Dancing with angels
Since when do the hard-nosed folks who work at the World Bank on boosting private sector performance in the Middle East and North Africa (MENA) go off to conferences to discuss ANGELS? Well, that’s just what we did last month when a team from the finance and private sector unit went to San Francisco to attend the Angel Capital Association (ACA).
In the hierarchy of entrepreneurial finance, most initial cash and capital for new start-up enterprises comes from “The Three F’s” – Friends, Family and Fools. Think Steve Jobs starting off in his garage in Silicon Valley. But if the company and its idea expand, the 3F sources of funding become way too limited to take these innovative ideas to scale – while these budding entrepreneurs remain far from becoming a banking proposition. They have no track record, they are frequently young, probably have little banking history and a bank is unlikely to take a second look. Indeed, even venture capital is unlikely to be a real option for these start-up enterprises. They are just too high a risk and too likely to fail.
That is where our Angels step in. With very early stage “innovation finance” these high-worth individuals offer capital and their own expertise to support promising new enterprises. Being extremely high risk, something between 60 to 80 percent of these start-ups are likely to fail and with no return to the entrepreneur or the angel financier. In many cases, their money is lost completely. However, the sweet spot comes with that one in ten – or if you are lucky two in ten – companies who will yield not twice or three times your original investment, but ten, twenty, thirty times, or even more.
Angel finance is a booming business in the USA, Canada, the UK, Europe, and Australia – and even in some developing countries such as India and Turkey. In fact, the growth of angel financing has increased exponentially over the past four to six years, with even faster growth in the last two years. Angels tend to operate in “bands” (bands of angels) where expertise and funding is pooled to help promising new ideas and, even more importantly, promising young entrepreneurs. And all this strong growth is happening in an era, after the financial crisis, in which Venture Capital has been contracting. Angels in the US tend to fund relatively small amounts but in exceptional cases can go as high as $35 million, with Super Angels. These angels have helped buttress the innovation eco-system that makes Silicon Valley such a dynamic hot-bed of new entrepreneurial talent.
MENA does not yet have this class of financiers to support young Arab start-ups – although the Cairo Angels are gaining some momentum, as are other bands of angels in the Levant and in the Maghreb region of North Africa.
Fostering angel financiers in support of start-up entrepreneurs is important for many reasons. It will help the region’s youth move from a public sector job mind-set; it will help catalyze new Arab start-ups which are generally considered to be important for employment generation; and, recent evidence from the US indicates that such start-ups tend to employ a disproportionately higher number of young people (a particular focus of the unemployment problem in MENA) and to also pay them higher salaries than older firms. It is also likely to help develop a more competitive and a more innovative private sector within the region.
Support for bands of angels can take many forms – but most importantly, we need to expose potential MENA angel financiers to the activities in this field which are already taking place globally with other bands of angels and the very positive impact that they are having on the development of young entrepreneurs, while making money for themselves. Exchanges, south-south learning, and stronger linkages through the World Bank and the IFC are all planned for the future – for the nascent MENA Angels.
So dancing with Angels and supporting them throughout the region is extremely important in the post-Arab Spring. With Angel support, MENA can look forward to the creation of many more “Maktoob’s” (Maktoob being the Arabic, on-line search engine, developed by a young Jordanian entrepreneur and sold to Yahoo for over $100 million) and, hopefully with it, many more jobs for young Arab workers.