Large professional investors have experience and connections in-country along sectors of interest. They depend on institutional knowledge and careful record-keeping to stay aware of and find new opportunities.
However, the amount of capital available through professional investment firms pales in comparison to the gap in the market. More capital is needed throughout emerging markets and particularly across sub-Saharan Africa. This is particularly true at an early stage where angels, who bear the greatest risk, have the most limited market information available.
A recent study in Morocco found that gaps in funding exist at all stages of a business:
This is a common environment across emerging markets. Seeking to fill the financing gap in Africa with institutional funding misses the source of the problem. The feeder system of angel investing through Series A continues to be a problematic bottleneck. On top of the environmental and political risks associated with emerging markets investment, an angel has little to go on other than referrals to judge the team risk. And if connections are the sole guide for investment, this expands financial exclusion in markets that are already known for their lack of inclusive social structures.
Angels need better information on a particular entity’s connections and the industry competition they operate in to understand the risks and potential opportunities before them, but the cost to acquire this data is too great when evaluating each potential deal. Some angels address this by 1) investing only in close connections/relatives, 2) seeking co-investment with larger firms or international angels, or 3) making a lot of small bets to counter the team and market risks.
All of these solutions limit the available opportunities that angels will invest in and in return limit the amount of early capital to businesses. Providing a more holistic and affordable view of the market would reduce market and network familiarity biases to investment, create more opportunities for investors, and de-risk potential investments when an investor knows what partners a particular business and/or team is associated with. One example was the recent market mapping of Morocco. Pulling in a greater amount of data on a wider variety of markets in more sectors is necessary to truly unlock angel investment in Africa.
Jason Eaves is the founder and Lead Strategist at Discovered Markets. Discovered Markets maps systems to highlight opportunities in emerging markets for businesses and investors.
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