Investment by angel investors into African startups has recently grown rapidly alongside the development of startup ecosystems, which have greatly increased the number of investable opportunities. Early signs of success, such as the emergence of several successful fintech startups, have spurred further interest from angel investors worldwide.
Their increased appetite for investment on the continent is both enabled and accelerated by new approaches to organized angel investing. Which makes it more cost-efficient to invest in high-growth African ventures. These businesses are key to stimulating (youth) employment, innovation, and competitiveness in African economies. So, this paper explores new approaches to organized angel investing and highlights the ongoing need for innovation to make finance more accessible to high-growth African companies.
Access to start-up and growth capital
While challenges to access finance are abundant for all “missing middle” ventures in developing countries, early-stage enterprises face especially large hurdles. Lack of financing constrains their establishment and growth, especially in Africa, where traditional sources of capital such as bank loans or government and research grants are particularly hard to access. Since high-growth ventures drive innovation, improve productivity, and create jobs, access to start-up and growth capital is critically important.
Business angels, who often invest through an angel network or syndicate, offer capital with high-risk appetite in combination with business expertise and networks. Angel investors are usually the first external investors into the company. As angels’ funding and mentorship is indispensable for founders, strengthening the role angels play in Africa is essential to helping startups overcome the pioneer gap.
New hybrid models
New hybrid models are combining elements of angel investing, crowdfunding, and venture capital, speeding due diligence and spreading the risk for investors. An increased reliance on data and the widespread use of standardized SAFE notes are bringing down historically high transaction cost. These hybrid investment approaches have already successfully mobilized greater seed capital for promising entrepreneurs and substantially increased the number of high-growth ventures that are creating jobs and positive developmental impact.
Future will tell
Questions regarding the scalability and replicability of these models remain unanswered currently. The years ahead will reveal the financial returns of these new, hybrid investment models and their investees. Better understanding is needed, too, of the impact of angel investments into early- stage companies on job creation, inclusiveness (notably gender equity), and broader ESG impact.
The paper was commissioned on behalf of: The Dutch Good Growth Fund, a “fund of funds” investment initiative from the Dutch Ministry of Foreign Affairs. Authors: Eelco Benink & David van Dijk
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