Even though financial technology innovations have brought a lot of progressive movement to the financial services sector in recent years, creating new ways of accessing finance, there is undoubtedly a need for more financing channels to bridge the funding gap of SMEs and start-ups. The establishment of the Mediterranean Business Angels Network (Med Angels) is potentially a big step in this direction.
Facts and figures: Access to finance in the MENA region
The financing gap of MSMEs in the MENA region is about $186 billion. On average across the region*, 55 percent of firms in need of credit are credit constrained. There has been an 11-percentage point increase in credit constraints between 2013 and 2019. Only 7 percent of total bank lending is to SMEs, even though they account for 96 percent of registered businesses and about half of employment. Due to a lack of credit histories, access to capital is particularly difficult for startups in the early stages of business creation. The immense potential of start-ups to be important drivers of economic growth, job creation and often catalysts for radical innovation is thus in danger of being squandered. Investment activities of business angels can be such an alternative access channel to unleash these potentials.
The added leverage of business angel funding
Business angels are private investors who support start-ups or entrepreneurs financially, usually in exchange for a stake in the company. For start-ups, the shareholding of angel investors is beneficial in two ways:
On the one hand, start-ups can acquire the necessary liquidity for business development in this alternative way if the risk of loan default and thus the risk of loss is too high for banks to grant a loan. On the other hand, shareholding is often accompanied by a proactive interest of the angel investor in the success of the company, which is not the case with the repayment- and interest-based profit model of the banks. Consequently, angel investors often also bring their skills, competences, knowledge and contacts to the companies they invest in, thus increasing the potential for success.
In short, a business angel is an advisor and private investor in one.
Accordingly, angel investment is seen as an important driver of business creation and growth, as well as economic growth in general.
The benefits of business angel networks
Today, each Mediterranean country has its own startup ecosystem. Basically, this means that a certain number of different players are somehow interconnected, act together as a system and share the common goal of driving start-ups with growth potential. Among others, this includes founders, large corporations, support organizations such as incubators, accelerators and co-working spaces, service organizations such as legal and financial services, and business angel networks. Different organizations typically focus their actions on specific parts of the ecosystem function and/or start-ups in their specific stages of development.
Venture capital interventions by business angels are of outstanding importance, especially in the experimental (seed) phase of start-ups, as they provide seed capital and thus help to narrow the existing funding gap.
In this respect, the association of business angel investors into a network is of great advantage. First and foremost, they make it easier to arrange and close co-investments, which has two essential facets: (i) Co-investments can increase the willingness to invest by sharing the financial risk of loss and thus minimising the individual investor’s risk. (ii) The search for co-investors also has the important effect of reducing information asymmetries between investors themselves, on the one hand, and between investors and the companies seeking seed capital, on the other.
Local ecosystems, but a need for cross-border investment
Founders are relatively immobile, founding their company where they grew up, studied or worked, for example. Because it is basically most promising to found where you already have a network. It is similarly true for the investment activities of business angels. Success is most likely when they operate in markets, jurisdictions or ecosystems where they are already knowledgeable and networked.
Engaging outside one’s local ecosystem and investing in unfamiliar jurisdictions or markets is therefore riskier, which in turn is one reason why cross-border investments are a difficult undertaking. At the same time, cross-border investment has huge potential to drive entrepreneurship across the Mediterranean region.
The captivating idea of the Mediterranean Business Angels Network
Breaking down these barriers and advancing cross-border startup funding is the vision behind the establishment of the Med Angels network in September 2019, promoted by the Alexandria Angel Network (Alex Angels), the Dutch development aid organisation Humanistisch Instituut voor Ontwikkelingssamenwerking (Hivos), the US non-profit organisation VentureWell and the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH. The establishment of a business angel investment network that connects local/national business angel networks, groups, funds as well as individual angel investors from across the region, thus pooling the individual into common resources. In this way, the aim is to work step by step towards an ecosystem encompassing the entire Mediterranean region.
To this end, the Med Angels serve as a communication platform for their members. The underlying idea is to share potential deals from member angel networks that would not materialise, e.g. due to insufficient local funding, interest or know-how, via the Med Angels in order to ultimately still be able to find co-investors from other countries.
However, in order to bridge investment barriers between Mediterranean countries and promote entrepreneurship in the region, the Med Angels network covers or intends to cover even more services:
For example, once interested co-investors have been identified within the network, Med Angels will proactively facilitate the investment process with the interested member networks. In the long term, it is envisaged that Med Angels will establish an intelligent cross-border business process with standardised due diligence procedures supported by a corresponding IT tool (app).
Furthermore, the Med Angels will actively find suitable start-ups with good growth potential and refer them to the members of the network in regular events.
Other essential elements are and will be regular knowledge and best practice sharing among members as well as capacity and trust building events. Likewise, the (co-)launch of a Mediterranean accelerator programme is envisaged to build better startup pipelines.
In addition to the measures described to promote cross-border investment and thus access to capital for early-stage startups, the Med Angels also provide startups with access to business networks and mentoring.
By expanding the deal pipeline and facilitating deal-making in this way, Med Angels aims to become a driving force for innovation and prosperity in the region in the short to medium term. The improved regional capital flow will help transform the Southern Mediterranean economy, ideally creating thousands of jobs in the process.
As a founding promoter and active supporter of Med Angels, GIZ will continue to help the network move step by step towards the great and promising vision in practice.
By Sebastian Kausemann