THEY are rich and hungry for investment opportunities. Private investors, a common investment force in the US and Europe, are starting to come out of the shadows in SA and could play a major role in boosting economic growth and job creation if the right conditions are created. Dubbed business angels, private investors are best described as high net worth individuals with sufficient surplus resources to invest. Typically, angels are early-stage investors looking for entrepreneurial business ventures to invest in, usually in exchange for equity. The amounts involved can be anything from R100000 to R5m. Angel investors usually precede venture capitalists, who tend to invest in established businesses — making angel investors a potentially highly valuable resource in a developing economy such as SA. It is common knowledge that entrepreneurs the world over struggle to secure finance. The 2004 Global Entrepreneurship Monitor report, an international research project involving more than 40 countries, lists access to finance as one of the top three stumbling blocks for entrepreneurs. Those that struggle most are start-ups that are too small to be of interest to venture capitalists and lack the collateral required to secure a bank loan. Fortunately, angel investors are less risk averse than banks. They also often contribute time and energy to their investment, and introduce entrepreneurs to their networks. They do not cost this time in the same way venture capital firms might. This, and the fact that angel investors generally require a share of equity in a business — which does not strip the business of cash flow in the initial, vulnerable stages — makes angel finance an attractive prospect to start-ups. Little is known about angel investors in SA. Research conducted in 2002 by Ian Hollander, Michael Shirnig and Lance Stringer at the University of Cape Town Graduate School of Business, provides some insights. They found that in almost all respects, angels operating in Cape Town are similar to those around the globe: mostly male, with extensive business experience and entrepreneurial backgrounds. They are in their late 40s and early 50s, well educated and wealthy. Their reasons for investing are also much the same: they are seeking superior returns or are semiretired individuals who want something interesting to do. But SA’s angel community is underdeveloped and entirely informal. Lack of co-ordination hampers their ability to play a significant role in aiding entrepreneurs. Many could be put off by the difficulties of finding a good investment and invest offshore — something South African entrepreneurs can ill afford. To address this, David Murray, Tony Mallam, Andrea Bohmert and Geoff Hainebach from Cape Venture Partners pioneered one of SA’s first structured networks of angel investors. The idea is to help angels to find appropriate investments in the most discreet way possible. “Angels by their very nature are hesitant in coming forward. They fear being swamped with applications for funding,” says Murray. “One of the key services we provide is to … narrow choices down to feasible concepts driven by entrepreneurs who have the ability to succeed. We also assist in matching opportunities to an investor’s own criteria, for example empowerment compliance, a particular industry, and so on.” Murray’s network also provides practical advice to angels, such as how to structure deals and how best to exit or harvest their investment. To unlock the potential of angel investors, more such networks will need to be established, and incentives to encourage angels to come forward may need to be brought to the table by government. While one wealthy individual investing in one small start-up may not be anything to write home about, the collective power of a well-networked angel community in SA could have significant benefits for entrepreneurship and economic growth. Can we really afford to overlook this vital source of investment any longer? Von Broembsen is lead researcher for the Global Entrepreneurship Monitor SA, run by the UCT Centre for Entrepreneurship and Innovation at the Graduate School of Business, University of Cape Town. This article has been sponsored by Liberty Life.

For more on moladi


Lets get South Africa working!