Epic Games, Uber, Juul Labs, Magic Leap, Instacart, Katerra, Opendoor, and Lyft share many common traits. As you might have guessed, they are U.S.-based, male-led, venture-backed technology companies. What you might not have realized is that each of them individually attracted more venture capital in the last year than was invested in the entire continent of Africa in 2017. The top three, Epic Games, Juul Labs, and Uber each attracted $1.2B, or more than twice the amount of venture capital invested in Africa.
African-based or -focused venture firms have seen substantial growth over the last three years. Of the 22 Africa-based funds, 41% have been formed since 2016. Jumia’s IPO announcement has gotten the world interested in “African” startups and there is for sure more startup capital available in sub-Saharan Africa today than a few years ago, but that capital is not coming from the sources that really matter for early-stage startups.
Africa needs more angels.
Angel investors invest their own money in early-stage startups. Even more so in communities where “friends and family” do not have the wealth or expertise to invest in startups, angels play a key role in financing the business from the concept stage to the revenue generating stage. They are especially critical for women in these communities who need to overcome a higher "proof of concept" to attract institutional capital. While it’s hard to pin down the total dollars invested by angels in Africa, it’s clearly not significant enough. In 2018, $133.5M of venture capital was invested in Nigeria, the continent’s leading destination for venture investment behind South Africa. That same year, the Lagos Angel Network, the most active angel investment network on the continent, invested only $1.5M.
Startups lament a lack of capital to get them started. Venture capitalists say they would invest more in Africa if only there were more viable companies in the pipeline. A robust angel network would solve both of these problems by serving as the bridge between startup idea and growing company. And in building that bridge, angel investors may help entrepreneurship fulfill its promise as a generator of youth employment and innovative local solutions to local problems.
Africa does not lack high net worth individuals (HNIs). According to South Africa's Business Report, there are more than 40,000 millionaires in South Africa. Nigeria leads the world in the growth of millionaires. It’s projected that the number of millionaires will grow by 16.3% annually until 2023. There are two main reasons that these HNIs do not invest in startups. First, they don’t understand the asset class. In the US, where over $24B was invested by angel investors last year, 6 out of the 10 richest people made their fortunes through technology. Africa’s richest man, Aliko Dangote, made his fortune in cement. Only 1 out of the continent’s top 10 richest people made their fortunes in tech-adjacent spaces. Naguib Sawiris’s wealth comes from the telecommunications industry.
Second, there are stable returns to be made elsewhere. Nigeria’s treasury bills have returns higher than the average annual growth of the U.S. stock market and new luxury apartment buildings shooting up in Accra are promising 17.5% annual returns. So why would you invest in an unproven technology market where, exits, if they come, are notorious for taking years?
Angel investment could be more catalytic than institutional venture capital for the sub-Saharan entrepreneurship ecosystem. Angels tend to invest in a broader geographic scope. Research from the Wharton Entrepreneurship and Angel Capital Association showed that in the US, 45% of all venture dollars are invested into San Francisco, New York, and Boston, while only 37% of all angel dollars are invested in those same three cities. Similarly, in Africa, most capital is invested in Johannesburg, Cape Town, Lagos, and Nairobi. HNIs investing on the ground in Abidjan, Accra, Gaborone, and Kampala would bring capital to second-tier venture investment markets creating success stories and pipeline opportunities for larger funds.
Second, angels can be more patient with their funding. Venture fund managers have a strict date by which they must return capital to their investors. It is no secret that things can take longer than anticipated in Africa. Founders find themselves not just building their company, but also building the technological, financial, and talent infrastructure that they need to grow. As angels are investing their own money, they do not have the same timeline constraints as institutional investors and can stick with an entrepreneur as they are building a market.
Angel investing is not for everyone. While the returns for successful angels are higher than other traditional investment areas, they are also riskier. Angel investing is a field where your returns improve as you get more experience and diversify a portfolio. Both of these things take time in a nascent ecosystem. Investors need to be comfortable with potential -100% returns in the short run. But if an individual can tolerate that risk, the financial and social returns will be higher than form any other instrument available to them.
The private and public sector both have a role to play in accelerating the development of angel investing. HNIs with exposure to startups need to promote angel investing in their networks. There is a lot to be learned from organizations like Golden Seeds in the US who are responsible for increasing women’s understanding of and participation in angel investing. Rising Tide Africa in Nigeria is replicating the model for the region.
Second, the government should provide tax incentives to make investing in angel investing more attractive. In South Africa, Section 12J of the Income Tax Act makes investments in funds that invest in small business 100% tax deductible. The combination of education and incentives could drastically increase the number of HNIs investing in startups leading to more investible companies for larger venture funds and eventually an investment ecosystem where no single American company attracts more capital than the entire African continent in a year.
