Angel’s Advocate: The Case for Angel Groups
What’s the value of local angel communities in emerging markets? First, let’s take a moment to play devil’s advocate. Angels accept high risk and often don’t see returns. It takes an average of seven years for a liquidity event to occur in non-tech angel investments, and around six years for tech investments. Sometimes this leads to Angel networks failing before they see any exits. Despite the drawbacks, at BeyondCapital we prefer to play the Angel’s advocate.
Angel financing forms a healthy foundation for startup ecosystems. The surfeit of early stage financing available in Silicon Valley was a precondition to it’s success in becoming a tech innovation hub. Cities around the world may fail in attempting to imitate the Valley’s domain expertise, but having the proper substructures in place can position their communities for broader success. There are hundreds of active angel groups in the US, which form an important role in the fundraising chain. Conversely, Angel groups are rare in emerging markets, but MENA is fortunate to have a few, including Cairo Angels of Egypt, IM Capital of Lebanon, and VentureSouq of Dubai, among others. In Jordan, however, there are no formal angel groups. Previous efforts such as Bedaya Angel Network and JoAngels are no longer active, in part, due to a lack of financial support.
So what exactly do Angels and Angel groups do?
As Cairo Angels founder, Hossam Allam, puts it, “We’re chasing premium returns on investment…but I’d be lying if I deny that we’re all closet patriots that kind of like what we’re doing for the country.” Patriotism aside, an angel investor is someone who funds seed stage startups, generally entering the fundraising picture after the ‘friends and family’ stage. The key difference between an Angel investor and a venture capitalist, is that Angels write checks from their private wealth, compared to venture capitalists who invest the wealth of others. The fundraising gap where angel networks typically come in is from $25k (at the low end) to $1 million (at the high end).
Angel networks differ by group, but they generally consists of individuals that regularly meet to hear pitches from selected entrepreneurs and review potential investments. The Angels that want to move forward on a deal, then work together or elect a champion to conduct due diligence, review financial statements, negotiate with entrepreneurs, produce term sheets, and serve on the startup’s board.
What’s the big deal about Networks?
Angel Networks allow investors to make bigger deals, more frequent deals, reduce risk, and expand support to more entrepreneurs. Networks add more value to all stakeholders, starting with the startups. Because Angels provide investment as well as technical expertise, their involvement relieves problems of funding capacity, entrepreneurial capability and access to early stage finance. Without angel investment, entrepreneurs typically have to rely more on their own savings or that of their family/friends, since they are generally too early to access banks or venture capital. This financing stage, often called the “valley of death”, is a critical inflection point for the survival of a startup. Most entrepreneurs will not be able to rely on their own savings or families’ to stay afloat. Besides funding, Angel investors help with mentoring, coaching, financial monitoring, and connections, which can significantly improve outcomes for both parties.
Networks also create value for the investors themselves. They allow less experienced Angels to learn from a network of peers through the deal process. Since the expertise match between the investor and startup can affect success outcomes, angel communities with varied member backgrounds will improve both funding capacity and investment capability. According to senior advisor to the World Bank, Oltac Unsal, active angels realize 7x returns compared to inactive ones.
Networks also have additional importance in Emerging Markets. Relevant to Jordan and the greater region, evidence shows that international investors interested in emerging markets are less active in seed rounds, and more active in later-stages after companies have demonstrated value locally (more about this here). An Endeavor Insight study showed that a significant factor for the high productivity of Bangalore’s tech scene was individuals of successfully scaled companies who invested in, or mentored startups. These examples show the particular importance in emerging markets of having a robust base of local investors at the seed stages. Unlike Bangalore, many emerging economies lack the supply of 2nd and 3rd generation entrepreneurs who can mentor and support local startups. A more expansive network of angels, with diversified business experience, mitigates this problem.
What is important for a sustainable angel community?
Angel groups require patient capital and a way for networks to sustain themselves in the near term, before they ever see returns. What would a successful angel network look like in Jordan? As Allam says, “There’s no entrepreneurship ecosystem in any country…without real local investment.” He recommends, “strengthening local and diaspora networks of angels…finding who out there is an angel or thinks they could be an angel, and helping angel groups to strengthen their infrastructure.”
Alongside Endeavor Jordan, BeyondCapital hopes to develop ideas and advance this discussion at the DealMakers event from March 11–12. This event will include a workshop for those interested in developing the know-how needed for early stage financing. We encourage anyone interested in angel investment in Jordan, and the greater region, to participate (you can register to attend here).
As BeyondCapital continues to play Angel’s advocate, we acknowledge that angel groups often fail, but we are confident in their value and optimistic that they can succeed. What else can be done to improve Jordan’s angel community? We would love to hear your opinions in the comments.