Angel investors as key drivers of entrepreneurship
A business manager meets his marketing team. Angel investors can provide entrepreneurial seed capital and stimulate economic growth. PHOTO | FILE
What you need to know:
Government should learn from the Turkey model to promote the financing of SMEs.
An angel appears at a board meeting and tells the chairman that in return for his unselfish and exemplary behaviour, the Lord will reward him with his choice of infinite wealth, wisdom or beauty. Without hesitating, the chairman selects infinite wisdom.
“Done!” says the angel, and disappears in a cloud of smoke and a bolt of lightning. Now, all heads turn toward the chairman, who sits surrounded by a faint halo of light.
One of the directors whispers, “Say something.” The chairman sighs and says, “I should have taken the money.”
Earlier this month I attended the G-20 Global Partnership for Financial Inclusion, which held a workshop on financing entrepreneurship innovative solutions in Izmir, Turkey.
Turkey currently holds the G-20 presidency and therefore its government played a pivotal role in the organisation of the successful workshop.
One of the panelists was a well-known Turkish entrepreneur, angel investor and author, Baybars Altunta, who impressed the audience with his vocalisation of tax incentives that the Turkish Government provides to angel investors.
I pulled Baybars to the side during a coffee break and asked for more details. Once a person has registered as an angel investor, he is allowed to net off up to 75 per cent of his investment in the startup company against his income tax payable in the year.
In other words, a tax holiday of up to 75 per cent of your investment! Baybars added that angel investors tend to get together and pool their funds to reduce the risks as the success rate for their investments was only typically 10 per cent.
“Why would one invest money in startups if only one in 10 initiatives succeed?” I quizzed. Baybars smiled the smug smile of the wealthy and responded, “Because the returns from that 10 per cent will make you more money than the losses on the 90 per cent!” I walked away, scratching my head and realising why my risk aversion would leave me a pauper for the rest of my life.
Angel investment is the provision of financial capital to newly established or growing companies which have novel business models or technologies with high potential for growth and profit but are unable to find eligible financing resources to realise their investments.
Recognising the inherent benefits that angel investors would provide through entrepreneurial seed capital support as well as stimulating economic growth through job and value creation, the Turkish Parliament passed the Regulation on Angel Investment law in June 2012 and the Treasury promulgated the enabling legislation in February 2013.
The rationale behind the law is to promote the financing of small enterprises and entrepreneurs by providing tax incentives to angel investors.
According to a PwC Turkey asset management bulletin, in order to benefit from the tax reliefs provided in the law, business angels first have to obtain a licence from the Treasury.
A qualifying company should, among other criteria, be registered in accordance with Turkish laws and have a maximum of 50 employees and net assets of not more than Sh354 million.
If the business angels participate in qualifying companies whose projects are related to research, development and innovation then the applicable tax incentive is 100 per cent instead of 75 per cent.
This is where it gets interesting. In order to get 100 per cent tax relief, those activities have to have been supported in the last five years by the Scientific and Technological Research Council of Turkey, the Small and Medium Enterprises Development Organisation and the Ministry of Science, Industry and Technology.
The tax reliefs are applicable until December 31, 2017, making it a five-year programme.
But the Cabinet can authorise the extension of the date by another five years.
So let’s bring this concept home. Imagine that the Kenyan government has picked four key economic areas that it wants to drive with the help of the private sector.
Let’s say agriculture, health, technology and education. Then the government wakes up to the fact that it needs to leave the business of business to the best people suited to do it – businesspeople.
It assumes that it’s far better to allow a business person to take a risk on an entrepreneur as the investors has; a) a much better nose for sniffing out and recognising good opportunities; b) years of experience in making and losing money, therefore an appreciation of risk; c) business experience the kind of which they don’t teach in business school, leading to mentorship; and d) his very own money which defines his skin in the game.
The same government would then ensure that the business angels’ interests are aligned to the strategic objectives of the relevant ministries.
Rather than allocate funds in totality to the women and youth funds, re-route a portion of the funds to backstop a tax incentive programme for Kenyan business angels.
The benefits hardly merit articulation due to their sheer obviousness. The government will distribute the risk of repayment from their annual budget allocations to the women and youth funds by providing an alternative mechanism for reaching those same stakeholders in a credible, efficient manner that provides the extra flavour of mentorship as well as stronger linkages between the existing business community, women and the youth.
Finally, it allows for a wider tax bracket to be formed since, by requiring investees to be formalised legal entities, their companies enter into the taxation realm.
It shouldn’t take a little wisdom from heaven to enable business angel investing to become a government-driven entrepreneurship initiative.
