As Caribbean small businesses struggle to raise seed capital, many look to angel investors to bridge the gap between potential and profit.
Every successful business starts with a great idea. But some entrepreneurs need help turning their passion into profit. Angel investors, those who provide financial backing for struggling start-ups, can help businesses bypass traditional lending routes to develop their potential and become players in the market.
Traditionally, this form of investment has been underutilised in the Caribbean but that’s changing thanks to a new initiative jointly administered by The World Bank Group and the Caribbean Export Development Agency (Carib Export). These two organisations came together last year to launch LINK Caribbean, a US$1.6m project funded by the government of Canada to connect entrepreneurs and SMEs with High Net Worth Individuals (HNWIs) eager to share their wealth, time and expertise. Halfway into its two-year term, LINK has already awarded over US$500,000 to 14 Caribbean companies and laid the groundwork for what organisers term “an angel investment ecosytem” in the region.
SMEs in need
Organised angel investing is a rarity in the region but Caribbean businesses are in desperate need of it. In Saint Lucia, as in other Caribbean nations, the commercial banking sector has contracted in recent years. In 2016 the loans to deposit ratio dropped to 90.1 per cent, in comparison to 119 per cent in 2013. Risk averse banks are now less willing to fund start-ups and SMEs are frequently shut out of the market. In addition, financial projects are rarely tailored for their needs, using a one-size-fits-all template that overlooks the unique challenges that come with operating early-stage companies and start-ups.
This makes these beginner businesses ideally suited to take onboard private investors who aren’t just looking for a return, but to see the company succeed. The benefits to using angel investors go beyond the financial. These investors not only offer funding but also their expertise, experience and contacts. They provide valuable mentorship to fledgling businesses who may not be fully aware of the pitfalls and opportunities that come with a new venture. Angels are motivated not just by balance sheets but by the chance to invest in their communities.
“The term ‘angels’ aptly describes these guys,” says Christopher McNair, Manager of Competitiveness and Innovation at Carib Export. “They give up their time, their network and their expertise. They are really giving up much of themselves. At the very core of what they are doing is giving back.”
Perfecting the pitch
Across the Caribbean, a number of HNWIs are signing up to become angels. The LINK project is supporting the development of a Regional Angel Investment Network (RAIN), hoping that it will draw existing angel groups and new angels together to pool their resources, diversify their risk and find suitable beneficiaries. “It is hard for angel groups to sustain themselves by just operating locally,” says Aun Rahman, Head of InfoDev at the World Bank Group’s Access to Finance programme. “It is good to build a regional perspective by building this infrastructure that brings them under one umbrella.”
According to Rahman, an organised programme such as RAIN can help overcome one of the most common obstacles to angel investing – lack of trust. “Angel investing is extremely new to the Caribbean and the reason why it did not start before comes down to trust between entrepreneurs and investors, and whether investors felt comfortable investing with strangers,” he says. “There is value in organised networks that they will trust.”
There are currently five active angel investment groups in LINK’s network and RAIN had its first official meeting in May. Early stage companies can get their ideas in front of these potential investors through LINK’s online platform. If the idea is approved by Carib Export, it is sent to every angel in the system and the investors take it from there. The average investment is around US$150,000 but can go as high as US$500,000.
But SMEs shouldn’t assume it’s an easy sell. They have to be at the top of their game if they want to attract funding. Part of the LINK programme is devoted to helping businesses become ‘investor ready’. Since its inception the scheme has awarded 11 Investment Readiness grants which help SMEs and entrepreneurs draw up viable business plans so they can pitch effectively. LINK has also awarded three Co-Investment grants whereby they invest alongside angels to reduce their risk (these grants are capped at US$100,000 each).
So what are HNWIs looking for? According to McNair, angels are drawn to areas where they can share knowledge. “Angels tend to like projects that are aligned with their own background and experience.” He is quick to stress, however, that SMEs from all sectors can attract this type of funding. Rahman agrees, saying: “Angels are sector agnostic. We have had ICT businesses, as well as bricks and mortar businesses like agricultural machinery. We’ve also had an organic food company. Ultimately what angels are looking for is a good growth opportunity.”
While angels are primarily involved to make money, they tend to have a less rigid approach than formal lenders. “The investors are looking for projects that have legs. It is a long-term investment; they do not expect to put their money in today and get a result tomorrow,” says McNair. “They are looking for great ideas and great people to execute those ideas.”
For an idea to have legs, it needs to be scalable. Caribbean investors know that the best chance of generating big returns is to target international markets. “Investors are taking a tremendous risk so they are looking for projects that give them a return on that risk, and those are companies that have the ability to scale,” says McNair. “ So for a company in Saint Lucia, the investor will evaluate that company based on its ability to move beyond Saint Lucia’s borders.”
One of the biggest challenges with an initiative such as LINK is simply getting the word out. McNair says LINK is particularly keen to reach entrepreneurs in Saint Lucia and other Eastern Caribbean nations and is planning more training sessions in the area in early 2018.
“We are trying to see if we can drum up as much awareness as possible [by] making a lot of noise about the project. We are really pushing for Saint Lucia and the Eastern Caribbean in general to be involved. There are a number of really great entrepreneurs there with really great ideas and we want to get them onboard as soon as possible.”
Although originally slated as a two and a half year project, LINK has the potential to carry on indefinitely if it continues its success. The World Bank’s involvement ends next year but it will then pass the mantle onto Carib Export, who will manage it alone. Rahman says: “Over the long-term, as we see more traction, it is going to get stronger and it will evolve. It is going to be an organic process.”
For McNair, the ultimate goal is to develop an angel network that becomes so active and efficient that it functions almost independently. He also says there is room to broaden the pool of potential angels by reaching out internationally. “We have a plan to see if we can get the disapora involved. Part of the reason we want a network of angels is that it allows us to put the Caribbean out there on the international scene and bring investors into the region.”
Given that SMEs are the lifeblood of the Caribbean economy, it is vital that they get the support they need. “We are a small region. One of the problems is we do not do enough to support entrepreneurs,” says McNair. “We have to understand that in order for us to compete globally, we have to innovate constantly. We have to allow new ideas to come to fruition, to be supported. At the very core of LINK is to create the kind of ecosystem that supports early-stage growth companies and, by doing so, create an environment for sustainable economic development.”