Seed funding tips for start-ups in MENA

Angel investors offer pointers on how you can convince financiers to loosen their purse strings and put early-stage capital into your business

  
Image used for illustrative purpose. Seed funding or seed stage funding is a very early investment which aims at helping a business grow and generating its own capital. Also referred to as seed money or seed capital, investors often get equity stake in exchange for the capital invested.

Image used for illustrative purpose. Seed funding or seed stage funding is a very early investment which aims at helping a business grow and generating its own capital. Also referred to as seed money or seed capital, investors often get equity stake in exchange for the capital invested.

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Raising seed capital is one of the most critical points in a start-up’s lifecycle – but it’s fraught with risks, and too often entrepreneurs can stumble at this early hurdle. Here, two regional angel investors give the inside track on what they’re looking for in seed funding pitches.

How much money to ask

One key thing to recognise is that seed funding expectations can be very different in the Middle East, compared to other regions.

“For example, in the United States, valuations tend to be very over-inflated, so it’s quite common to find entrepreneurs regularly raising USD 1 million, with a USD 10 million valuation,” said Elissa Freiha, co-founder of Womena.

“However, for us in the region, we see lower valuations, more realistic valuations. For us, a seed round would be anywhere from USD 100,000 to USD 1 million in funding, and the company would be valued at about USD 1.5 million to USD 4 million,” she added.

How much equity to give

Freiha said the typical equity share sought by an angel investor would be between 10% and 30%, while Mike Lebus, founder of the Angel Investment Network, put it at 20% to 40%.

But Freiha said one of the most critical factors was not so much the amount of equity an angel investor could acquire, but the amount the entrepreneur was willing to give up.

“This, again, is what’s so important about entrepreneurs supporting their own businesses up to a certain point – the longer they’re able to support their business themselves, the higher the valuation they can get. So they’re not giving up as much equity when they need funding,” she said.

When to raise seed funding

Lebus reinforced this point: “It's important to make as much progress as possible before you approach angel investors, as traction makes your business more attractive to investors.  However, it can take several months to raise seed funding, so you need to start raising early enough to make sure that you'll be able to close the round before you run out of money.”

Trying to raise seed funding too early is one of the most common mistakes entrepreneurs make, according to Freiha: “They think ‘here’s my great idea, I need money now’.

“But the truth is, you can do a whole lot with very little in the way of funding – and when we see an entrepreneur that is pretty thrifty and has committed themselves and their resources wholeheartedly to the business, but now needs capital in order to make that business really grow and bring it to market, then we will come in.”

How to impress investors

Other red flags Freiha sees are start-ups run by a sole founder without a team – “that’s very discouraging for investors to get on board with, if there isn’t any proof they’ve been able to convince other people of the strength of their idea” – and an unwillingness in putting effort into selling an idea.

“In order for us to consider an investment, and in order for most angels to consider an investment, you need to be able to do a certain amount of diligence – and in doing that diligence, the entrepreneurs need to be prepared to answer any and all questions that are thrown at them, with openness, curiosity and grace. Some entrepreneurs take a lot of offence in being questioned,” she said.

Lebus sees this as being under-prepared for the rigours of pitching to would-be investors: “To impress investors, you need a well-conceived idea, a great team, good traction, sensible financials and well-presented documents. It's also important to be flexible on the valuation; if investors repeatedly tell you that the valuation is too high, then you obviously need to negotiate to try to close the deal.”

Both angels agreed that investors in the Middle East could be much more conservative and risk-averse than in other regions, making preparation key.

“The concept of angel investing is much younger in the Middle East than in other countries like the US or UK, so it may take time for investors to get used to the idea of the high-risk, high-return nature of start-up investing,” said Lebus.

Freiha agreed: “The concept hasn’t been proven that much – or at least it has been proven, but it hasn’t been publicised. The success stories of the region haven’t been publicised until very recently, so investors are still uncomfortable with investing their funds in technology business, because they don’t understand how it works.”

What investors look for

Freiha said success stories such as Careem, Souq (now Amazon.ae) and Talabat would help change things, along with big names such as Emaar chairman Mohamed Alabbar entering the world of tech start-up investments. But she also said there were fundamental differences in what investors were looking for.

“In emerging markets like the Middle East, where it’s politically and economically volatile, investors want to be reassured that the business is able to generate revenue – and so they’re more likely to want to see that earlier, and forgive high growth until later,” said Freiha.

She also said an ability to expand across the diverse markets of the region was key: “If the best entrepreneurs are in Dubai that’s fantastic – but we’re also looking to see those companies scale into Saudi Arabia, into Egypt, Jordan, Lebanon. So we need to know the entrepreneurs and the teams behind them are able to expand across the region and into those markets.”

Note: This article was originally published on Accelerate SME and it has been republished on Zawya with full copyright permission.

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

© Zawya SME 2020


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