and The Daily Maverick. Other World of Avatar investments included a post-production company with close links to Vodacom and a small business in the mobile space. Founded in April 2010, World of Avatar signed an agreement to acquire 90 percent of Stellenbosch based Mxit for an undisclosed amount. This was in September last year.
Given such high returns in such a short timeframe and that large financing institutions are reluctant to back start-up businesses, it’s no wonder that there is an emerging trend of angel investment networks in South Africa – networks that provide funding for companies in the early stages of development that need R 1 million to R 10 million in seed capital. While angel investors are generally required to invest a minimum of R 300 000 in funds a year, the idea is that the network’s individuals collectively invest to get businesses going and eventually make a profit by selling their holdings within three to five years.
The result has been the revolutionization of the local entrepreneurial market particularly the mobile app sector. Mike Lebus, founder of Angel Investment Network (investmentnetwork.co.za) – with 30 000 registered investors worldwide – has set a record with 2000 registered angel investors on his South African network. At the start of 2010 his network, which was receiving around 150 monthly requests for angel investors now has just about tripled that monthly figure. Angelbub (angelhub.co.za) – founded in September last year by former InVenfin CEO Brett Commaille, has already clinched 15 angel investors. Currently the network is on track to reaching its target of 30 and to concluding three deals in its first year.
As more South Africans are attracted to the high returns of being angel investors, prospective investors are warned, however, to be prudent in choosing this portfolio as an investment model. They are cautioned that such investments over the short-term are a high risk because there are businesses that will fail within a year or two. The mobile app sector is particularly vulnerable. This is according to Eric Edelstein founder of Evly.com – a leading South African tech start-up that is successfully navigating the crowdsourcing and social media space.
Very few of the success stories that you read about are overnight successes, even if they appear to be. As an example, Rovio launched many games – none of which were that successful – before they became an overnight success with “Angry Birds”. Having said that it has become far less expensive to launch a tech business than it was just a few years back, but the competition has also become far more intense. You either need to have a brilliant product that spreads virally so you don’t need to market it, or you need to be clever with your marketing. Most successful businesses have people with both these skill-sets.
Before signing on the dotted line…
Be aware that when investing in a start-up that more fail than succeed. It is also quite possible that your initial investment might not be sufficient to “launch” the company adequately and that you may have to inject more money than originally anticipated into the business to make it successful.
If following serious consideration you, as a prospective angel investor, are prepared to help others reach great heights as part of a balanced investment portfolio, then make sure you’ve answered the following questions for yourself:
What capital are you looking at investing? Angel investors generally invest between R 100 000 and R 250 000 at a time.
What is the timeline you’re looking at with regards to your investment?
Are you investing for the long haul, earning dividends, or are you looking for a fast turnover on your investment and want the business you’re investing in to sell within a few years?
What is your attitude towards business growth?
How risk-averse are you?
What is your history with former similar investments?
Will you bring anything else to the table other than funds? Mentorship, expertise, time, knowledge?
Insist on hearing the prospective business owner’s pitch on the business venture. Ensure that he has:
Set out clear objectives and is clear about the problem the business is going to solve
Done his research into the potential market size and who his competitors are
Clearly shown that the business you’re thinking of investing in is profitable will have a positive cash-flow in a reasonable period of time with potential for a great return on your investment and that it has the potential for major expansion into sustainable and growing markets
Proven his credibility by getting endorsements from his network, especially those who have witnessed his previous success
Shown how he will leverage potential businesses and partnerships with which he might have synergy and that he has a strategy to tapping into his client base and extended networks at a marginal and minimum cost
Shown how you will share in the dividend and profit upside
Protected his intellectual property by having gotten necessary patents and trademarks
Identified from the start how he will put your capital to work
Planned a prototype
Before committing your signature to a contract ensure that:
The firm you intend investing in matches your mission and ethos
The management team is experienced and has proven itself – look to invest in a good team!
You can negotiate to have your own team members on the board of directors to further protect your investment
The business you’re thinking of investing in has a solid, feasible exit option from your investment such as on selling or listing on an exchange
You have clarity on what kind of partner you are going to be. Are you going to be actively involved in the business, simply a silent partner or will you be collecting a dividend cheque?
It has set out how disagreements will be resolved, and who will make the ultimate call on what
You know what your voting rights will be
You can negotiate if necessary to invest capital with incremental monthly payments if this is your preferred type of investment
If you’re unclear about something, ask questions and feel free to add your suggestions to the business proposal. Take your time to make your decision. Be prepared to walk away from an opportunity if it doesn’t feel right – there will be other opportunities.
Once all of these issues have been discussed, commit your agreement to paper in a partnership or shareholders’ agreement. This will ensure there are no misunderstandings or unpleasant disagreements in future. Insist on having a proper reporting meeting once a month.
Remember to be an angel investor you will need to have a resilient mind frame because as mentioned there are businesses that will fail within a year or two, while successful businesses will take some time to yield returns. Nevertheless, while risky, the angel investment model is continuing to boom in South Africa, and the mobile app industry has become the new lucrative playground for the rich. Judging by the R 100 million total value of known deals struck in SA in 10 years, the promise of hitting a jackpot return is worth both the wait – it seems – and its weight in gold.
BizAssist Technologies is your Business to Business Partner – Specialising in Sales Lead Generation. For more information visit www.bizassist.co.za [http://www.bizassist.co.za]
Article Source: https://EzineArticles.com/expert/Lena_Raman/1369190
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