Are you looking to source funding for your business from non-financial institutions? Then, Angel investors networks may be what you need. Sourcing funds can be a big issue especially if you don’t have any proven track record that your business is going in the right direction.
Most South African entrepreneurs face challenges in sourcing funds from financial institutions and government because of their lack of educational background, experience, credit history, and lack of collateral.
As an entrepreneur, your best bet to source funding maybe angel investors. Angel investors don’t require much from entrepreneurs and normally invest in start-ups without looking to gain short-term profits but rather long term profits.
There are several online investment networks that one can make use of. We will discuss each of these as they may help you find an angel investor that you will likely appreciate. We will go into detail on angel investors and then discuss their importance to entrepreneurs and the South African economy.
What is an Angel Investor?
Angel investors also known as seed investors, are high net worth individuals that provide financial support to entrepreneurs or start-ups in exchange for ownership or interest.
Angel investors offer two types of funding for startups and entrepreneurs, these include once-off investments to help businesses get off the ground and recurring financial support to help a business through difficult times.
The word ‘angel’ came from Broadway theatre where the rich would pump in money in theatrical productions. These contributions by the wealthy were then viewed as angelic by people.
The term ‘angel’ would then be bundled with the term ‘investor’ and was first used by William Wetzel in a study on how ‘entrepreneurs gathered capital’.
Today the words ‘angel investor’ is used more often than not. People that are referred to as angel investors carry a lot of weight and are the renaissance of investing across all industries around the world.
How Angel Investment works
Before you go out seeking angel investor funding, you first need to know how they work. Angel investors are individuals that want to invest in the early stages of a startup and normally provide working capital.
Angel investors assume a lot of risks since 95% of start-ups in South Africa normally fail. From the statistic, you can safely say that angel investors have a 5% success rate in South Africa.
The chances of success are very low yet the returns are higher. What angel investors do is that they invest an amount of money in a start-up in exchange for equity or interest.
Angel investors normally require an entrepreneur to make a pitch on what they offer to clients or customers and how they are planning to profit from services or products that they offer.
They may require further information such as current financial statements, projected financial statements, management accounts, business plan, business profile, tax returns and other documents necessary for decision making.
Mind you, Angel investors are some of the most indiscriminate investors that you can come across. This is because they are not willing to mingle in the day to day running of the business.
Investment can take two forms, that is the equity investment or issue of debentures to the business but with favourable considerations for both parties involved.
As technological usage increases in South Africa, many Angel investors can now be found on investment platforms. With a subscription, you can get a whole network of angel investors
in South Africa and abroad. The utilisation of such platforms is a must should you want to better your chances of finding an investor that understands you and your business.
Angel Investment Versus Venture Capital
Many confuse venture capitalists (VCs) with angel investors and they are different yet they share one common factor which is an investment in startups.
Venture capitalists are private equity investors that provide capital to companies exhibiting high potential growth whereas angel investors are individuals who provide financial backing to small start-ups and entrepreneurs.
Difference between VCs and Angel Investors
- Provides funding to small businesses that wish to expand but don’t have access to equity markets.
- They target companies that are at the stage where they are looking to commercialise their idea.
- Manage a pool of funds from individual investors into the VC company.
- They are likely to intervene in the day to day running of the business to ensure growth and sufficient returns on investment.
- These are individual investors who are normally of high net worth.
- They fund small startups at their idea stage regardless if they are to commercialise anytime soon.
- They normally don’t interfere with the day to day running of a business.
- Angel investors can form a crowdsourcing pool to embark on a more financially demanding project.
VCs and Angel Investors are all in the investment business to make money in the long run. However, how each investor goes about investing is different.
Hence, as an entrepreneur, you will need to know what stage your business is at. Normally VCs come with supporting structures for your business and strengthen lacking departments where necessary.
Where do Angel Investors get money from?
Angel Investors use their own money to fund an idea or a startup. Angel investors are wealthy individuals who have worked or had success in an industry or have inherited money or are business owners themselves. Thus, funding a business that is at a pre-startup stage or developed isn’t an issue.
Their access to capital differentiates them from any other investors and they understand the type of risk that they are taking. Angel investors represent themselves in most cases but they sometimes use registered companies.
What angel investors look for when investing
Angel investors look for the most promising business opportunities out there with a promise of success in the long run. As an entrepreneur, you need to get into the mind of an angel investor to understand what they are all about.
In every business deal, every party involved is there to oversee their self-interests come to fruition. Your self-interests as an entrepreneur is to get adequate funding from an angel investor, however, what is in it for an angel investor?
Knowing what to say and how to say it will be your primary objective. Show him/her how you are going to achieve their interests which is stable income and growth over time. By doing this you will be likely entrusted with cash to oversee your venture grow.
Below are some of the particulars that angel investors look for when they invest.
Angel investors don’t necessarily expect an entrepreneur to possess a qualification in a certain field but they look for entrepreneurs with skills. If you can demonstrate that you are skilled in a certain field you will likely impress an angel investor.
In many circumstances, an angel investor will want a leader to show some skills in basic accounting, sales, human resources and also an understanding of regulations within your industry.
For example, if you are selling a software product, you will need to demonstrate a skill to sell and show an understanding of the regulations that govern software. Showing such skills will separate you from the bunch.
Many angel investors are accredited investors meaning they can participate in high-risk investments in unlisted entities. Hence you won’t be dealing with amateur investors as such you need to show how you are going to make them money.
It’s not about making profit today or tomorrow but making a consistent profit that is worthy of their investment.
Angel investors don’t look at short term profits but are more comfortable with long-term profits. If your business idea can generate long-term profits then Angel investors may want to be part of your business.
One thing that you cannot go to an angel investor without is a business plan. Your business plan will need to stand out. It has to be complete, convincing and it needs to have financial projections. Financial projections should be for a period of 5 years, with the first year’s projection being monthly.
Your business plan’s purpose is to educate the angel investor about your business, the industry it operates in, risks, forecast, and competition. The most important aspect of the business plan that angel investors want to see is the vision, mission and objectives of the business.
If your plan stands out in the aforementioned aspects you are going to catch the attention of an angel investor.
Make sure that you write an appropriate business plan before going out to seek funding from an angel investor.
A business structured for investment
Angel investors are some of the most connected individuals that you can come across in South Africa. With the connections they have, angel investors are likely to invest in an idea or start-up that has the potential to attract institutional investors.
If you are a business owner, you need to assure an angel investor that one day, should there be a need to sell equity to an institution to grow the business there you would do so. This way you may get into frontiers that you have never imagined.
Remember that 95% of businesses fail in South Africa and ideas are businesses and cannot achieve profits. You need to take advantage of what angel investors have to offer and selling equity at a later stage can grow your business multiple times.
Having an exit strategy
Angel investors expect to be presented with exit strategies before putting in money in a venture. Along with existing strategies, they will also need you to present them with a risk analysis for each exit strategy that you present.
As much as angel investors are comfortable with bearing risks, they also want to stay comfortable during their investment period. There is no foolproof in investing but there should also be some insurance should something happen that may disturb your agreement.
Your ability to present an exit strategy will help you win the heart of an angel investor. You can suggest that the company may buy back shares if they want to exit the deal or list mergers that are possible to assure their exit in the business.
Angel investor networks available for South Africans
Since there are so many Angel investor networks in South Africa, we will only limit our list to the most popular 3 angel networks that are available for South Africans.
This is the most popular angel investment network in South Africa with more than 2000 local angel investors.
To have access to some of the best angel investors in South Africa. Not only do you get access to angel investors in South Africa, but you also get access to angel investors from around the world.
There are many success stories with projects funded for millions of Rands. To be part of the network you need to subscribe to the network. Subscription packages start from R1000.00.
The higher your subscription the better the engagement with angel investors.
Jozi angels is an investment network based in Johannesburg. Investors invest in innovative early-stage companies helping them with working capital and purchase of assets.
SABAN is an angel investment network aiming at growing angel investing in South Africa. Its objectives are to raise awareness of angel investing, networking peers, research, lobbying for regulatory improvements and recognize angel achievements.
Advantages and disadvantages of using an angel investor
- You get exposure to having someone with experience as a business owner to assist you.
- Angel investors want capital in exchange for equity so you don’t need to pay money.
- They bring years of experience in business and can assist you in running your business.
- There are no strings attached so should the business fail you won’t have to pay an angel investor anything.
- There is no need to have good credit for an angel investor to invest in your business.
- Angel investors are willing to fund business ideas and established businesses.
- There is a possibility of further funding.
- You won’t be in full control of your business anymore.
- The angel investor might set the bar higher than you expect.
- An angel investor may want to take part in the day to day running of the business.
Angel Investment gives you muscles that allow you to build or grow your business. Joining an investment network is an idea that is worth investing in as a startup. Besides, you get to choose from several interested investors with which you want to do business with.
Angel Investors are taking South Africa by a storm. If you cannot access funding for your business from financial institutions or the government, your best option is to join an investment network.