The world has experienced different crises and pandemics, which have often disrupted economies before and though the disruption due to Covid-19 is not novel, its magnitude is one that has not been felt for many years. Whether it was the economic recession in Europe and the States in 2008, or the micro-finance crisis in India in 2010, the effects these crises have on the economy of a country and region are profound. In East Africa where more than 80% of the economy is run by the informal sector and SMEs, a crisis of this magnitude that causes exponential societal disruption, has far-reaching consequence for the health of the economy. As such, many resources have been focused on how entrepreneurs can survive the Covid-19 pandemic, which is fair enough.
However, looking at the other side of the coin, entrepreneurs will need financing to get ensure that their businesses survive the economic downturn. However, most institutional funds are currently focusing on their well performing portfolios to ensure survival and may not be deploying capital to new investee companies, unless the deal was negotiated up to term sheet level pre-Covid. The burden thus lies with angel investors to support these companies to ensure survival and subsequently ensure a healthy pipeline for the institutional investment funds after everything settles. As such, some level of aggressiveness is required. How then do you, an angel investor, ensure that you select the right opportunity and ensure that you get some level of returns? Here are a couple of practical considerations and guidance for your investment thesis:
Diversify Your Portfolio: You can consider diversifying the sectors you invest in, the financial instruments you use, the geographical focus and the stages of the companies you select. The aim of diversification is to reduce the risk of your investment, whilst ensuring that financial returns are optimally maximized. Optimize your diversification strategies by mixing different strategies.
Bet on the Jockey, Not on the Horse: Consider selecting potential investee companies that has a team and leader that is not only visionary, but is also agile enough to be flexible to pivot and adapt to the current market needs and situations. This type of leadership will carry the business through the crisis by ensuring that the business pivots and is re-designed according to the current market needs, which will ensure that your investment survives.
Be Selective with Where and How You Invest Your Money: During these times of crisis, be very selective on how you invest your money. You may want to consider how the companies performed pre-crisis and whether it had potential to scale. Equally, consider companies that have lower burn rates and do not burn through cash fast. This will ensure that the capital you invest carries the company for a longer period. It might also be prudent to consider what currency you would want to invest in as it has the potential to affect your potential returns.
Don’t be a Predatory Shark: In as much as this crisis presents an opportunity where the temptation to undervalue companies caused by sharp declines of capital be careful not to be a predatory shark. This is because it has the potential to affect the motivation of the management team of a company significantly.
Invest with Other Angels: Co-investment during this times, will give you some level of comfort in the investment you make. Look for other like- minded individuals who are willing to take the risk and invest together because if managed properly, co-investing has better potential in generating returns than investing in a deal single-handedly.
Get Creative with Due Diligence: Now that movements have been restricted, be sure to be innovative about the ways in which you build and enhance trust with the entrepreneurs. This can include using technology solutions and (or) local on-ground partners. This will ensure that before you make the investment, you establish some confidence in with the investee company.
Plan to Provide More than Just Money: During this time of crisis, companies require more than just the money. Plan to provide strategic support, your knowledge and networks to the companies to ensure that the company survives the pandemic. This is because, if the investment is used inefficiently, you could lose your investment entirely.
Have Realistic Expectations on Exits: Have an open and honest conversation about your return and exit expectations. This is because, during this crisis period, investment-holding periods may be longer than anticipated, which ties up the capital and returns for all investors. You may therefore need to work harder for your exit and explore other avenues of exits such as strategic buy-outs.
Written by, Jason Musyoka, Arielle Molino and Mercy Mangeni
INTELLECAP & VIKTORIA VENTURES MAY 2020