Bridging the funding divide
As an entrepreneur, the odds of success really are stacked against you. Out of every 10 new business ventures started, three or four will be lucky to see out the first two years of existence, and two of those will be lucky to get even further. STYLI CHARALAMBOUS takes a look at a new enterprise that aims to assist South African entrepreneurs bridge the funding gap, one of the biggest reasons start-ups fail before they even start.
Even with the much-publicised rate of new business failures, each year wannabe Bransons, Jobs’ and Zuckerbergs toss aside their golden corporate handcuffs to enter the entrepreneurial minefield of start-up business. South Africa needs a vibrant new business ecosystem to generate the kind of job growth necessary to make a dent into the 25% unemployment rate haunting this country. We know SMEs and new businesses are the only sustainable way to create economic growth and employment, yet the environment can be particularly unfriendly to newcomers, burdened with administrative red tape and the lack of access to capital. Building this “ecosystem” is what AngelHub CEO Brett Commaille and his team are passionate about.
AngelHub’s mission is to bring the experience, mentorship, networks and, of course, money of already successful businessmen together in order to assist South Africa’s new wave of entrepreneurial hotshots. Officially launched in September, AngelHub’s management draws on the venture capital and start-up experience of its founders to attract both investors and entrepreneurs, before selecting those that meet their mandate for presentation to their group of early-stage Angel investors.
Raising venture capital in South Africa has never been easy. “South African entrepreneurs are generally inexperienced in this form of fundraising, coupled with the fact that there are very few Venture Capital funds around. In this country, VC's are expected to be first round funders whereas in more developed markets, this role is played by Angel Investors who get the business to the point where it is suitable for VC funding. Essentially, the liquidity of this stage of start-up process has been missing, and that is what AngelHub aims to address,” Commaille told iMaverick from their offices in Cape Town.
And with so few VC funds around, each manager can afford to be more selective and stringent in qualifying criteria, meaning a one-page business plan or a back-of-napkin drawing that was the founding idea of Twitter, just won’t cut it in here.
AngelHub was created by a group of seven experienced individuals, deeply involved in entrepreneurial and early-stage funding activities in SA. They hail from several venture capital firms as well as software and asset management businesses, and currently serve as advisors and management for AngelHub. The faces you are most likely to meet are Commaille, the former CEO of Invenfin, Keet van Zyl, a partner at PoweredbyVC that manages Mark Shuttleworth’s South African Venture Capital fund HBD, and Wesley Lynch, CEO of development house Realm Digital. Along with other local and US-based advisors and partners, the management team are all shareholders in AngelHub.
Apart from “merely” offering access to scarce capital, AngelHub has arranged for several business service providers in the areas of legal, accounting and business reporting to assist entrepreneurs in building a business that will be well positioned for some kind of investment exit down the line.
AngelHub charges each investor an annual fee of R10,000 and requires them to make a minimum total investment of R300,000 per annum across the businesses they select. The initiative is also open to institutional investors with a minimum investment of R1-million per annum. “We spent a lot of time learning from Angel groups abroad. One of their biggest challenges is getting rid of ‘passengers’ – people who love to watch but never actually invest. Paying a fee ensures investors intend to participate. The membership fee covers some operational costs and means our entrepreneurs get to pitch to serious investors only.” Commaille said.
Unlike VC funds, AngelHub does not have a committed management fee based on fund size, so they only recover some of the due diligence costs at the transaction stage, and charge entrepreneurs a nominal fee for the legal, accounting and reporting services, which they would have had to fund anyway. In support of this important space, the IDC as well as other sponsors contribute towards operational expenses. AngelHub shares in the upside risk of each investment, hoping to make its return when the business has created enough value to implement its exit strategy, three to seven years down the road.
Commaille and his team look for the type of businesses that will scale quickly, i.e. can generate additional revenue without adding too many additional layers of overheads. “We look to invest in areas our Angels are interested in and that will return between five and 10 times the initial investment.” Whilst not strictly a technology-focused initiative, the use of technology will be important in how entrepreneurs get the management team’s attention. Sin categories of alcohol, porn and gambling are off-limits, as are the non-scalable categories of infrastructure and franchising.
To date AngelHub has sourced a total of 15 investors in South Africa, or who live abroad with an interest in South African business. Commaille hopes to grow this number to 30 by the end of 2012.
While most of the initial contact and work is done through the web at AngelHub.co.za, the team can also be found speaking at conferences, working with universities and even lobbying government when not connecting businesses and investors. The ecosystem doesn’t exist in a vacuum, and convincing schools and universities to incorporate more practical business elements to their curriculum is essential to lay the foundation and arm the starry-eyed tycoons with skills early on.
Commaille would also like to see the SARS follow international trends when it comes to Angel investing. “In the UK, 30% of the investment into an SME comes back as tax credit and if held for more than three years, the entire capital gain on the investment is tax free.” While SARS has made some strides in the right direction, Commaille would like to see them match at least these measures to incentivise more Angel investment in South Africa.
AngelHub allows investors a case-by-case opportunity to invest in businesses that the management team thinks will shoot the lights out. Using mostly their existing networks, Angelhub is already receiving 100 funding requests per month, and expect to screen 100 every quarter, with the decision to invest left entirely up to investors. They have already facilitated their first investment, in an accounting software business called “SMEasy”, with a further two deals at the term sheet stage.
As Africa becomes the final global economic and commercial growth frontier, ventures like AngelHub will become even more vital in the quest to see South Africa produce another Shuttleworth or even our very own Zuckerberg. Given the current economic climate and the lack of progress made by government to stimulate start-up investing, AngelHub and whoever else can connect businesses with experienced advisors and funding, will have a key role to play in how job creation and the next 20 years play out in South Africa. DM
- AngelHub website.