Large professional investors have experience and connections in-country along sectors of interest. They depend on institutional knowledge and careful record-keeping to stay aware of and find new opportunities.
However, the amount of capital available through professional investment firms pales in comparison to the gap in the market. More capital is needed throughout emerging markets and particularly across sub-Saharan Africa. This is particularly true at an early stage where angels, who bear the greatest risk, have the most limited market information available.
A recent study in Morocco found that gaps in funding exist at all stages of a business:
- Limited equity at an early stage: There is a weak Business Angel Dynamic to fund $50K to $100K USD investment.
- A $100K to $500K USD gap despite the existence of startup funds: There is a need to reinforce early VC funds in this space but also improve the deal flow for them from incubators (quality/match to investors)
- The growth gap from Seed to Series A: There is a significant availability gap between $1.5M and $4M USD as exit and investment economics continue to push the PE industry towards bigger deals.
- The exit challenge for investors: Exit is the key challenge impacting the industry at all levels, resulting in greater selectivity on investment and a generally dysfunctional VC cycle throughout the lifecycle.
This is a common environment across emerging markets. Seeking to fill the financing gap in Africa with institutional funding misses the source of the problem. The feeder system of angel investing through Series A continues to be a problematic bottleneck. On top of the environmental and political risks associated with emerging markets investment, an angel has little to go on other than referrals to judge the team risk. And if connections are the sole guide for investment, this expands financial exclusion in markets that are already known for their lack of inclusive social structures.
Angels need better information on a particular entity’s connections and the industry competition they operate in to understand the risks and potential opportunities before them, but the cost to acquire this data is too great when evaluating each potential deal. Some angels address this by 1) investing only in close connections/relatives, 2) seeking co-investment with larger firms or international angels, or 3) making a lot of small bets to counter the team and market risks.
All of these solutions limit the available opportunities that angels will invest in and in return limit the amount of early capital to businesses. Providing a more holistic and affordable view of the market would reduce market and network familiarity biases to investment, create more opportunities for investors, and de-risk potential investments when an investor knows what partners a particular business and/or team is associated with. One example was the recent market mapping of Morocco. Pulling in a greater amount of data on a wider variety of markets in more sectors is necessary to truly unlock angel investment in Africa.
About Jason Eaves
Jason Eaves is the founder and Lead Strategist at Discovered Markets. Discovered Markets maps systems to highlight opportunities in emerging markets for businesses and investors.