SMEs and angel funders.

SMEs and angel funders are an interesting discussion topic in South Africa.  In South Africa it is still an under-developed market. An angel opportunity was launched in KZN some years back, but failed. I am not sure of why it failed, Subsequently another organisation sprung up to try and channel angel funding, but it appears to be inefficient, to be generous.

What does appear to be happening is that angels are funding businesses, but almost on a basis of friendships, old school tie networks and similar. Therefore it does appear to be happening, but with constraints.

It is highly unlikely that only friends and colleagues have good business ideas, and therefore many unconnected yet smart people are therefore unable to raise funding.

From what I have been able to ascertain, these angels are lending from R500,000 to R5,000,000 but sometimes up to R10,000,000. However, there are always numerous exclusions to the rules when it comes to finance. It appears that the funding for the IT sector is particularly bouyant at present, especially cloud-based solutions.

Someone somewhere in South Africa will eventually get it right and get the angel funding more formalised. Then I believe things will fly. In the meantime ask around among your business colleagues and friends in business. Do not confuse friends from the 3Fs with an angel.

There are things to watch with an angel funder. When they first start to invest they want to control things. They have not yet learned how to invest without controlling, so be wary of this type of angel. The angel should be available to assist and mentor but not run and control the business.

Secondly, the new angel wants an extremely large share of the business, in return for their investment. They are not sure yet on the rules of engagement and still act as though they are buying a business, as opposed to investing in a business.

So be careful when engaging with angels who are new in the game. So if you can find an angel who will invest for around 5% to 15% of the equity, depending on the numbers of course, then look carefully at the terms and conditions, and if your lawyer and accountant give you the green light, go for it.

Remember that there have been significant changes to South African law, so ensure with a Chartered Accountant who specialises in these transaction or at least in tax, that the transaction is structured properly from a tax perspective, and then with a specialist lawyer to ensure that you get the best advice in respect of the terms and conditions of the contract. Please use specialist accountants and lawyers. You do not go to a urologist for a heart condition.