Angel Investors as Key Drivers of Entrepreneurship

An angel appears at a board meeting and tells the chairman that in return for his unselfish and exemplary behavior, the Lord will reward him with his choice of infinite wealth, wisdom, or beauty. Without hesitating, the chairman selects infinite wisdom.
“Done!” says the angel, and disappears in a cloud of smoke and a bolt of lightning.
Now, all heads turn toward the chairman, who sits surrounded by a faint halo of light.
One of the directors whispers, “Say something.” The chairman sighs and says, “I should have taken the money.”

Earlier this month I attended the G-20 Global Partnership for Financial Inclusion, which held a workshop on Financing Entrepreneurship Innovative Solutions in Izmir, Turkey. Turkey currently holds the G20 Presidency and therefore its government played a pivotal role in the organization of the successful of the workshop. One of the panelists was a well-known Turkish entrepreneur, angel investor and author, Baybars Altuntaş, who impressed the audience with his vocalization of tax incentives that the Turkish Government provides to angel investors. I pulled Baybars to the side during a coffee break and asked for more details. Once a person has registered as an angel investor, he is allowed to net off up to 75% of his investment in the start up company against his income tax payable in the year. In other words, a tax holiday of up to 75% of your investment! Baybars added that angel investors tend to get together and pool their funds to reduce the risks as the success rate for their investments was only typically 10%. “Why would one invest money in start ups if only 1 in 10 initiatives succeed?” I quizzed. Baybars smiled the smug smile of the wealthy and responded, “Because the returns from that 10% will make you more money than the losses on the 90%!” I walked away, scratching my head and realizing why my risk aversion would leave me a pauper for the rest of my life.

Angel investment is the provision of financial capital to newly established or growing companies which have novel business models or technologies with high potential for growth and profit but are unable to find eligible financing resources to realize their investments.

Recognizing the inherent benefits that angel investors would provide through entrepreneurial seed capital support as well as stimulating economic growth through job and value creation, the Turkish parliament passed the “Regulation on Angel Investment” law in June 2012 and the Treasury promulgated the enabling legislation in February 2013. The rationale behind the law is to promote the financing of small enterprises and entrepreneurs by providing tax incentives to angel investors. According to a PwC Turkey Asset Management Bulletin, in order to benefit from the tax reliefs provided in the law business angels first have to obtain a license from the Treasury. The business angel cannot directly or indirectly be a controlling shareholder of the qualifying company that it wishes to invest in, neither can the qualifying company belong to his relatives. A qualifying company should, amongst other criteria, be a registered company in accordance to Turkish company law with a maximum of 50 employees and net assets of not more than TRY 10 million (Kshs 354 million). If the business angels participate in qualifying companies whose projects are related to research, development and innovations then the applicable tax incentive is 100% instead of 75%. This is where it gets interesting. In order to get 100% tax relief those activities have to have been supported in the last five years by the Scientific and Technological Research Council of Turkey, Small and Medium Enterprises Development Organization and the Ministry of Science, Industry and Technology. The tax reliefs are applicable until the 31st of December 2017 making it a 5-year program, but the Cabinet can authorize the extension of the date by another five years. Shares acquired by the angel investor have to be held for at least two years and the minimum investment is TRY 20,000 (approximately Kes 700,000) and a maximum of TRY 1,000,000 (Kes 35 million) annually.

So let’s bring this concept home. Imagine if the Kenyan government picked four key economic areas that they wanted to drive with the help of the private sector. Let’s say agriculture, health, technology and education. Then the government wakes up to the fact that they can’t be all things to all people, and that they need to leave the business of business to the best people suited to do it: business people. They then assume that it’s far better to allow a business person to take a risk on an entrepreneur as the business person has a) a much better nose for sniffing out and recognizing good opportunities, b) years of experience in making and losing money therefore an appreciation for and recognition of risk, c) business experience the kind of which they don’t teach in business school leading to mentorship and d) his very own money which defines his skin in the game. The same Kenyan government would then ensure that the business angels’ interests are aligned to the strategic objectives of the relevant ministries for the four key areas. Rather than allocate funds in totality to the Women and Youth Funds, re-route a portion of those funds to backstop a tax incentive program for Kenyan business angels. The benefits hardly merit articulation due to their sheer obviousness. The Government will distribute the risk of repayment from their annual budget allocations to the Women and Youth funds by providing an alternative mechanism for reaching those same stakeholders in a credible, efficient manner that provides the extra flavor of mentorship as well as stronger linkages between the existing business community, women and the youth. Finally, it allows for a wider tax bracket to be formed since, by requiring investees to be formalized legal entities, the investee companies enter into the taxation realm. It shouldn’t take a little wisdom from heaven to permit business angel investing to become a government driven entrepreneurship initiative.

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Twitter: @carolmusyoka

Sights and Sounds of Turkey

A work related trip to Turkey recently got me to make my maiden voyage on Turkish Airlines. The narrow bodied 737-800, with a passenger capacity of anywhere between 151 to 189 passengers depending on its configuration, was packed to the rafters and every single seat was occupied for the six hour flight to Istanbul. The flight left bang on time at 10:25 a.m. filled with a motley group of passengers. Somewhere in the middle sat a group of female Kenyan traders, with the ubiquitous well worn scarf wrapped around seasoned shoulders. At the back of the plane was a group of young Kenyan males, quite obviously going for a sports related trip given the loud, raucous laughter filled with competitive promise that occasionally punctuated the air.

As a card-carrying member of the Kenya Airways (KQ) fan club, I couldn’t help but compare the service on the two airlines. KQ beats them on food hands down despite a Turkish-steward-dressed-in-chef-uniform perambulating about and offering more promise than fact during the flight. However, I have to admit that individual passenger screens providing at least 40 choices in each of the three genres of drama, comedy and action made for an unbeatable in-flight entertainment service.


Image from http://ichef.bbci.co.uk

The Turkish Government owns 49.12% of Turkish Airlines while the rest is free floating on the Istanbul Stock Exchange. With about 277 planes ranging from Airbus, Boeing and Embraer, the profit-making airline is the fourth largest carrier in the world flying to 218 international destinations. It has faced challenges like most airlines and posted losses in 1987 and 1988 due to high payments on its new Airbus A310s. It also suffered in the global aviation crisis following the Gulf War in the nineties and didn’t break even until 1994. The airline also underwent some stress during the SARS outbreak that forced it to suspend flights to several Asian destinations. However in the last three years 2012, 2013 and 2014 the airline turned over $8.2 bn, $9.8 bn and $11 bn respectively yielding a net profit after tax of $657m, $357m and $845m during the same period. It enjoys relatively good profits and very healthy and positive cash flows.

But it’s not difficult to see why. Turkish Airlines is a key partner in the Turkish government’s tourism initiatives, which started when the new government in 1983 chose the airline to be its primary ambassador and committed to maintaining a modern fleet with high security. Data from the Turkish government shows an average growth rate of above 5% in tourism per year with 36.84 million visitors in 2014. Turkey happens to be the sixth most popular tourist destination in the United Nations World Tourism Organization’s ranking. It relies on its cultural and historical heritage along with sea tourism. It has also been helped recently by the depreciation of its local currency – the lira- against the US dollar and Euro which has therefore made it an attractive destination for visitors from those regions.

We landed in Istanbul in the early evening and as I was travelling to Izmir, the third largest city in Turkey, I had to go through immigration. Long lines awaited me with about 22 counters reserved for non-Turks and another 8 reserved for Turkish passport holders. I must admit I let out a quiet snort of derision as I gleefully stood in the same tortuous line with British, American and EU passport holders. No privileged access here. We were all in it to win it.


Image from http://www.trazeetravel.com

Istanbul’s Ataturk airport is actually not visitor friendly and it’s quite a schlep to the domestic terminal with poor signage and mostly non-English speaking airport staff. I barely had time to grab something to eat before I heard the last boarding call for my flight to Izmir. As it was a domestic flight I was expecting it to be an Embraer or another Boeing 737 at least. However the transfer bus pulled up in front of a Boeing 777 -300 ER with a passenger capacity of 349. The reason for the use of the wide-bodied equipment quickly became apparent. The 42-minute flight was packed to gunwales to Izmir, a town 331 kilometres south west of Istanbul that sits along the coastline of the Aegean sea. Izmir has a rich history with at least 4000 years of urban civilization and is proximate to the ancient city of Ephesus- remember John the apostle’s letter to the Ephesians? Most of the passengers were tourists, many who were of oriental extraction.

There is newness to Izmir, certainly not the crowded old city feeling that I recall from my Istanbul trip 15 years ago. The streets are wide, 3 lane highways on a each side and my cab driver drove like he was possessed with and conceived by Lucifer’s spawn. Having had a seamless check in process into the hotel and feeling slightly peckish, I took the lift to the 8th floor sky bar and was immediately taken by the wide vista of twinkling lights on the hillsides of Izmir. Immediately below me was a city square, it was 10 pm on a Saturday night and there were many people walking, rollerblading and cycling on a sea fronting promenade, the centre of which is the Republic Square. It looked safe, appealing and attractive as it was brightly lit and secure. On the other side of the square, was a police car parked seemingly carelessly on the road, insouciance oozing out of every screw holding its authority together. Its red and blue lights flashed brilliantly to mark its territory. Republic Square was safe for its users.


Image from http://www.trazeetravel.com

The Turkish government uses the national airline as a fundamental tool of tourism, which is a key economic driver. Security is present and very visible to residents and visitors of Turkish cities. It is apparent even to the untrained eye that the government plays a key and supportive role in the way business is done in the country. More on Turkish government support of Turkish business next week.

[email protected]
Twitter: @carolmusyoka