Zachariah George is the wearer of many hats – co-founder of the Startupbootcamp AfriTech accelerator, principal at Nedbank Venture Capital, and active angel investor.
As an angel, George is especially busy. He has made around 50 angel investments since moving to South Africa in 2010, initially all in the financial services space. After building Startupbootcamp AfriTech he saw the need for innovation in other spaces, and started making investments elsewhere too.
Speaking on the latest edition of Disrupt Podcast, George shared a few key tips for high net worth individuals interested in getting involved in angel investing in African tech.
Stick to your lane
At the beginning, investors should stick to the geography – and indeed the vertical – that they are familiar with.
“If you are a first time angel investor, or have been investing for less than a year or two years, I would really suggest that you stick to your local or regional geography where you can add a lot of value beyond just money. Contrary to popular belief angel investing is more about networks and resources, intellectual value add and value add from a supply and distribution standpoint than just money,” George said.
Be patient
You may be keen to build a portfolio as quickly as possible, but it makes more sense to take your time.
“Do not invest all your money at one single point in time. Just because you’ve had a windfall of let’s say US$100,000, don’t just dump it into five companies, US$20,000 each. You want to tranche your investments over a period of time because you want to account for market cyclicality,” said George.
“I would strongly suggest angels look at disbursing capital over a one year period, and stick to about two or three investments a year if this is your first rodeo, and try and limit your total exposure to angel investments to nothing more than 20 per cent of your net worth. Twenty per cent is a high watermark.”
Syndicates make due diligence easier
There are many differences between VC and angel investing, with the latter about taking educated bets on mostly pre-revenue businesses. Conducting due diligence can be challenging.
“Angel investing diligence is much less structured than VC diligence, which can take months. The four components are financial diligence, operational diligence, technical diligence and legal diligence. That’s why they take so long. And most VCs will outsource one or more of those to third party firms,” George said.
“Angels don’t have the time for that. They have a one or two hour call with the founding team. And the questions they need to be asking are – how big is this market? What are the average margins? Who are your biggest competitors? And angels get a lot of that done by investing in syndicates. I would suggest being part of a group where you have people with varying expertise.”
Add value to your portfolio, but don’t let startups become dependent
As mentioned above, angels bring a lot more to the table for an early-stage startup than simp;y cash, and ensuring you have the ability to offer active support to entrepreneurs is another reason why you should tranche your investments. Yet you want to avoid a situation where a startup becomes dependent on your help.
“As an angel the most value that you add to a company is the first year or 18 months after investing in them. You add all your networks, the corporate connections you have, the investors you know. A company I invested in five years ago, I may have at best an hour chat with the founders every three months. One that I invested in two months ago I’m talking to more often,” said George.
“Never get into a situation as an angel investor where you allow your portfolio companies to become dependent on you. There are advisors for that, and advisors get paid, or they get paid in equity. As an angel investor you want to open doors to founders as quickly as you can and then sit back and help when you can, not at the beckon call of the founder.”
Know when/how to get out
There are two ways an angel can make a return on an investment. VC kicks in at seed or, more likely, Series A level, where minimum cheque sizes are larger and startups have met certain KPIs. At this point an angel investor will be given the opportunity to get out.
“You literally add almost no value to a company and are just sitting on a cap table and making matters more complicated. A lot of very prominent African tech ventures end up having 25-30 people on their cap table at Series A or Series B, so what ends up happening is that incoming lead investors will offer X to buy out these angels, and do a secondary sale in addition to putting in money,” said George.
More patient angels could be prepared to sit it out and wait for an acquisition or (far less likely) an IPO.
“There are some angels that don’t need to get out, and they can wait seven to 10 years for a liquidity event,” said George.
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The latest episode of Disrupt Podcast is available now, featuring in-depth interviews with George as well as Antoine Paillusseau of South African AI startup FinChatBot
You can listen on Soundcloud, Spotify, Apple Podcasts, and all other podcasting platforms.
