April 2, 2020
Description: How to improve the state of the VC ecosystem in MENA particularly from the standpoint of a VC investor. My article was published in Forbes Middle East.
The VC ecosystem has rapidly evolved. Four years ago, MENA had 15 active VC funds. Today, that number is cited comfortably at over 55 according to MenaBytes. An estimated $900 million dollars was raised in 2018 alone, a figure that is set to be exceeded in 2019 as an unprecedented number of VC funds mark their entry.
Two unicorns have emerged out of the literal sandbox of Dubai—a small market relative to others in the region—proving that ecosystem is more than just a buzzword. The acquisitions of Careem and Souq.com brought much fanfare and credit to the region when it saw two buyouts by FAANG companies. These deals demonstrated that the region can deliver better than Silicon Valley firms can. If you can’t beat them, join them—or buy them.
MENA’s range of exits have also broadened. Startups such as Property Finder are attracting major capital from the world’s leading PE firms and Network International, a Dubai-headquartered payments firm, saw a successful IPO debut. Viewed in the context of a nascent and small market and a difficult economic and political climate, their ability to prove that homegrown models work make them all the more profound.
Still, the region’s ecosystem is wrought with challenges and requires VCs support to fix it. Regulatory reform is still required but VCs will need to step up if they desire a more sophisticated and growing deal-flow.
Capital is not the problem. MENA is blessed with a strong network of wealthy families and ample sovereign funds. This resource, however, remains underpenetrated. Private wealth leaves the region, and is invested in safe assets like real estate. VC is little understood in circles that view it as risky, illiquid and potentially non-shariah compliant. However, the share of private capital allocation in VC and PE in the US and China is on the rise. Startups are staying private longer and once-public companies are being taken private. The role of private capital will continue to grow globally and will impact the region, making it all the more critical that LPs are informed about this asset class.
Indeed, the world’s largest bets in VC are being made in the region. Saudi’s PIF and Abu Dhabi’s Mubadala are showing that VC is a serious asset class—$65 Billion worth in SoftBank’s Vision Fund for example. If risk-averse governments believe in VC, why can’t LPs?
Awareness raising and communication to LPs is needed. To start, firms can make the process more experiential for LPs—they can organize touchpoints between LPs and management teams, a move that can make LPs feel more engaged, committed and informed.
VC firms need to promote transparency through a focus on better governance. The Abraaj scandal has set the PE and VC industry back but the lessons gained make it all the more compulsory to restore trust in the industry. Data collection and fund performance tracking will enhance trust between LPs and fund managers. It will also lead to better decision-making and firms with track-records bring in more capital in the future.
Funds and not just founders need to shift their mindset on failure. Owning and sharing stories of successes and failures will drive better collaboration and lead to more sophisticated investment practices. It is no secret that VC firms in Silicon Valley fail to make the right call in at least 30% of their investment decisions.
Finally, VC firms need to make the case for homegrown talent. Not only have local startups demonstrated the potential to be superior in meeting local needs, but facing an overcrowded VC market like the US means that better deal terms are likely to be struck at home.
VC firms can do more to support entrepreneurs.
VC funds can provide management teams with business advice and act as connectors to business partners, industry leaders and talent. Platforms need to be created that link portfolio companies to one another to promote shared knowledge and resources—an all-hands quarterly in-person workshop is one trick to employ.
Most critically, VC is a boys’ club. The industry should move away from that. VC investors need to do more to promote diversity within their ranks, their LP base and all levels of their portfolio teams. A diverse team that draws on multiple perspectives and experiences leads to better performance. A study by the IFC showed that funds with gender-balanced senior investment teams earn returns that were 10% to 20% higher.
VC firms should support startups that are turned down for investment. Providing open, critical and actionable feedback on failed pitches can over time strengthen the pitch-making process and business acumen of entrepreneurs as lessons get passed on in the wider ecosystem.
VC investors sit at the center of this ecosystem. The time to leverage this powerful role is now.