How to start an angel investment company in Nigeria
Businesses other than venture capital and private equity firms can invest in startups. High net worth people (HNIs) and upwardly mobile professionals can both contribute to businesses as angel investors. But they are up against certain difficulties. Many times, those wishing to diversify their investment portfolio through angel investing are unaware of the best opportunities. Additionally, when people learn about these offerings, the size of their checks may not be sufficient for them to take part in the funding round, which is often a pre-seed, seed, or bridge round. Additionally, because Nigeria has no laws or rules governing angel investing, novice investors are vulnerable to dishonest founders.
In 2021, startups in Africa raised $5.2 billion. That about equals the total sum raised from 2016 to 2020. However, early-stage capital is still only a fraction of a billion dollars. Only $29.5 million, or 1.48% of the $2 billion raised in total, was invested in early-stage deals in 2020. Early-stage deals were estimated to be worth $23.6 million in 2021, which is less than 0.46% of the total capital raised. Given that a significant portion of the investment is going to the series rounds—A, B, and C—this points to a gap that has been persistent. However, a group of financiers known as angel investors are trying to close this gap by identifying, supporting, and working with early-stage firms.
What does the term “Angel Investor” mean?
An early-stage startup is funded by an individual known as a “angel” in exchange for a share of the company, typically in the form of equity or royalties. In other terms, an angel investor is a person with extra money who invests in businesses in their early phases in order to get a higher rate of return than what is offered by conventional investment alternatives. Angel funders, private investors, seed investors, and business angels are other names for angel investors. They contribute funding to early-stage firms in return for ownership stock or convertible debt. Additionally, compared to other sources of capital for businesses, their term sheets are typically more favorable. Angel investors frequently contribute as a means of assisting the founding team; as a result, they place more emphasis on assisting the firm in its early stages than on their returns on investment.
However, this does not imply that angel investors are charitable or selfless. They are also involved for financial gain. True angels don’t care if they lose their entire investment. They are looking for the one out of 50 that will yield a 100% return, or perhaps even more. Angel investors differ from limited partners and venture capitalists (VCs). Limited partners (LPs), who can be either persons or companies, are investors in venture capital firms. Institutional investors including pension funds, college endowments, trusts, insurance firms, family offices, sovereign wealth funds, and finance and development organizations are frequently among them. Other venture funds may accept LP investments from VC firms and angel investors as well.
Angel investors are frequently business professionals, C-level company executives, founders and entrepreneurs who have already launched successful companies and know how to identify startups with a bright and profitable future, investors who make financing small companies a profession, and crowdfunding platforms that raise funds in groups by having participants invest a small sum in exchange for a small share of any future profits, if the company succeeds.
Types of Angel Investors
- Guardian Angel
Guardian angels are knowledgeable in the necessary fields. Additionally, they are actively committed in assisting the startup’s growth. The strong network and experience of startup founders can be used to expand the business.
- Operational Angel
Operational angels have previous experience holding high management roles in significant corporations. By avoiding common errors that new firms make when scaling, founders can use their experience to grow the business.
- Entrepreneur Angel
Angels who have successfully launched and operated a firm in the past are known as entrepreneur angels. They can serve as a mentor for aspiring startup founders.
- Hands-off Angel
Angels that are hands-off have money to invest but lack the network, knowledge, or time to help founders. Most angels tend to err in this area. For instance, a wealthy doctor, attorney, or accountant might choose to put some spare money into start-up companies with big potential.
How much can you make as an Angel Investor in Nigeria?
A good query! Let’s use Kendall Ananyi, the creator of wifi.com.ng, as an illustration right now. In order to invest in Paystack, Kendall sold his Canadian home in 2016. Kendall stated that Paystack had a 20x return on her initial investment after Stripe purchased the company for $200 million in 2020.
So let’s calculate. A 20X return on Kendal’s $25,000 investment in Paystack in 2016 would result in him receiving $500,000 in 2020. That profit in less than five years is unquestionably astonishing. One advantage of becoming an angel investor in Nigeria is that. If you’re wondering how I can have such returns on my investments, read on. The straightforward response is, “Start investing as an angel in Nigeria right away.” However, Kendall wasn’t the only person who had a testimony to provide. Other angel investors made investments in Paystack’s seed round in 2016, and each of them saw a return on investment of roughly 1,440%. In other words, their money was returned in multiples of 14.4 in just 5 years. Tell me, what other investment opportunity is better than that?
How to start an angel investment business in Nigeria
- Join an angel club or syndicate.
Syndicates are sometimes confused with angel networks or clubs, even by individuals who have the greatest of intentions. An angel group is made up of investors who have decided to pool their funds to invest in a startup. In contrast, a syndicate gives investors the chance to take part in the deals of a qualified lead investor. Additionally, a portion of the angel investors’ profits on investment would be paid as carried interest to the lead investor.
For instance, if you invested $2,500 and the main investor charged a 20% carry. You would first receive your $2,500 original investment, and the lead investor would deduct their 20% carry from the profit after a successful exit with 2.5x returns ($6250). That is equal to $750 or 20% of $3,750. Your actual returns on investment would be $3,000, leaving you with nothing.
Angel clubs or organizations are essentially loosely organized syndicates. With just $2,500, an angel investor can persuade nine other people in their network to contribute, resulting in a total of $25,000 that can be used to fund any firm.
Angel clubs and syndicates can have benefits and drawbacks. People enjoy being a part of syndicates since the top investors are frequently seasoned businessmen. However, for some investors, angel clubs are a preferred choice due to the carry and subscription fees syndicates charge.
- Be a part of an angel network
Angel investment is made simpler by the structure and mechanisms provided by a network of like-minded investors. You could have access to deal flows, training, syndicates, and support organizations by joining an angel network.
The largest network of angel investors in Nigeria is called the Lagos Angels Network (LAN). Tomi Davies co-founded it in 2012. According to Tomi, the network was founded by five angel investors with assistance from a number of organizations, including Nokia, Digital Bridge Academy, Mobile Monday, Paradigm Initiative Nigeria, Co-creation Hub, and Wennovation Hub.
- Utilize websites such as GetEquity, WeFunder, etc.
To prevent you from making irrational investment decisions, you should think about investing alongside others. But if you’re game, these services let you put as little as $100 directly into businesses. Tokenizing private equity makes this possible.
It would be challenging to manage their cap table, which is one of the reasons companies don’t accept piecemeal financing from angel investors. However, because these platforms offer tokenized shares, businesses are able to conveniently manage their relationships with small-dollar investors.
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