Angel Investment

Providing A Glimpse of Hope for women Entrepreneurs

For many female entrepreneurs in Ethiopia, starting and running a business is a very challenging prospect. One of the biggest issues facing women in Ethiopia is access to finance. Traditional loan models rely on collateral and credit histories, which many women do not have. However, some new investment models have arisen, including angel investing, which involves investors, sometimes in foreign countries, investing in small and medium enterprises in developing countries, sometimes for a small cut of the company. EBR’s Ashenafi Endale explored this new avenue for women to start their businesses.

In developing countries like Ethiopia, access to finance remains one of the major challenges for entrepreneurs. However, it is even more difficult for women entrepreneurs than men, because they lack collateral and credit histories, or don’t have the knowledge and skills to acquire loans. As a result, many women with potential business ideas fail to break through and become drivers of economic growth and accelerated human development.

Bethlehem Alelign, a student of Construction Technology and Management at Hawassa University, is among the many women who have been unable to change a business idea into reality. It was when she was a high school student that Bethlehem came up with the idea of manufacturing roof tiles from recycled plastic products. Four years after the idea popped up in her mind, she finally got a gleam of hope when she was awarded ETB50,000 in a competition nine months ago. “However, the money was too little to convert my idea into a business,” Bethlehem tells EBR.

Based on Bethlehem’s estimation, at least ETB750,000 is needed to start operations. “I am currently searching for a laboratory to undertake detailed product research and to produce a prototype, in addition to finding the remaining finance,” she explains.
“In Ethiopia, women entrepreneurs in particular have to face daunting challenges, especially when trying to access finance before turning their business idea into action,” argues Hohete Arefaine, a former director at Belcash Technology Solutions who currently works at the World Bank. “That is why companies established by women are rare in Ethiopia.”

Of course, financial inclusion is still in its infancy in Ethiopia. According to the National Financial Inclusion Strategy released by the National Bank of Ethiopia (NBE) in April 2017, only 22Pct of adults have transaction accounts in financial institutions. Although 44Pct of the adult population above age 15 reported access to credit from different sources, only seven percent borrowed money from formal financial institutions.

It is not just on an individual level that access to credit is difficult. Rather, micro and small businesses can also rarely find their required capital. For instance, 38Pct of micro, small and medium businesses operating in the country that require financing do not manage to get loans, according to the International Finance Cooperation Finance Gap database. In addition, micro and small businesses are especially underserved. In fact, only three percent of these firms access credit in Ethiopia, compared to 18Pct in sub-Saharan Africa. This is despite the fact that the majority of businesses in Ethiopia are micro and small enterprises, accounting 98Pct for of all business firms.

According to the World Bank, one-third of the micro and small businesses operating in the country are run by women. Also it is difficult to know the exact estimate stakeholders stress that opportunities for women entrepreneurs is far behind men. Although there are many factors for low credit penetration among women entrepreneurs, excessive collateral requirements is the major reason restricting women’s access to credit from commercial banks. On the other hand, Micro Finance Institutions (MFIs), established on group lending schemes, tend to have low outreach to women entrepreneurs.

One such person is Netsanet Workeneh, who founded LonAdd Consultancy together with two other people. “I was forced to sell my house to establish the company,” she said. LonAdd Consultancy, which was established with a very small initial capital, offers a wide range of services, including recruitment, outsourcing, and training as well as human resource consultancy. Currently, the company employs 24 people.

But not everything is so glum. The voids that are unfilled by commercial banks and MFIs are started to be filled with angel investors, a new scheme in the country. Angel investment is a mechanism of financing start-up companies using the resources of individuals known as angel investors. Although the scheme is more than half a century old, angel investment is quite new in Africa.

In Ethiopia, angel investment has so far been dominated by foreign business people. RENEW is the US company behind many of the angel investments in Ethiopia. It navigates new business ideas and links them with angel investors abroad. The investors are pooled under the Impact Angel Network, which is a global collection of investors seeking to achieve financial returns and sustainable social impact by making investments into high-growth companies in Africa.

RENEW develops the ideas at its incubation centre in Addis Ababa, which also serves as an investment platform. “Once we invest in a start-up company, we run a business accelerator program,” explains Laura Davis, a partner at RENEW. “Then, we train companies to help them grow.”

So far, RENEW has facilitated 11 venture capital deals for ten companies, bringing in close to USD20 million. “Four of the ten companies were established by women,” says Davis. “There are hundreds of projects in the pipeline particularly initiated by women.”
Following RENEW’s example, a number of incubation centres are opening in Addis Ababa. Iceaddis, Xhub Addis, Gebeya and BlueMoon are the major angel investment facilitators that are currently operating in the country. All of them focus on incubating technological ideas, while BlueMoon particularly focuses on agricultural based ideas.

Iceaddis has facilitated investments for 34 entrepreneurs, while Xhub Addis has helped almost five. Xhub Addis is on the move to open similar incubation centres in regional cities, according to Saminas Belayneh, Community Development Coordinator at Xhub. So far, Xhub has facilitated the establishment of two women led companies, while the majority of the current batch of 15 entrepreneurs are women.
“Angel investment has a lot of potential, especially for women entrepreneurs who are unable to access finance from financial institutions,” argues Bekure Tamirat, operations director at Gebeya Talent.

Davis also stresses that angel investors help companies at earlier stages than institutional equity investors. “Incubation centres are important for building the entrepreneurship ecosystem. In Ethiopia, the scheme is solving the supply side of the problem.”

Indeed, stakeholders stress that angel investment has the capacity to improve women-led companies. Especially in the last decade, a dramatic increase was observed in the number of female founders in western countries due to the expansion of angel investment. Since most female entrepreneurs, especially in developing countries like Ethiopia, don’t have assets to show as collateral, the scheme has the potential to improve the odds of success for women entrepreneurs.

Mesenbet Shenkute, president of Addis Ababa chamber argues entrepreneurship and angel investment are contributing less to the economy mainly because it is not institutionalized. “There are only individual efforts but no organized support from the government. There are so many youth who have good ideas, but many of them have no opportunities. Since 70pct of the university population is science students, there are many graduates who have no place to turn their ideas into products. They are victims of policy. That is why many university students now prefer accounting, because they can get jobs. Recently, I judged a competition which nominated 15 entrepreneurs. Finally three were picked but the ideas of all 15 were amazing. These will get some money but where the rest will go? The government must establish research centres, and provide funds for such entrepreneurial minds to develop their products.”

Although global experiences reveal that business ideas funded by angel investors and passed through incubation centres are 20Pct more successful than companies started without them, Marcos Lema, founder of Iceaddis says it is difficult even to access incubating license in Ethiopia. “When we first approached the government to open the company, they told us we have to take 12 licenses to run such a centre. Simply put, it is impossible.”

On top of this, there are many indicators that angel investment is in a complete limbo in terms of legal frameworks. The main problem starts from the lack of legal framework that governs the relationship between the entrepreneur and angel investor.

“The angel investor asks for 50Pct to 70Pct shares in the company that is to be established. So, the piece left for the entrepreneur ends up being very small. That is highly discouraging for the entrepreneur,” argues Marcos.

Bethlehem, who has tried to partner with many private and public institutions to access their laboratories and develop her prototype, also agrees this is the major problem. “When I went to the incubator centre at Addis Ababa University they asked for a 50Pct share in royalty revenues. Other private companies I contacted also asked for up to 70Pct.”

Hohete, however, argues that a 20Pct acquisition by the angel investor is reasonable. “I know many local companies who have made millions in profit by investing in start-up companies, and taking larger shares. But this should not be the case.”

Laura, who says RENEW typically takes a minority share of less than 50Pct, elaborates that the problem fundamentally emanates from two factors. “Internationally, angel investors like to use different structures, like convertible debt, that allow them to provide capital during the early stages of a business’ growth. If the company is not evaluated at the early stage, which is the case in Ethiopia, investors will eventually shy away. Or the angel investors have to take equity, which means the value of the company at that point in the time needs to be negotiated, which is not easy for early stage companies and forces entrepreneurs to get severely diluted,” elaborates Davis.

The second factor is that the minimum investment allowed for foreign investors in Ethiopia is USD200,000. “This means, a company would need to have value of USD400,000 for an investor not to take more than 50Pct,” says Davis. This has pushed up RENEW’s average deal size to USD500,000.

Currently, Ethiopia is amending the decades’ old trade and investment laws, in order to accommodate modern trade and investment practices. However, most burning issues like the bottlenecks in angel investment have not been considered in the amendments, according to Mekonen Hailu, director of the Public Relations Directorate at Ethiopian Investment Commission. “The investment code is amended mainly to accommodate the recent privatization tendencies in power, telecom, shipping and aviation. Angel investment is still considered as FDI.”
A number of solutions are also recommended to create a fertile ground for angel investment in Ethiopia. Establishing a stock market, facilitating mechanisms for entrepreneurs to join industrial parks, considering angel investment and equity investment modalities in the commercial and investment codes, relaxing banks’ strict laws towards financing ideas and preparing professional company evaluation indexes are some of them.

8th Year • Mar.16 – Apr.15 2019 • No. 72