Angel finance services has become increasingly important to South African entrepreneurs in in recent times. With both business owners and entrepreneurial observers alike considering angel investments to be one of the key drivers behind the startup and the growth of new businesses in the country, despite a shortage of information to confirm whether or not this is true. Unlike venture capital, angel investments are made by individual investors who do not make up a known population. Therefore, much of what is reported about angel investing comes from anecdotes and surveys of convenience samples, which are prone to biases and inaccuracies. Moreover, research on angel investment is plagued by definitional confusion, in which different investigators confound informal investors, friends and family who invest in startups, accredited and unaccredited angel investors, and individual and group investing.
The term "angel" comes from the practice in the early 1900's of wealthy businessmen investing in Broadway productions. Today "angels" typically offer expertise, experience and contacts in addition to money. Less is known about angel investing than venture capital because of the individuality and privacy of the investments.
Thus far the investors network team has been able to collect the following information on angel investors in South Africa.
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The "average" private investor is 47 years old with an annual income of R450,000, a net worth of R3 000,000, is university educated, has been self employed and invests around R200,000 per venture.
- Most angels invest close to home and rarely put in more than a few hundred thousand Rands.
Informal investment appears to be the largest source of external equity capital for small businesses. Nine out of 10 investments are devoted to small, mostly start-up firms with fewer than 20 employees.
Nine out of 10 investors provide personal loans or loan guarantees to the firms they invest in. On average, this increase the available capital by 57%.
Informal investors are older, have higher incomes, and are better educated than the average citizen, yet they are not often millionaires. They are a diverse group, displaying a wide range of personal characteristics and investment behavior.
Seven out of 10 investments are made within 50 miles of the investor's home or office.
Investors expect an average 26% annual return at the time they invest, and they believe that about one-third of their investments are likely to result in a substantial capital loss.
Investors accept an average of 3 deals for every 10 considered. The most common reasons given for rejecting a deal are insufficient growth potential, overpriced equity, lack of sufficient talent of the management, or lack of information about the entrepreneur or key personnel.
There appears to be no shortage of informal capital funds. Investors included in the study would have invested almost 35% more than they did if acceptable opportunities had been available.
For the business seeking funding, the right angel investor can be the perfect first step in formal funding. It usually takes less time to meet with an angel and to receive funds, due diligence is less involved and angels usually expect a lower rate of return than a venture capitalist. The downside is finding the right balance of expert help without the angel totally taking charge of the business. Structuring the relationship carefully is an important step in the process.
Although we have seen a slow increase in the involvement of banks in small business financing over the last 3-6 months entrepreneurs are now increasingly opting for Angel finance services due to the benefit of receiving not only the financial support but also the skills, experience and contacts that angel investors have accumulated during their career.
