Life continues to be hard for one of the most important segments of the economy – new start-ups and existing small and medium size enterprises (SMEs). The lot of Sri Lankan SMEs are worse than many of their global peers.
Banks have tightened lending standards and have for the most part completely shut out the SME sector, with many unable to obtain even working capital. Continuous problems in global bond markets will only make this situation worse.
Cutting off credit to this sector has major economic repercussions as they remain the true driver of growth in any economy including that of Sri Lanka.
This may present an interesting yet very risky opportunity to some investors. Angel investing may be a new term for a style of investing that goes back a few millennia.
An “angel investor” is an affluent individual who provides capital (both funds and expertise) for a new business start-up in exchange for equity ownership or convertible debt. Globally these investors are increasingly becoming more organised and pooling their capital and research to form “angel networks”. They are different to venture capitalists, who manage other people’s money that get invested in new ventures.
For angel investors to flourish in Sri Lanka, the government needs to come out with a clear policy directive including a tax holiday as a minimum for any returns on invested capital. Encouraging angel investing would help the government in two very significant ways. First, it would bring desperately needed capital which everyone knows exists but no one can seem to find, to the mainstream economy. Secondly, the creative destruction of various businesses would stimulate jobs’ growth and increase the overall tax base (through higher consumption).
Start-up industries need policy support from the government as they are a crucial driver of productivity and innovation in an economy. In the case of Sri Lanka, support for angel investing would also support other significant social issues. Encouraging the freeing up of currently non-deployed capital would allow private entrepreneurship in the North and East, thus boosting the confidence in the overall economy. Allowing a purely private support mechanism for new inventors and other entrepreneurs would also dampen any growing social unease about the current inequality in the distribution of wealth across the island.
It is important for the government to support angel investors, as the successful start-ups would account for vast levels of employment. An attractive policy will help tap into the vast Diaspora across all communities who may not have large amounts for mga projects, but are keen to support small private start-ups of family and friends. Paving the way for angel investors to provide capital would alleviate pressure from the government in trying to convince banks to increase lending, which is currently harder than asking politicians to give up their perks.
Think of it this way, none of the great Sri Lankan businesses started out because the big banks supported them. They all owe their success in some shape or form to either personal capital, or angel investors in the form of family and friends.
The good news for those of you who do want to become an angel investor is that you can legally do so under existing laws in Sri Lanka, although you may not receive any special tax considerations on profits. But before you open your wallet, it’s important to understand the extreme risks that are involved in this sector. Globally, only about 10 % of all start-ups go on to make money for angels.
If you want to do well with an angel portfolio, you should expect to invest not just money but time. By some estimates, one in four angels does no due diligence before making the investment. Such trusting angels are unlikely to be blessed with high returns.
Too many angels get stars in their eyes, bedazzled by a charismatic entrepreneur bearing gee-whiz technology. Too few ask tough questions to determine the market potential for the company's products, the obstacles to growth and whether the entrepreneur has any aptitude for the details and drudgery of day-to-day management.
So why would anyone want to be an angel, and who should consider it? You get to be in control over a lot of decisions and get the chance of helping to create something exciting, without having too many annoying partners.
If you love business, enjoy mentoring and have wisdom to impart, then the psychic rewards of becoming an angel might be worthwhile. Many angels, are motivated much more by the satisfaction of being a coach and giving back to the community than by money alone. That is a luxury you can afford only if you can afford to lose every rupee you invest.
(Kajanga is an Investment Specialist based in Sydney, Australia. You can write to him at email@example.com)