In a couple of recent posts (here and here), we deconstructed the local angel investing cycle. One observation that comes up is that despite the existence of African-based investment institutions, a large percentage of money pumped into the continent still comes from international institutions. Why is it that we still haven’t tapped into the big reservoir of African high net-worth individuals (HNWI’s) who can become angel investors but are choosing not to be.

There’s a general idea that man fears that which he does not understand, and given the generational gap that usually exists between HNWI’s and startup founders, it’s easy for the former to dismiss investing in such startups and instead focus on buying properties.

But angel investing can be quite lucrative — as long as you understand it.

It’s a Numbers Game

Googling “average return on angel investing” will most likely return a hit that mentions a 27 % internal rate of return. Quoting this source, “Multiple studies* have shown that over the long run, carefully selected and managed portfolios of personal angel investments produce an average annual return of over 25 percent.”

While this might make your eyes light up with dollar signs, it’s important not to take that number at face value. The key phrases in the previous paragraph are “over the long run” and “carefully selected and managed portfolio.”

Angel investing is risky business. According to Failory.com (the self-proclaimed experts of failure), 90 % of new startups fail. Investors need to go in knowing they’re writing a check they might never see again.

But here’s the thing, when it comes to investing in startups, the Law of Large Numbers applies, where your probability of success is directly proportional to how many times you play. Given the risky nature of the game, this means it’s prudent to limit how much you invest to 10 % of your savings.

Deals don’t get publicity

Another thing to note is that many deals on the continent don’t get announced publicly because people don’t want to put their wealth on display — or in question. This is not surprising in countries where people still associate wealth with corruption or drugs.

Because the startup ecosystem in Africa is still at its infancy and because of this tendency to not publicize deals, the information on this specific market is still incomplete and skewed.

Investing in startups is not for everyone

One more thing that needs to be highlighted is that angel investing is not for everyone. It takes a special type of personality to direct a portion of their investment into something as unpredictable as a startup. Investors need to have a long-term view (measured in years if not decades). Also, they should be financially able to tolerate losses and have a high threshold for risk — and failure.

As quoted here,“So if you are the kind of person who is going to get upset when you lose 100 percent of your $50,000 investment in a promising startup, or can’t deal with the fact that the day after your founder launches a breakthrough product, Google unveils a better, free version that soaks up the entire market, then angel investing is not the business for you to be in…just as you clearly should not be an entrepreneur yourself.”

Steve Jobs once said, “Stay hungry, stay foolish.”

He perfectly encapsulated the sort of personality ideal for an entrepreneur. That phrase would need to be modified for an investor so it reads, “Stay hungry, stay patient.”

Personally, I think every one of us can invest in the people who build our economic ecosystem to some extent. You don’t have to write a 1,000,000 $ check to support budding entrepreneurs. You could invest in them by sharing your expertise and time. Not only that, but I feel if we were to make solid progress as an economy, it is not just something we can do but also something we must do.

In the next post, we explore venture builders and compare them with venture capitalists.

Co-written with Amina Islam