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Returns and Exits
1. How do angel investors make money?
- Larger funds – The angels could potentially exit into larger funds or corporates that have an interest in the sector the company operates in.
- Exit to founders – With good returns the angels could exit their stakes to founders.
- Angels could use structured debt instruments as forms of exits.
- Strategic exits like acquisitions or mergers also offer great opportunities for angels to extract value from their investments.
2. How risky is the investment?
- Compared to other asset classes, angel investing can be risky since the investments or businesses are unproven. Angel investing isn’t a way to get rich quickly. It takes a long time for a startup to grow to the point where investors can make a rewarding exit, hence it’s important to invest only money you won’t need to use in the near future, but also money you’re not too scared to lose.
- Statistically, up to 75% to 90% of startups might fail, hence why experienced angel investors frequently make investments in multiple startups throughout various industries — this helps to spread risk. One win can more than offset the cost of the other failed ventures.
3.How much can an angel make in returns?
In relation to the response above, every investment should be considered from a max return perspective. Each investment opportunity should be approached as if it was the only one that will make the money back. Returns vary from market to market but a good average would be to target a 10 – 15 times money back.
4.Who is accountable for the investments?
Private capital asset class is not a heavily regulated sector in Africa unlike more mature markets where there are accreditation requirements. Also, there are no tax incentives to angel investors in most of Africa, hence the requirement to learn, network and seek advice before committing capital to investments. The angel investor is solely responsible for the investments they make as it is an individual decision
Syndication approach can reduce (not eliminate) risk as it allows for collaboration in sourcing, assessing and adding value to the investments by exposing the companies to previously inaccessible networks..
5.How does it compare with alternatives?
Investing in early-stage private companies has a different risk and return trade-off compared with investing in traditional stocks and bonds.
Conventional asset classes tend to be more predictable than unproven start-ups that are still validating their market need. While the risk is hence higher, they also can offer supersized returns when things go well.