Last week, June 8, VC4Africa contributed to an Expert Forum on SME Finance in Kenya. Around 100 experts in African SME finance converged at the Villa Rosa Kempinski in Nairobi.
“How do we reach the missing middle and bridge the gap between start up support and full-fledged equity participation?” was one of the key questions addressed. The forum was hosted by the Dutch Good Growth Fund (DGGF), the Aspen Network of Development Entrepreneurs (ANDE) and the East African Venture Capital Association (EAVCA), in cooperation with the Venture Capital for Africa community (VC4Africa), the African Business Angel Network (ABAN), Novastar Ventures and GroFin.
VC4Africa hosted the session ‘Facilitating Angel Investment for Venture growth’, moderated by Ben White, co-founder of VC4Africa, the African Business Angel Network (ABAN) and AfriLabs. Other speakers in this session were Stephen Gugu, co-founder of Kenya based angel investing organisation Viktoria Ventures, Hilda Moraa, co-founder of Kenyan DEMO Africa alumni company Weza Tele that recently got acquired by AFB, Mbwana Alliy, partner and co-founder of Savannah Fund, and Robert Yawe, active angel investor and business mentor.
Angel investing added to debate
It is new that Angel investing as a topic is included as part of the SME missing middle debate, a recent development that recognizes the key role business angels play in a mature startup ecosystem. Business angels have the ability to spot talent early, and more importantly, can offer the mentorship and coaching needed to develop entrepreneurs as individuals. This is some of the hands on work that might otherwise be packaged by SME practitioners as technical assistance, otherwise costly support mechanisms for providing entrepreneurs with extra support. Fund managers can make considerable gains when Business Angels are involved.
Key is to also recognize that business angels open doors, making introduction to industry players, and often times helping starting entrepreneurs secure their first clients. This proof of market, and the grooming of the entrepreneur into professional founder, sees a growing number of companies achieve a meaningful stage of development where they can be considered by more established SME investors. It’s this hands on work at an early stage of the venture life-cycle that sees some companies succeed where others have failed. The ‘Weze Tele case study, Startup to Exit‘ as case in point. The founder Hilda Moraa told participants about some of the key challenges she had to overcome as a founder, at one point a lack of liquidity nearly shutting down her business. Angel investor Joe Mucheru worked with the management team to redesign the business in a way the company was able to thrive.
Below we list a number of key takeaways from the discussion:
1) Business Angles are in a unique position to spot talent at an early stage, to identify entrepreneurs with founder potential and to mentor and coach that talent. Their proximity to the business is an advantage;
2) Business Angels engage entrepreneurs often because they have built similar businesses in the past. They are able to share their experience and lessons learned, a critical source of information for a first time founders particularly. They are not always rich themselves;
3) Business Angels have an established network of contacts and can make introductions and often times attend meetings with the entrepreneur. Business Angels are an important champion for the business, lend the founder needed credibility, and play a key role in securing initial clients;
4) Business Angels work with entrepreneurs anywhere from a few months to 1-2 years before additional funding is required. In this period an important track record is established. The professionalism of the founder is tested. Documentation and reporting standards are established;
5) Business Angels are able to invest at an earlier stage than SME financiers. They are able to invest between 25K and 250K where most SME funds start at 250K and much higher.
Given the critical role Business Angles play in helping to build successful startups, there is a growing interest to develop these networks and support angels with both framework and tools. Stephen Gugu, co-founder of Viktoria Ventures, explained, “We need to catalyze local angel investment much more and just as we have done with our entrepreneurs. Angel networks are important in Kenya, and especially because there are still a limited number of active angel investors in this space. This means that we need to reach out to prospective angels and offer them our tools and experience.”
Business angel networks
The session recognized a number of angel investing networks in Kenya that are now in their formation stages. These developments run parallel to the emergence of Angel investing networks that have emerged in Cameroon, Nigeria, Ghana and Egypt. The African Business Angels Network association (ABAN) has been formed in linking these networks across countries, and to help spur cross-border investing across the continent and with counterparts in the Middle East, Europe and North America. This is an important step in building a robust network of African business angels and to take the necessary steps to professionalize their activities. Also to welcome new investors and networks to the table.
Stephen Gugu adds on the role of networks, “Experience sharing from various angel investors and networks is very important. This should eventually help angel networks to set up, perhaps by financing some events in the different countries, and perhaps with a co-investment fund.”
In the closing session, Ben White concluded, “There are at least 6 million high potential high growth entrepreneurs active today across the continent. We need the participation of local Business Angels to identify this talent and to help us bring them up as outstanding founders. There is a massive opportunity to build thousands of great companies, but only if we reach out to these individual entrepreneurs and do our part to open doors.”