Welcome to a new week and newsletter.
As Nigerians bask in the fact that its youths are speaking with one voice in demanding for an end to SARS, we all got the news of the sale of an indigenous technology company, Paystack to Stripe.
What made the news all together heart-warming is the fact that the company is home grown and is a success story of what the average Nigerian youth can do if allowed to thrive.
Apart from the two founders who became naira billionaires, the early investors are also smiling to the bank. According to social media, a N2 million investment in Paystack at its inception in 2015 amounted to a pay-out of N180 million when it was sold last week.
Also impressive is the fact that the investors achieved this profitable exit within a 5 year period; thus allowing investors the opportunity of reinvesting their funds in other ventures.
In addition, the Paystack story is also raising awareness in the opportunities for angel investing within the Nigerian business space and Africa as a whole; especially given the fact that viable investment opportunities are currently shrinking.
Today, we will be discussing angel investing, what it means, its advantages and disadvantages (remember, like life; everything has its inherent risks).
According to Investopedia, an angel or private or seed investor or angel funder is a high net worth individual that provides financial backing to small start-ups or entrepreneurs usually in exchange for equity in the company.
Angel investors are typically family and friends of the entrepreneurs and provide the funds either at the start up stage or working capital during the early years of the business.
Angel investors tend to be high net worth individuals mainly because the funds required are medium to long term in nature and are usually not more than 10% of their investment portfolio.
In other words, angel investing requires that you have excess funds available. It is risky but tends to attract higher rate of return than other conventional investment opportunities.
Entrepreneurs prefer to approach angel investors for initial funding as they tend to be cheaper and less onerous than financial institutions or venture capitalists. Given that many angel investors have relationships with the entrepreneurs, they sometimes provide other forms of support such as mentoring or networking opportunities. Angel investing can be done either directly or through crowd funding platforms.
Like I mentioned earlier, angel investing is a risky venture and not all startups become successful or have huge pay outs or returns.
Below are some of the pros and cons of angel investing:
- Higher returns: as mentioned earlier, due to its risky nature angel investments tend to have a higher rate of return – on the average x3 of the initial investment.
Although there are outliers like Paystack and Facebook, not all startups generate such pay outs, some fail outright. Softbank made a massive loss on WeWork (remember them?).
- Alternative investment vehicle: Angel investing helps diversify your portfolio and create further flexibility for you. Do remember that most angel investors limit this class of investment to not more than 10% of their portfolio.
- Altruistic nature: By investing in a startup, you are giving back to others through funding and also empowering others to create employment for themselves and other members of society.
- Risky: like we have said severally, angel investing is about funding a startup and there is no assurance that the business idea or company will be viable.
Over 75% of startups fail and those who succeed, take a minimum of 5 years to either become liquid or profitable.
Uber is yet to post profit despite being valued at around $50 billion. It took Amazon over 5 years to become profitable.
Remember, Moderna, the biotech company developing a vaccine for corona virus; it took 10 years and a pandemic for the shares to raise appreciably.
- Speculative: Angel investing is very hypothetical in nature as there is no guarantee that the investment will yield its desired expectation.
Some investors have made the right call and became billionaires or multimillionaires while others aren’t so lucky.
Only 20 of the 60 friends and family approached by Jeff Bezos agreed to fund Amazon as a startup; just like how the investors on Shark Tank walked away from Ring (then known as Doorbot); only to be bought for over $1 billion some years later.
- It is a bet on people: not all entrepreneurs can run businesses properly and so there is also no guarantee that the founder would make a good CEO.
The scandals that led to the exits of Adam Neumann (WeWork) and Travis Kalanick (Uber) from companies they founded illustrate this.
Both men had to be eased out of those companies by other shareholders and investors in order to safeguard their continued operations.
- Capital intensive: There is a reason why angel investors tend to be high net worth individuals; not too many people have the financial capacity to commit the volume of funds required for funding rounds (and for the tenor also).
It is necessary to note that Pareto’s Principle holds very true in case of angel investing. 80% of the yields will come from 20% of the investments.
- Specialized activity: The process of deciding which startup companies to invest in is not a sentimental one as it involves parting away with cash with the knowledge that the venture may not succeed.
As such, experienced angel investors hardly invest without documentation or even legal representation, which cost time and money. A common alternative to this is membership in Angel Investing Groups.
In conclusion, angel investors (existing and aspiring), will always do well to remember that no return is real until you have received the funds in your account.
Kindly remember that there is still no cure for the corona virus and that prevention is always the better option.
Please continue to take personal responsibility for ensuring that Nigeria does not experience a second wave of COVID 19.
Keep washing your hands, maintaining social distancing and wearing your face masks in public.
As the youth continue to demand for better governance, may the labours of our heroes past never be in vain; and may this new dawn herald the Nigeria we yearn and pray for.
May the souls of the victims of Police and SARS brutality also rest in perfect peace and may they find justice no matter how long it takes. May God continue to bless the Federal Republic of Nigeria.
Till next week, stay safe and do have a wonderful week.