Startup companies are constantly on the hunt for two things: initial funding to rise, and creative and innovative ideas to penetrate into their target market. In some cases, the initial funding injected into any startup venture comes from the founder’s pocket, however in many other cases, outside funding remains a recipe for growth and success for any startup.
The ideal candidates to provide funding for startups in this scenario are Venture Capitalists. For years, it has been proven that investments from Venture Capitalists result in positive growth streaks for new startups.
Here’s the issue: getting a Venture Capitalist to pump in investments into a new startup business is only half of the equation. In fact, any Venture Capitalist, before making any decision, studies in advance the current outlook of the market as well as other factors including the exit strategy of the startup they’re planning to invest in. An exit strategy determines the losses or gains that the initial founder will realize when exiting their startup.
Middle East and North African startup’s now serve as a magnet for Venture Capitalists. According to Statista.com, the year 2019 recorded an overall of 564 investments in startups totaling to a worth of USD 704 million.
As the landscape continues to evolve and new ecosystems appear in the region, investments in the MENA region are set to exceed USD 1 billion by the end of 2020.
The region is heading towards high growth!
The digital sector remains the most pertinent and promising at this point. In the past few years, the MENA region has quickly jumped to become one of the most digitally connected areas around the world. Based on statistics presented by MAGNiTT, 94% of the MENA region’s population owns a smartphone. Out of these, 88% of the population are online on a daily basis. The appetite that this region has for online services is unrivaled, which is attracting more and more Venture Capitalists towards the region at an unprecedented level.
Despite the region having high levels of digital connectivity, only 8% of small and medium businesses have online presence, which is very low in comparison to the original rates. Most Venture Capitalists are keen on putting their funds in ventures with high digital presence such as Ecommerce platforms and Fintech startups, which only make up these 8%.
Although the scene in the MENA region may look promising on a certain level, many Venture Capitalists find themselves thinking twice before injecting funds in the startups available in the region.
Below are some factors that VCs currently take into consideration before taking the decision to invest in a startup:
The idea behind any business model is a decisive factor; however, the character of the business partners and the team members is equally important for Venture Capitalists. Any Venture Capitalist, when asked about the first thing they consider when making investment decisions, automatically mentions characteristics such as enthusiasm, confidence in abilities, honesty and commitment. These are important traits that are sought in order to see -and actually realize – potential for a long-term business relationship.
One other equally important factor is the team’s capacity as a whole. The latter, itself measured by the individual capacities of every team member: What are they skilled at? How many years of experience do they possess? What are their past records? All of these are skills that ensure eventually the security of any business model.
Protests and revolutions affect several markets in the region. Arising from unstable political environments, protests creep into stable markets…which propagates negative opinions on the region as far as investment is concerned. This is creating a bottleneck for many innovative startups and for their overall growth plans.
Also, in light of political instability, corruption tends to find its way throughout the political, and institutional infrastructure as well as the public sector, which makes it hard for startups to finish their paperwork or set up their official files. This puts Venture Capitalists in a natural state of worrisome and affects investment as a whole.
According to the World Economic Forum, the projected population is forecasted to increase by 40% in the next couple of decades. Alongside this forecast is the need to prepare for industrial demand. The region has to find a way to inject at least USD 100 billion a year in order to maintain growing communities across the region and provide infrastructure services for the latter. This is a key pillar to Venture Capitalists’ investment decisions. They need to make sure the sustainability of their businesses will not be compromised by the quality -if not absence- of infrastructure in the targeted markets.
There are many other criteria that shape investment decisions such as the market characteristics (size, growth, potential, share, buyer concentration and sensitivity to business cycle) or financial characteristics (liquidation, valuation, risk, equity, rate of return…); however these factors shape investment decisions globally and are not Mena-region-specific.
One other newly-introduced factor is the Covid-19 Pandemic, also known as the “Coronavirus”. Coronavirus has affected thousands of people all over the globe. Although things seem to be positive on the investment front in the MENA region, it is important to keep in mind how this pandemic has already affected the economies of this region:
1. Capital markets have become more volatile. Firms that have weak credit scores will find it difficult to penetrate the market.
2. The tourism sector which was blooming has been hit hard, decreasing its contribution to the GDP.
3. Oil prices have greatly decreased. This will have a significant hit for countries that rely mostly on oil revenues.
Given the immense opportunities that the MENA region offers, it is worth having a look at 5 Venture Capitalists that have invested in this region:
Being one of the first firms to invest in the MENA region, Middle East Venture Partners (“MEVP”) have seen the demographics change over the years.
With an increase in quality and high digital literacy, MEVP’s growth increased from USD 10 million to USD 120 million in just seven years. Banking on diversity, they invest in Fintech, e-marketplaces, and biotechnology companies.
MEVP’s investment in an Arabic language cooking site called Shahiya is definitely one of their success stories. It was later sold to Cookpad, Japan’s leading cooking site in return for a consideration of USD 13.5 million (six times worth what MEVP had invested 2 years ago).
This VC is a leading firm when it comes to investing in the technology sector. They invest in firms at their “seed” stage or “growth” stage.
Jamalon is one of the companies that Wamda Capital invested in. This is a firm that translates books from English to Arabic. The first series that the founder translated had over a million downloads.
Seeing the market size, Wamda pumped an amount of USD 2 million into Jamalon. .
Flat6Labs invests in bright and passionate entrepreneurs who have innovative business models and proposals. They offer services ranging from seed funding, legal support, office space and strategic mentorship.
Their main goal is to seek innovative, yet highly functional and realistic business model ideas. TransPooler – a Flat6Labs investment – for example is an app-based school bus tracking system that allows communication between parents and schools.
With their core focus on technology, this firm does more than simply investing in SMEs. They provide mentorship programs and help startups plan for sustainable growth and entrepreneurs when setting up a business. Their main criteria for investment is to pump funds into startups that have already launched a product that generated a revenue of USD 5,000 for a period that lasts between 3-6 months (e.g. Ordera).
This firm supports startups they deem are solving real problems with a solid business model at hand. They provide their expertise at specific stages so as to make the business plan for any startup grow.
Arzan has provided seed funding to a company known as PET Recycler. This company supplied polyethylene terephthalate (PET) that is used in 3D printing. Injecting investment in a new sector, they managed to fill in a gap in global funding.
1. High volume and diversified investment strategies deliver more consistent and strong cash returns as opposed to concentrating investment efforts in one sector.
2. Target companies that forecast high growth and capital are innovative technology ventures.
3. It is better to get a skilled Venture Capitalist than to get direct funding. Governments do not possess specialized skills in investor approaches. Their opinions may be biased as well.
4. Build relationships with founders. This will help you gauge them and see whether they have the capability and drive to pull off their idea or not.
There is no doubt that there will be a growth of the Venture Capital model in the MENA region. There is still a huge gap that needs to be filled. It has not yet reached its full potential and is still a young economy that has the potential to bloom.
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