A crop of investors allocating capital to early stage-startups is emerging in Africa. They deploy funding in a way that traditional and commercial lenders cannot. They tend to be patient in nature and their lending requirements are not strict.

This class of capital allocators are called angel investors.

They are individuals who typically provide financial and non-financial support, including equity or debt funding, mentorship and access to business networks for small businesses, or startups, in exchange for potential future returns.

This rising class of investors deployed more than $22.5 million across 408 deals at an average ticket size of $552,000 in the first and second quarters of 2023, according to estimates by the African Business Angel Network (ABAN).

These investors deploy their investments through networks of angels mainly operating across key startup ecosystems in Africa – Nigeria, South Africa, and Egypt. ABAN estimates there are 68 angel networks spread across more than 34 African countries and the diaspora.

"There is an increased ‘democratisation’ of angel investing. Angel investing was previously seen to be a preserve of ultra-high net worth individuals. We are now seeing more syndicates that work to pool individuals to invest,” Joshua Murima, Head of Investor Relations at Briter Bridges, says.

Murima asserts that the availability of capital at early stages, which is what many angels unlock, is always a good indicator that the ecosystem is moving in a good direction, but he insists that market dynamics are somewhat the main determinant of startup success.

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Angels in Africa invest predominantly in technology entrepreneurs who are innovating for finance, agriculture, education, healthcare, commerce, clean energy, as well as entertainment, and supply and logistics.

Most of the angels surveyed by ABAN are based in Africa’s top investment destinations, with Nigeria leading (19 per cent), followed by South Africa (10 per cent), and Kenya (8 per cent).

Angel investing in countries like Rwanda is yet to take off.

For instance, Business Angels Rwanda (BAR), a network of angel investors in Rwanda, has invested once in 2020 and it was the only deal, according to one female member of the network who preferred anonymity.

In comparison, she says, Nairobi Business Angels which was created at the same time as BAR has made more than 30 investments in Kenya.

"The legal framework in Rwanda is not suitable. We do not have a Startup Act like other African countries do,” she notes, adding that their network has tried to set up as a non-profit to organise itself but has failed to get the required documentation from the authorities.

She argues that the red tape is too heavy.

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Deal activity

According to ABAN’s 2023 Angel Investment Survey, angels who invested in Africa last year used their own money, with 36 per cent generated from their salaries and 29 per cent from their wealth.

A small minority of angels, representing 17 per cent, invest other people’s money.

Majority of angels who invest on the continent, or 60 per cent to be precise, prefer investing in the form of equity. In other words, they invest to acquire stakes in ventures where they deploy capital.

Twenty per cent of angels deploy blended finance – a mix of funding such as loan guarantees, grants and venture capital, while 18 per cent invest in the form of debt.

Angels use a combination of investment instruments to deploy capital.

At least 32 per cent of angels in Africa prefer equity/shareholders agreement as their investment instrument, 29 per cent favor simple agreement for future equity (SAFEs), and 19 per cent would rather use convertible notes – short term debt instruments that can be converted into equity.

Fewer than 20 per cent of angels use loan agreements and grants.

The majority of angels in Africa, or 75 per cent, are interested in investing in startups at the idea phase or the pre-product market fit stage.

This, the report says, is in line with existing literature that suggests many angels prefer to invest in the formative stage of a startup, usually in their first or second year of operation, when startups are figuring out who the right customers are and how to satisfy their needs.

For those startups, angel investing is proven to be a gamechanger, thanks to growing legal frameworks across Africa that are enabling this type of investing to flourish across the continent.

Fadilah Tchoumba, CEO of African Business Angel Network (ABAN), is convinced that legal frameworks also present potential for African investors to manage risk perception.

"Legal frameworks for angel investing in Africa, still in their infancy, present both challenges and opportunities for building a solid foundation to support current and future investors and manage risk perception,” she says.

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Profit vs social impact

Nearly half of African angel investors who were surveyed by ABAN, or 45 per cent, said they prioritise economic impact such as job creation in their investment decision-making processes.

While it suggests that angels in Africa are driven by a desire beyond just generating profit, they are looking for financially viable businesses with the potential for strong economic returns alongside job creation.

That doesn’t necessarily imply that angels in Africa are interested in investing in social impact ventures such as those that create impactful solutions for education, healthcare, and environment, among others.

Some believe that angels in Silicon Valley, for instance, invest expecting social returns, or what one writer Alex Danco calls the Social Subsidy of Angel Investing. This makes them more patient to early-stage startups that usually require years to build up their ventures from the ground up.

It is different from angels elsewhere where most angels are purely investing expecting financial returns. They are more often than not concerned by how fast their money will be diluted with follow-on capital, and as a result, they are looking for quick exits.

Murima doesn’t necessarily agree, rather he argues that it is the other way round.

"The larger majority of Africa-focused investors could be seen as impact investors given the different sectoral and thematic inclinations e.g., financial inclusion, gender etc.,” he weighs in.

However, he suggests that there has been a gradual adjustment away from the traditional notion that these impact investors don’t care about returns. "There’s now a widespread belief that you can make money whilst doing good as well.”