Deconstructing the Local Angel Investment Cycle in Kenya (Part 2)

In the last post, we went through the initial stages of the Investment Life Cycle that includes Screening, Due Diligence and Deal Structure. However, not unlike a marriage, the real work in an investor-entrepreneur relationship begins after signing the contract and popping the champagne. This blog post explores post-investment activities such as monitoring, value addition as well as exiting.

Monitoring

When it comes to monitoring, investors tend to exist on a spectrum that ranges from the ghost investor who is clueless about what’s happening — or not — at the startup they’ve invested in to the hovering investor who keeps a close eye on everything.

As an investor, it’s good practice to be informed about what’s happening within the startup, partly due to its high-risk nature, and partly because you might be required to make additional investments in the future. On top of that, you may also have tax reporting obligations related to your investment.

You also get a chance to formalize the monitoring process by serving on the startup’s board. Since the board is legally mandated to make strategic decisions, hire (or fire) the CEO, and put the stockholders’ interests ahead of an individual’s personal ones, that ensures that you’re always aware of what’s going on within the organization.

Value Addition

In additional to potential financial rewards, as an investor you get the chance to give back to society by mentoring the next generation of entrepreneurs. There’s also the joy of business creation without the headaches that come with daily operations. Through skill-sharing and the provision of networking opportunities, investors don’t just get a chance to grow their portfolio companies but also contribute to the entire startup ecosystem, as well as building their countries’ economies, thus causing what Steve Jobs would call, “a dent in the universe.”

Exits

When it comes to exiting a startup, Jason Musyoka from Viktoria Venture advises the investor to plan for it from the beginning and not treat it like an afterthought. Basil Peters, an experienced Canadian angel investor, provides the common rationale behind that advice in the book “Angel Investing,” by saying that a well-defined exit strategy would affect how the business runs.

Peters notes, “Businesses designed for sale at a […] sharp valuation increase will be purchased with an eye to their future growth and profitability, rather than their current earnings, or even revenues. They should thus be willing to take bigger risks, accept outside equity and debt capital, and swing for the fences, focusing on growth above all. In contrast, a business that the founder intends to own and manage for the long haul as a cash-generating sinecure should focus primarily on generating near-term profitability and avoiding debt, while retaining most or all of the equity in the founder’s hands.”

So what exit options do investors have in emerging economies?

As mentioned previously, unlike Silicon Valley, exiting into an IPO is a rare occurrence. Options that do exist for an investor however are as follows:

• Strategic trade sale/corporate sale
• Management buyout/sale back to the founder
• Sale to financial/secondary buyer e.g. bigger Venture Capitalist or Private Equity
• Self-liquidating instruments

There is also the unfortunate exit outcome of the startup going belly up and closing its doors for business, which — naturally — translates to a failed investment.

What Does African Exiting Landscape Look Like?

The Weetracker African Startups & VC Ecosystem Report that published the activities of the first half of 2018 showed 14 merger and acquisition (M & A) deals, with only 2 being mergers. This positively shows a nearly 3 fold increase compared with only 5 M & A deals during the first half of 2017.

While not entirely bleak, the current exit landscape still shows room for growth, which is what would happen if we encourage more venture builders rather than venture capitalist to enter our startup scene — which happens to be a topic for another day.

Co-written with Amina Islam