4.5.10. Angel Investment Networks
DESCRIPTION
Angel investors, also called informal investors, angel funders, private investors, seed investors or business angels, they invest in entrepreneurs and their businesses in the earliest phases. Angel investors typically invest their own money in exchange for equity or convertible debt. Because they are often closer to the entrepreneur, they may also provide some mentorship (Source: Mobilizing Private Finance for Development: A Comprehensive Introduction).
CONSTRAINTS ADDRESSED
- Ability to find borrowers in target sector/region
- Appropriate capital to meet borrower needs
- Burden of banking/finance regulations and supervision
- Transaction costs associated with originating and managing loans to target sector/region
ADVANTAGES
Guidance for SMEs/government/banks, access to finance
DISADVANTAGES
Coming soon.
MUST HAVE’S, CRITICAL POINTS, OR QUESTIONS TO CONSIDER
Coming soon.
VIGNETTE: ANGEL INVESTOR NETWORKS: INVESTING & MENTORING SMES
SITUATION
Small and Medium Enterprises (SMEs) need investment to grow – from purchasing equipment, to hiring new staff, to investing in new technology. Yet, accessing capital can be challenging, particularly in developing countries where capital supply does not fit SME capital demand. Growing businesses quickly outgrow microfinance, and commercial banks frequently have stringent collateral requirements or unfavorable terms that stifle company growth. STRUCTURE Angel investors, by providing early-stage capital in the form of equity, enable firms to reinvest additional earnings into expanding their business. With higher risk and transaction costs present in developing countries, angels tend to be less active in these markets. To mitigate costs and risks, angel groups are evolving for developing countries. In addition to pooling capital from individual angels, thereby lowering transaction costs, angel groups provide on-the- ground support to decrease operational risks and navigate specific market complexities. In Ethiopia, USAID identified the RENEW Impact Angel Network as a model structure for developing markets. RENEW links its network of the 100+ U.S.-based Impact Angel Network investors to SMEs in need of financing, while its team on the ground builds the SME’s capacity. To keep transaction costs down, RENEW does not charge its angel investors a management fee. It only makes money if and when its angels do. USAID provided a $200,000 grant to help establish RENEW’s Ethiopia operations, provide the initial technical assistance to SMEs in USAID’S Feed the Future value chains to make them “investment ready,” and provide guidance to the local government and banks.
IMPACT
By lowering initial startup costs in Ethiopia, USAID helped bring new investors into priority markets and sectors and helped RENEW achieve its own financial sustainability. Thus far, USAID and RENEW have leveraged almost $2M of equity investment, $10.5M in total financing, and an expected $30M of additional capital (e.g. through bank loans that would not have otherwise been issued).These angel investments have resulted in over 1,000 new jobs, generated millions in export revenue for the country, and strengthened professional expertise of key government officials—priming the pump for other investors. With an estimated $35 billion of angel investment funds available in USAID’s target markets, the potential impact of supporting and growing angel networks is enormous.