Venture Capital in MENA: Lessons learned from the Middle East Investment Forum

I had the pleasure to be invited to speak at the 2018 Middle East Investment Summit held in Dubai . As someone who has been in Venture Capital in Lebanon for the past 3 years, I was very curious about the MENA VC funds’ outlook and how the entrepreneurship eco-system in countries with high spending potential (Saudi Arabia and United Arab Emirates) compared to Lebanon’s and what were the views of MENA traditonal investors in VC funding.

Venture Capital in Lebanon

Venture Capital has boomed in Lebanon since the announcement of the
Central Bank’s Circular 331 which enabled VC funding through commercial
banks. The circular resulted in around $600 Million unblocked for
investing in Lebanese based start-ups. This resulted in the inception of
8 funds with an estimated $350 Million allocated and the funding of 50
startups with amounts ranging from $100K to $5M.

The initiative has been a great success invigorating the
entrepreneurship eco-system in Lebanon and resulting in other
initiatives such as accelerators, bootcamps and competitions. This
initiative also provided a great learning experience as it pushed all
parties involved towards understanding the ins and outs of VC funding
and assessing financial returns, success rates and exits.

VC in MENA vs VC in Lebanon: Different sources of funds, similar challenges

During the conference I attended all the panels related to Venture
Capital; I wanted to understand how VC funding in powerful economies
worked and if the investment processes followed the same underlying
assumptions. The panels had very prominent investors such Angus
Patterson from STC Ventures, Mishal Kanoo Chairman of the Kanoo group
and others. The major difference between VCs in MENA and Lebanese VCs
was the source of funds and disbursement flexibility. MENA VCs have
traditionally private investors such as family offices and high net
individuals and can deploy money with less restrictions than Government
funded schemes such as the circular 331. The lessons learned from
Venture Capital are very similar.

• High return potential, high risk: VC investing is
  known to yield high returns than with exits ranging from an average 3X
  to 10X the amount invested. However failure rates on average for
  startups is around 70% as per entrepreneur.com.
  The region being more risk averse, potential investors tend to turn to
  safer asset classes such as real-estate, bonds and private equity.
  However as per Magnitt’s research,
  VC Funding has grown from $168M in 2014 to $560M in 2017 with an
  exceptional peak in 2016 ($874M because of investments in Careem and
  Souq).
• Invest in innovation or copycats ? Most VC firms
  face the same dilemma while putting their investment strategies: Look
  for innovative startups with high risk/returns or focus on copycats:
  startups with proven concepts being localized for the region. The trend
  in MENA is currently leanings towards copycats (Anghami,Careel, Souq
  etc…). The verticals were highly debated between panelists with some
  arguing that the most successful investments would come from enterprise
  software while others reaffirmed their belief for consumer oriented
  business models to capitalize on the size and potential of the MENA
  region. Everyone however agreed on not investing in hardware investments
  due to the process of building and commercializing a product. It’s
  worth noting however that at Berytech Fund 2 we invested in 5 hardware
  startups including Instabeat a swimming goggle wearable and Band Industries
  a music tech company that manufactures automatic tuners for music
  instruments. Although the time to market is usually long for these
  startups the returns and innovation are usually high.
• Choose versatile teams: Investment criteria differ
  between funds: Stage, industry, innovation, size and type of business
  are all viable factors. Panelists unanimously agreed that one of the
  most important investment factor is the team. In an era where everything
  can shift rapidly having a team that can adapt to adverse market
  conditions, pivot their business and listen to feedback is a major
  success factor. Great teams build great companies.
• Act as a partner not a silent investor: Investing
  in a company and leaving it to run itself works more often than not, but
  investors can and should contribute more than just money. Acting as
  mentors, interim CXOs and the startups biggest advocates leads to even
  greater value created. VC firms should also be comfortable with putting
  follow-on funding if needed; business plans and forecasts do not always
  go as planned and follow-ons besides their financial upside are signs of
  investors believing in their founders.
• Wait for the perfect exit: There has been a handful of exits in MENA ranging from small ones such as Shahiya
  (acquired by Japanese Cookpad), trailblazers such as Maktoob (acquired
  by Yahoo) and quasi-unicorns with the acquisition of Souq by Amazon (The
  first expansion acquisition ever made by Amazon). However exits have
  not been very common; the absence of structures that allow IPOs and the
  relatively short period since the boom of VC funding are the major
  bottlenecks. Most investors in the MENA are anticipating a horizon of
  8-9 years from investment to exit while the Lebanese Central Bank
  Circular 331 gives funds a 7 year investment mandate.The long exit
  cycles has been a huge deterrent for wealthy individuals, family offices
  and other investors looking for more liquid investments. VC Fund
  Managers are aware of the exits and believe that they will come sooner
  than what is expected. Acquisition of regional startups by multinational
  powerhouses desiring to tap into the MENA region is the likeliest exit
  path validated by the Souq/Amazon deal. Another exit potential comes
  from larger, future funding rounds giving the opportunity to early
  investors to sell their shares to new investors with a significant
  return.

VC investing in MENA has been booming during since the last few years
but is still nascent compared to the US and Europe. MENA VC firms are
aware of the return/risk ratio and are committed to their investment
policy. The next couple of years will be crucial; a couple of
acquisitions or major funding round can quickly catalyze the MENA VC
eco-system and into even more growth.