Angel investment: Risk Investing or Wealth Management

By Salum Awadh ~ CEO at SSC Capital on 18 May 2020Finance

Angel investing has become one of the popular investing options for many pre-seed and seed stage start-ups globally.

It helps entrepreneurs realize their start-up dreams by financing their pre-revenue business ideas, and some post-revenue businesses with early market traction.

According to World Business Angel Forum, the global market of angel investment is over USD 5O billion annually, supporting thousands of businesses, which wouldn’t otherwise be able to raise money from other sources such as banks or venture capital.

But Africa, and Tanzanian in particular, still make up a small fraction of this investment, but the industry is taking shape now and we begin to see deal traction in many parts of Africa such as Nigeria, South Africa, Egypt, and Kenya.

 

According to Baobab Insights, the amount of pre-seed investment has grown rapidly in the last five years, from $0.289m in 2015 to $4.257m in 2019. The graph below shows the median pre-seed and seed round size in Africa since 2015

 

But who is an angel investor really?

An angel investor is an individual who invests his/her money in an early stage business, usually in exchange for equity ownership, with the expectation that his/her investment will grow in value and make huge returns, normally in a range of multiple returns of the original investment in a couple of years.

Unlike venture capital, an angel investor also actively supports the investee company with technical advise, mentorship, and bring in a network of other players that can support the start-up company to grow. That’s why; an angel investor must be someone with history of entrepreneurship, understands business life cycles, and has made some money, part of which can be invested in that start-up business

But most people can’t differentiate whether angel investing is a risk investment understanding or wealth management.

 

Risk Taking

Angel investing is theoretically and practically a risk investment practice, where an investor can lose all of the investment, recover partially, or make huge return, as the compensation of the high risk taken. When Peter Thiel invested in Facebook in 2004 with USD 500,000, nobody knew if Facebook would turn out to be a multi-billion dollar company, and for the compensation of that risk, Peter Thiel made over a billion dollars.

Unlike wealth management where the rule of the game is safety, risk balance, with moderate returns. Wealth management is more of supporting an individual preserving their capital, and happy with annual return of 5% to 15%, make it a no match with angel investor, in both risk and return.

 

Valley of Death

Another characteristic that defines the risk nature of angel investing is the type of the companies they invest in, and the stage, which they are in. Angel investors invest in a company, in most cases, at the stage called “valley of death”.  This is a stage where a start-up has begun operations but lack revenues (in majority cases), the cash flows are likely negative, and it largely depends on the invested capital to survive, and it is at this stage where angel investors invest, and where many start-ups die as well. But is also an opportunity stage for an investor to spot the right company such as Facebook and laugh all the way to the bank if the start-up thrives.

But with wealth management, an investor invests in mature companies, usually listed and trading on the stock exchange. Most of these companies are mature, have history of profitability and dividend payouts, but again, the returns generated here are still outweighed by angel investment, so are the risks.

 

Manage the Risk

So it is very important for an investor to understand these and other risks and characteristics of angel investing before investing.  Angel investing is not a game of “get-rich quick scheme” neither an asset for risk averse people.

If the angel investor is well guided, invests with other experienced investors through an angel investors network, the changes of success increase as proper due diligence is done before selecting which start-up to invest in, which instruments to use, and if the start-up has the potential to scale and provide better opportunities for exit. With this way, angel investing could not only be game changing for supporting entrepreneurs that bring solutions to the market, but can also generate unbeatable returns to the investor.

 

By Salum Awadh ~ CEO at SSC Capital