Angel investing – don’t risk all your retirement money

Stephen Gugu

Stephen Gugu

Much has been written about the lack of appetite among local investors to back African technology start-ups. In East Africa, the majority of the funding comes from foreign entities, with local investors opting for traditional industries such as real estate. As a result, many businesses, particularly those in the early stages remain cash-starved, unable to scale.

Kenyan finance professional Stephen Gugu seeks to fill these gaps by linking angel investors with technology-focused early-stage businesses operating in East Africa. After years working to help start-ups secure financing, Gugu in 2014 co-founded the angel investment network ViKtoria Ventures. Through the network investors pool funds together to back start-ups that require a minimum of US$50,000 investment.

Gugu shared his experiences in angel investing. Below are edited excerpts.

What was the motivation behind forming ViKtoria Ventures?

Since 2011 we were involved in working with early-stage companies helping them prepare for investment. There were a couple of grants that some of the people we’d been working with received, but really in terms of hardcore investment from local or international investors, there was not as much as we would had wished to see.

We looked at the start-ups we were working with and realised most of the funding coming in was foreign – a couple of VC funds, grants and some angel investors. That kind of money helps a company in terms of being financially nourished but does not help the company with new contacts, networks or introductions. So you find that when you have cross-border investment they tend to help in terms of funding – but for an early-stage company you need so much more.

If you look at the typical trajectory for a start-up – you begin with your own money, before you go to VC investing or seed investing or private equity. In Kenya, as well as the rest of East Africa, the concept of angel investing is not present.

You find that people will start with their own money, and then they will have to apply for start-up competitions or go for grants. The challenge with grants is that they usually have some expectations for the start-up. So angel investing for us was just trying to unlock this handicap. We started late 2014 and we are just closing an investment from the previous round.

Do you come across enough businesses that are worth investing in?

In my view, yes I see them. We see companies that are scalable. We see entrepreneurs that are very passionate. They have a product that they don’t need to put in as much capital to scale. The key issue is that they just need someone to believe in them, to move them to the next stage.

Describe the profile of angel investors ViKtoria Ventures is working with.

About 60% to 70% of the investors in our network are locals and the rest are foreigners who live in Kenya, drawn from far places like Europe, and even as close as Uganda.

Most of them are former entrepreneurs. I use the term “former” because they have already made some cash, so they understand the journey. If you look at most angel investors, you’ll find them empathising with the younger entrepreneurs. These are also people who have disposable incomes and they must have a certain pedigree for risk. The general rule around angel investing, if you look at what’s recommended in portfolio allocation, is to not put in more than 10% of your entire portfolio. If you are going to engage with us, we advise as a minimum $5,000 per investment and at least one investment a year.

But that $5,000 cannot be your retirement. You have to analyse whether you can really take the risk on this amount or not. You have to realise that you might lose all that money and that you must be okay with that fact. Early stage investing is risky. In some cases, you back very young entrepreneurs who do not have much experience running a business.

You have made some personal investments, and even had some losses. What’s your motivation for being an angel investor?

I want to go to heaven (laughs). I find it interesting, and I love engaging entrepreneurs when they are trying to create. I love that part of the business of trying to make something out of an idea, or a concept, or a small business. Secondly, for me it’s also about giving back. I always feel that for everything that I have gotten I should be able to give back to people who, like me, are entrepreneurs trying to grow their businesses.

The best way I discovered to accomplish this is to bring in other people – and also to invest money myself to push these companies up. This sounds very ‘angelic’ but in Africa this is what’s needed. I feel there is a need for people to start pushing these companies because otherwise nobody else will do it. I’ve worked closely with entrepreneurs; I’ve coached so many and reviewed so many businesses, but if you don’t manage to get them funding, then you are just wasting time. If you do not manage to grow the business into a corporate – then you have not done what you should have.

The second point is the return. Who knows, maybe some of these companies that we are taking bets on today end up making supernormal returns. But at the really early stage, you just don’t know where the company can go. It could be a rock star or it could be nothing, and I have experienced that.

I took a gamble on a team and put in some cash [but] after a couple of months they changed direction so I lost some cash through that. [As an early-stage investor] you have to realise that you may lose the cash you are putting in. When I speak to people and they tell me, “I’m not ready”, or “I’m not interested”, I understand where they are coming from because $5,000 is a significant amount of money.

If you want, you can buy a plot, invest in government bonds, put it into your child’s educational policy or into a mortgage. It’s not like there is a shortage of safe investments. But if you get it right [as an angel investor] you could make a lot of money.

The investors who backed Facebook in its early stages made huge returns. Could that happen here?

In my opinion, you won’t see those kind of Facebook success stories in Africa. You will see guys that make 100 times their investment, but 10,000 times – I don’t see that happening. It’s just that African companies will scale around Africa, but you won’t get many scaling into Asia or Latin America. If you look at your American counterparts, they are scaling everywhere. So here, yes, you will make money, but I don’t think you will get the kind of returns Facebook investors got.

How do you convince people to become angel investors when there are other competing investment options?

I think that most people get convinced more by the returns discussion. Everything, even the real estate boom that we are seeing right now, is about being patient. There was a time when there was not much real estate investment. If you go back to the early and mid-2000s, in Kenya [buying] shares [was popular] and this was because of the listing of some prominent companies. We just need to get to that tilting point then many more people will join. We need more success stories that demonstrate how people have made returns.

If you look at Kenyan tech entrepreneurship, most of the businesses that people are talking about right now were founded from the late 2000s to now. In five or ten years, some of these companies will be huge, and the space will become more competitive. I think this is the right time to come in and start taking risks. If you look at the hugely successful tech companies like Apple and Microsoft, they got founded around the same time. In my view we are in that time in Kenya, give or take a couple of years. At the end of the day it is our ecosystem. If you want to create jobs and have those businesses that transform the ecosystem it has to start with simple ideas. Every big company you see was once a small business.