Wednesday, January 27, 2010

Angel Investors Filling Funding Gap

ANGEL investors in South Africa have been forced to fill the funding gap caused by banks' continuing resistance to lending to South African promising high-tech entreprepreneurs.

These Informal Investments, which supports young, potential high-growth firms with equity funding, has raised almost R1 million for a local start0-up recently. The Johannesburg-based technology firm produces advanced prosthetic upper body limbs for amputees.

The debt funding package is a first for the firm. Its chief executive, Jake Moolman, said the terms of the loan were "tough but fair".

A South African Co-investment Fund, which matches angel and private equity investment in South African firms, also contributed to the loan.

Waddell said banks were "nervous" about backing young, high-tech companies that export internationally. He said the banks' strict requirements, including personal guarantees from directors, would have proved too much of a "distraction" for management. Moolman said: "Investors were keen to do it. We raised the money very quickly. "After having spent time with a large number of banks that operate in South Africa, it became apparent that it was so much distraction for the management that it was easier to get the investors to do it, and they did."

Although Waddell said the investors would consider doing the same for other companies in its portfolio, it was not changing its policy as an equity investor. "We are not becoming a lending institution," he insisted.

Local entrepreneur, Josh Maloney said the lack of bank lending was threatening its growth plans. Bank loans are much harder to come by today than what it was two years ago.

"The banks are hesitant to provide funding because they're still risk-averse as a result of the financial crisis. This can hamper progress needlessly. It's time for the banks to step up and start supporting profitable fast-growth companies," he said.

Angel investment firms such have tended to provide loans as an interim "bridge" before an equity fundraising has been achieved. But the South African investor community has rejected the notion that private loans could replace bank lending.

Garry Olsom, an active angel investor said: "I wouldn't anticipate that this is a solution to the vast majority of SME funding requirements.”We still have to keep the pressure on banks and the government to do what I regard as normal lending."

Entrepreneurs are increasingly turning to sources of angel finance and venture capital to fund growth in their firms and the trend seems to be supported by the fact that business angels are also bringing more to the table in the form of experience, contacts and guidance. The banks do seem to unknowingly be supporting the trend and may not be able to reverse it in the future.

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