|10 April, 2019

Getting in early: Investing in start-ups

Want to invest in early-stage business ventures in the region but don't know where to start? Here's a guide.

Investments in Middle East and North Africa (MENA) start-ups are proving increasingly popular. Image used for illustrative purpose.

Investments in Middle East and North Africa (MENA) start-ups are proving increasingly popular. Image used for illustrative purpose.

Getty Images/ imran kadir photography

Ever since the Middle East produced its first ‘unicorn’, it has become apparent that the region is capable of fostering young businesses with huge upside potential. As an investor, you can gain exposure to the growth of promising young ventures by offering them the capital they crave to grow. However, conducting due diligence is key, due to the inherent high risks attached to investing in early-stage companies.

Investments in Middle East and North Africa (MENA) start-ups are proving increasingly popular. Careem, the ride-hailing start-up founded by Mudassir Sheikha and Magnus Olsson, has just achieved the biggest exit of any of the region’s homegrown technology start-up through its $3.1 billion sale to market leader Uber. This follows on from the sale of Ronaldo Mouchawar’s e-commerce portal Souq.com to another U.S. technology giant, Amazon, two years ago for $580 million.

Given the healthy returns achieved by investors in these deals, it’s hardly surprising that the region’s venture capital sector is attracting so much investor interest. Last year was a record for the number of start-up investments, with Magnitt’s 2018 Venture MENA report reporting 366 start-up deals across the region, an increase of 31 percent compared to 2017.

Overall, $893 million of total funding was raised. Interestingly, Magnitt’s study reveals that of the 155+ institutions that invested in MENA start-ups in 2018, 30 per cent came from outside the region, while nearly half (47 per cent) had not previously invested in the region. Fintech overtook e-commerce as the most popular sector to invest in.

Still room for upside

The region’s governments and their related entities are also only too keenly aware of the benefits of both attracting and facilitating the growth of technology enterprises. The Dubai International Financial Centre recently appointed a pair of venture capital firms – Middle East Venture Partners and Wamda Capital - to run a $10 million portion of its $100 million fintech fund, whereas in Abu Dhabi state-owned investment company Mubadala has teamed up with Softbank and Microsoft to launch a new technology hub, Hub 71.

This follows in the footsteps of a plethora of other business incubators and accelerators that are nurturing promising young companies, including a number of dedicated fintech accelerators in Abu Dhabi, Bahrain and Dubai.

“Innovation hubs are popping up throughout the region,” notes Wissam Khoury, managing director, Middle East and Africa, at Finastra.

While internet penetration in MENA is one of the highest globally, sitting at 64.5 per cent, versus a 55.1 per cent global average, according to InternetWorldStats, a staggering 86 percent of adults do not have a bank account.

“For many, that means not having access to small loans or credit lines, not being able to securely save money, and having no way of receiving and making payments. This leaves a huge opportunity for banks and fintechs alike to develop services and products for the unbanked,” Khoury adds.

“Bahrain Fintech Bay, the largest fintech hub in the Middle East, launched earlier in 2018, gathering 50 partners including banks, corporates, government bodies, universities and fintechs. Its mission is to bring together the ecosystem to collaborate to develop new applications at low cost and speed. Before that, in 2017, Dubai’s International Finance Centre had launched Fintech Hive, the first financial technology accelerator in the region.”

Given the flurry of initiatives to promote start-ups growth, in tech or other fast-developing sectors, how can private investors get exposure to early-stage companies? Lucy Chow is director of WAIN, the Dubai-based Women’s Angel Investor Network. She closed a total of $500,000 in early stage equity funding in six women-led companies active in the MENA region.

“By investing in startups we are accelerating intellectual capital. Start-ups are the heart of any entrepreneurial ecosystem. But no one should do this out of altruism. There is potential for strong returns. It makes business sense to deploy capital into this space,” she explains. 

Backing a team

Asked what criteria she considers when investing in start-ups, she replies that, for her, success very much depends on the team driving its growth. She believes that when you invest in an early-stage company, you are mostly taking a bet on the people behind it, not just their unique selling proposition.

“Many investors will look for the same criteria: strength of the founders and whether the business model is viable. It is important to note that while it is great to present an entirely new concept, investors will not shy away from an idea that already exists. It is not always the first mover that ends up building the most profitable company. Sometimes it may be the third, or fourth, in the market. The key is being able to execute and plan well.”

A word of warning to would-be start-up investors though: it is a risky business. “You can get high returns if a company does well. However, there is also a risk of losing all your money. As a matter of fact, the chance of losing all one’s money is high,” Chow says.

“The general rule of thumb is if an angel has a portfolio of 10 companies, the majority will go belly up. You may break even on two or three. And one will do exceptionally well.”

As a result, she recommends taking a portfolio approach by investing in a number of different start-ups. In terms of where to start, she advises to go out, meet people and to just “reach into your pocket and start investing”.

“It’s important to attend various start-up events. There are so many now in the UAE. The more you attend, the more companies you will meet and interact with. Another obvious way to start is to join an angel network. WAIN takes in new female angels once a year. But there are also Dubai Angel Investors, Keirutsu Forum, Envestors and Falcon Network etc.”

It is also possible to invest in start-ups trough the various crowdfunding platforms that exist in the region, or by participating in fundraisings or IPOs on junior or alternative stock markets. Then comes the question of how much to spend. Chow thinks the right question to ask yourself is ‘How much are you willing to lose?’

“Do not invest anything if you are not willing to walk away from,” she concludes.

(Reporting by Charlotte Kan, Editing by Michael Fahy)

(michael.fahy@refinitiv.com)

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© ZAWYA 2019