More than $900 million has been invested in regional digital startups in the last 4 years. With over 100 active institutional investors across the region, MENA has witnessed a significant proliferation of new funding institutions in the past 5 years, with Venture Capital (VC) funds, in particular, capturing the largest percentage of the investor community and doubling in number from 2013 to 2015. We spoke to key investors across the region to get their perspective on the state of venture capital in the region, the major trends, what they consider a good venture return, their predictions, and more. During the next couple of weeks, in a series of posts, we will be sharing their insights with you. You can find part 1 here.
We’ve witnessed substantial investments in the region during 2016 and 2017. How do you look at ROI and what do you consider a good venture return/ROI?
CEO @ MEVP
Financially: MEVP expects to allocate its funds between star companies (10%) that will generate minimum 10x return, solid companies (60%) with 2-3x returns, and failed companies (30%). Star companies usually cover the fund return and compensate for the performance of the remaining investments. Ultimately, we expect to generate a 30%+ return on the fund. Socially: We believe that our investments create direct and indirect jobs with a high multiplier effect and create wealth for the region that can improve local social mobility. MEVP has contributed to the creation of more than 1,100+ jobs since inception. Strategically: We like to invest in businesses where knowledge share, synergies, and partnerships can take place with our other portfolio companies, thus boosting our fund returns across multiple investments.
Managing Partner @ Silicon Badia
I like to look at cash-on-cash returns in venture (the public also understands that better). A good performing VC fund typically returns 3X net of fees. So if you think of a fund that might have 10 to 20 portfolio companies, one-third of them will die (the "losers"), one-third will return ~1X (the "money back") and one-third should return 5, 10, 20X to balance the others out (the "winners"). With that being said, given how nascent the industry is in the region, I believe that any scenario that makes people money is a good scenario right now as it continues to inspire belief and also creates "returning entrepreneurs" and historical numbers in other ecosystems is on the side of returning entrepreneurs.
Abdulaziz Al Loughani
Managing Partner @ Faith Capital
Given that there’s probably only one fund that has reached its maturity, we do not have the luxury of comparing different fund vintages in this part of the world. Generally, most direct equity investments made recorded 5-10x at approximately +60% xIRR. Social impact, primarily jobs creation, is not yet mainstream; of all the money being invested, jobs creation remains relatively modest with the exception of the sharing economy taxi app (Careem). We think most of the impact created was around awareness and embracing the modern entrepreneurial mindset. Concepts like lean startup, business model canvas, independent wealth creation and liberalizing our economy are happening everywhere in the Arab World.
Head of Investments @ Riyad Taqnia
We think it’s important to take a step back and think about the long-term returns of Venture Capital in a region that’s diversifying away from reliance on oil in an age where technology is transforming every industry under the sun. This situation is extremely relevant to VC because VC is the engine that empowers the growth and scaling of the regional companies that can both lead that transformation of the region’s established industries, but also capture some of the value (know-how, financial…etc) unlocked by those transformations. The alternative is that international companies from outside the region would be the ones capturing these opportunities and the effect on the regional tech industry would be limited. To elucidate with an example, we’d point at a companies like Souq and Careem that have engineering, data, product and other teams in the region as opposed to international tech companies with only sales/marketing/operations offices in the region. The difference between these two scenarios are vast for the region. Every tech giant of this size has a by-product of creating veterans in building high-tech companies that benefits the entire region, not just the company’s shareholders. This is further improved if these companies realize large exits that make tens or hopefully hundreds of these veterans financially capable of starting other companies that themselves continue this cycle of growth. Starting and empowering this virtuous cycle is the higher goal we see encompassing under it vast benefits to the region as well as the best financial returns for current and future funds in the asset class.
Managing Partner @ Iliad Partners
At Iliad Partners we target companies that can achieve significant scale and can generate large multiples and financial returns. From there on, as ex-entrepreneurs with an operational background and an active approach, our model is to engage entrepreneurs early on in their journey, well before we seek to invest. This is not only to get to know them and their companies, and do our due diligence over time, but to also support and mentor them to the next stage. We do this directly and via organizations such as Endeavor and MITEF. Having seen the full lifecycle of a MENA startup - from launch to exit - as co-founder and seed investor of GlamBox, I am aware of the pain points and challenges that entrepreneurs face, and can provide them with first-hand advice and guidance. So, beyond the financial return on our investments, we see our relationships with entrepreneurs as strategic and are keen to contribute to their success and to the development of the overall ecosystem