Venture capitalists (VCs) and angel investors are gradually pulling their weight as a major force in the growth of technology start-ups around the world. They have become an important alternative for funding in the sector. Ideas and talent may be crucial without which there will be no innovations, but if the required funds are not available to translate those ideas into innovations, that could be a bigger problem.
Big technology companies like Facebook, Twitter, Uber, Airbnb and many others were once start-ups which grew through seed funds made available by venture capitalists or an angel investor. Available research today indicates that the tech scene in Nigeria is exploding. With an internet population of 62.4 million, an e-commerce market that is worth $12 billion, Nigeria’s tech space is the toast of many investors including VCs and angel investors.
A venture capitalist is an investor who either provides capital to start-up ventures or small companies that wish to expand but do not have access to capital or equities markets. Venture capitalists are willing to invest in such companies because they can earn a massive return on their investments if these companies are a success. They are typically wealthy enough that they can afford to take the risks associated with funding young, unproven companies that appear to have a great idea and a great management team.
In Nigeria we have had many examples of companies that leveraged venture capitalists to scale their businesses. For example, IrokoTV an online movie streaming start-up established in 2010 has closed several funding opportunities in excess of $30 million from venture capitalists. Jobberman which began in a Nigerian university hostel in 2009 and has grown to be the country’s top recruitment firm online with over 1.5 million visitors also has a strong venture capital backup. The company was acquired 100 percent recently by One Africa Media. Hotels.ng which opened its site for business in 2012 as a small online hotel booking agency was scaled using seed investment of $225,000 from SPARK in 2013.
On the other hand is the angel investor who is in some respect different from the venture capitalists. An angel investor is someone who invests in start-up companies in exchange for an equity ownership interest. An angel investor also helps with advice and contacts. Unlike venture capitalists, angel investors usually operate alone or in very small groups and they play only an indirect role as advisors in the operations of the investee firm. The $24 million investment in Andela from Mark Zuckerberg and Priscilla Chan Zuckerberg is a good example of angel investment.
So what do venture capitalists and angel investors look for before investing in start-ups? We asked major stakeholders in the seed funding space. Collins Onuegbu, from Lagos Angels Network said “Angel investors and VCs generally look for companies that are viable to make a decent return on investment. Such companies should have a clear path to grow and scale, and founded or run by founders that espouse trust and capability.”
Maya Horgan Famodu, founder of Ingressive, a firm that has pulled majority of tech investors directly from Silicon Valley to Nigeria says the investors are looking for “lower valuation and equal returns. They are looking to diversify their tech investment. They are looking for fast growing start-ups.”
A tech startup has to be solving a problem said Tobi Oke, co-founder of V8 Africa.
“If you have skin in the game – meaning you are very committed and invested in ensuring the business succeeds, if the idea is properly researched with target market properly understood, then the business will qualify for funding. The team is also important; we prefer a team with a minimal number of two founders,” Oke said.
Once VCs and angel investors spot their start-up they are in for a long while. According to Maya Horgan Famodu, investment maturity takes seven to ten years. The investors know from the beginning that they are investing in start-ups that will require a number of years to mature. However, they will not wait forever. “The traditional venture fund life is 10 years,” Famodu says.
