Shark Tank. The Profit. Dragons Den. All these TV shows share a common bond; Angel investing – described as an investment by an affluent individual(s) in a business start-up, usually in exchange for convertible debt or ownership equity.
And in the spirit of enhancing our investment ecosystem – adding to the Ibuka programme, growth and enterprise segment (GEMs) and the Sandbox Initiative—perhaps it’s time we tap into the nascent angel investing community.
Why? Angels are known to play a crucial catalyst role. They do this through bringing risk capital, business experience and skills to support the growth of small businesses.
Looking at the country’s high mortality rate among micro, small and medium enterprises (MSMEs) – almost 50 percent die in the first year of operation—perhaps incentivising angels to take interest here could just change the story. More importantly for us, angels can help develop a stable pipeline for future listings.
How? UK’s Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are great examples. The two programmes offer tax relief for investments in start-ups with the aim of encouraging wealthy individuals to put money into new ventures that would struggle to raise financing from traditional sources. Typically, angel investors enjoy a tax relief on both income and capital gains tax with tax breaks of up to 78 percent.
These initiatives have proved quite a hit. A report surveying 403 UK business angels highlighted some of the positives; nine out of 10 used the tax relief programmes to invest in young companies, median number of investments per angel improved to five, up from 2.5 years prior, median age of early-stage investors dropped, more female investors joined the angel list and so on.
Who? Kenya’s population of high net worth individuals (HNWIs) – those with a net worth of over $1 million excluding their primary residence – could serve as the main angel pool. But besides providing mentorship and money, HNWIs can benefit from a little bit of portfolio diversification.
Data from the 2019 edition of The Wealth Report by Knight Frank showed that on average, Kenya’s superrich allocated three percent to private equity while traditional asset classes still accounted for a big chunk of their portfolios; equities (25 percent), properties (22 percent), cash or cash equivalents (22 percent) and bonds (20 percent).
According to the same report, HNWIs numbers increased by 306 to 9,482 (the number is projected to reach over 11,000 individuals over the next five years) last year.
A Start-Up Kenya initiative is not a bad idea. The whole scheme may look like this; angels who buy an equity stake in the form of ordinary shares—preferential shares may not be allowed under the scheme – get an income tax relief of 30 percent of the cost of shares they buy. For investments that lead to a GEMS listing, the income tax relief should go up to 50 percent of the cost of shares bought.
To avoid abuse, a minimum and maximum investment can be set say ranging between Sh3 million and Sh30 million. Additionally, claims for tax relief can be limited to investments within a 10-year period.
Anyway, some food for thought. Someone do the dishes.
Mwanyasi is MD, Canaan Capital Limited