Building An Investment Culture In The MENA Region
Five tips for entrepreneurs raising funds in the region (and beyond).
There is one problem that entrepreneurs seem to suffer from worldwide: a lack of funding to start and grow their businesses. Regardless of whether you are working on an MVP in a garage in San Francisco, or writing code for an app in your family’s living room in Amman, capital raising is no easy task. The process is lengthy and time-consuming. For many entrepreneurs (especially first-timers), capital raising can seem like an impossible task, a belief that often leads them to become unsuccessful in this pursuit.
As the CEO of BrightCircle, a company specializing in business strategy and capital raising headquartered in Dubai and Geneva that caters to clients in the US, Europe, and GCC, I’m committed to helping small and mid-cap companies achieve their corporate development objectives by providing customized advice. My expertise is in strategy and capital-raising, and I have used my skills to support some of the Middle East and North Africa (MENA) and Europe’s most innovative startups. One of my key responsibilities at BrightCircle is to meet with entrepreneurs, and show them how they can turn their ideas into successful and sustainable businesses in the short-term and the long-term.
In the decade that I have worked as an advisor, I have found that my clients face three main challenges when it comes to scaling their ventures. First, they struggle to secure funding outside of the three Fs: family, friends and “fools.” Second, they struggle to find the right support and investors for their businesses. Third, they struggle to earn and maintain customer loyalty. Of the aforementioned challenges, I believe that securing funding from private and institutional investors is the main challenge that entrepreneurs face globally.
Finding the right investors and receiving adequate funding are not only important because they allow entrepreneurs to finance and scale their businesses- they are also important because they empower, embolden, and motivate entrepreneurs to do what they do best: manage their business and achieve their company’s objectives. In my experience, finding the right investor and smart funding often triggers a domino effect in an entrepreneur’s business. In other words, the right investor and investment can allow entrepreneurs to focus on satisfying their customers’ needs, which enables them to enhance their business and increase their potential valuation. Once an entrepreneur is able to establish their company as a revenue-generating business, they can start to draw the attention of private investors, venture capitalists, private equity firms, trade buyers, and eventually the public in the case of an initial public offering (IPO).
Regardless of whether you are an entrepreneur in the idea stage, or you are looking to raise your first, second, or even third round of funding, here are some tips that you should keep in mind as you seek to find the right investment partners and investment in the MENA and beyond:
1. BE PREPARED (IN ALL SENSES OF THE WORD)
Today’s entrepreneurship gurus will often tell you that you have to know your business inside out, and be able to respond to any questions from potential investors in order to be truly prepared. However, being able to present that knowledge to investors and answering their questions isn’t enough. You also have to be able to give investors thorough, well-written, and skillfully designed supporting documents that address their concerns. Although there are many supporting documents that you can use to encourage investors to fund your venture, here are some of the main ones that you should have:
I. Teaser This is the first document that is shared with investors. It should entice them to invest by highlighting key information about your business, and the monetary (and sometimes even non-monetary) benefits that they might reap from investing in your business. This document should include some of the following elements: a business summary, a business model, a list of possible challenges and solutions, your company’s products and/or services, your financials, your current competitors, and competitive advantage(s).
II. Pitch deck This is a presentation that is used during startup meetings and events (both online and offline) to provide an overview of your business plan, financials, traction, future goals, so on and so forth. Although it might seem like PowerPoint presentations are the “standard” way to present this information, this is not the case. The more creatively you present and pitch your business, the more likely it is to be remembered by potential investors and future customers.
III. Information memorandum An information memorandum (IM) is a document that is prepared when you are in the process of selling your business. This document is important because it gives prospective investors all the information they need to generate an initial investment or offer for your business. In order to get the best valuation, you need to make sure that your IM clearly outlines all of your business’ key information. Your IM should include an executive summary and different sections on your business’ operations, resources, industry and financials.
2. UNDERSTAND WHAT INVESTORS ARE LOOKING FOR
One of the biggest complaints that I hear from entrepreneurs in the MENA region is that “there is little seed funding,” or that “investors are riskaverse.” While that might be true, there is a reason for that. Most investors in the region have traditionally invested in retail, brick-and-mortar, and F&B. Consequently, their understanding of marketing, scalability, profit and loss is very different. However, the new wave of entrepreneurship that has emerged in recent years has changed what it means to be successful, but many regional investors have yet to adapt to this change. Subsequently, it is vital for this new generation of entrepreneurs to take it upon themselves to educate investors about their sector and help them in the due diligence process.
The formal due diligence process begins when an entrepreneur is introduced to potential investors, and both parties sign a termsheet or letter of intent. The purpose of this process is to allow investors to verify the claims that entrepreneurs make during the relationship-building phase. A smart investor will conduct thorough due diligence to understand how a business sector works, prior to making an investment in any business in any sector. This process will usually involve advisors and lawyers, who will review various aspects of the business in question including team management, revenue model(s), business model, operations, general governance, market size, traction, distribution channels, partnerships, competition, financial projections (e.g. cash burn rate), and potential exit opportunities.
3. LEARN VALUATION BEST PRACTICES
One of the most challenging aspects of raising capital is figuring out your valuation as a business. Globally, there are three methods that are commonly used to a “put a price tag” on a business:
I. Discounted cash flow This is a valuation method that uses future free cash flow projections and discounts them to arrive at a present value estimate. This value is then used to evaluate the potential for investment. If this number is higher than the cost of investment, then it likely a worthwhile investment. However, an investor should not make the decision to invest on this information alone.
II. Market and transaction comparables Simply put, this valuation method determines the value of your company based on the value of similar companies in the market. The “comparables” here can be any number of factors such as the sales, income and sale value of similar businesses.
III. First Chicago Method (FCM) This valuation method combines elements of the previous two methods. The FCM evaluates the best, worst and expected scenarios and then tries to calculate the probability of each case occurring. Then these forecasts are used to attain the valuation and pricing strategy for each case, and can be averaged to obtain a general valuation and pricing. At BrightCircle, we believe the best way to value your business is to see what the market is willing to pay for your direct competitors in the same stage of growth you are in.
4. DO YOUR DUE DILIGENCE
There are many investors out there who are looking to invest in promising businesses and entrepreneurs. However, more entrepreneurs need to understand that not all investors will be aligned with their business’ vision or work culture. Just like potential investors conduct detailed due diligence prior to committing to an investment, similarly, entrepreneurs have a duty to do the same. What should the due diligence process look like for an entrepreneur? It should cover three main points.
Firstly, you should assess an investor’s mindset about issues related to business and investment in general. Secondly, you should clarify what expectations investors have in terms of communication and business performance. Lastly, you should investigate if potential investors have already invested in other startups and get feedback from these startup teams. Once you reach the negotiation stage with potential investors, you need to safeguard your business interests in the terms and conditions of the deal, so that you do not lose control of your venture.
5. UNDERSTAND THE CULTURAL BACKGROUND OF YOUR INVESTOR
Just because your business is incorporated in the MENA region does not mean that your investors and shareholders will be in the region. This also means that they will not necessarily understand the local business ecosystem. In fact, many international investors will not be familiar with the MENA region’s regulations, business culture, or investment practices. Therefore, international investors are more likely to be comfortable with investing in free trade zones and offshore holding companies in a jurisdiction that applies international business law.
Generally speaking, US and European investors tend to be more willing to take risks, and invest in disruptive business ideas and startups. This is mainly due to the fact that while the concept of modern startup ecosystems has only existed for a few years in the MENA region, they have existed for at least decades in the US and Europe. The good news is that MENA investors are gradually beginning to understand how lucrative a promising startup can be in comparison to a more conventional business.
While most successful business owners in the baby boomer generation had to spend 25 years building a multi-million-dollar business, a modern-day startup can achieve the same multi-million dollar valuation in much less time. Just consider the case of Careem, the Dubai-based ride-hailing startup. When we look at the relatively short time that Careem co-founders Magnus Olsson and Mudassir Sheikha were able build a successful startup, one thing becomes abundantly clear: the MENA region can produce successful startups if regional investors, venture capitalists, angel networks and sovereign wealth funds start investing in regional startup ecosystems.
Although many startup enthusiasts believe that MENA investors, financial institutions and regulatory frameworks are responsible for the lack of funding in the region, I believe the lack of funding has more to do with the culture of investment in the region. If the legal and financial institutions of a startup ecosystem are the hardware, then the culture is the software. As a long-time advisor, I’ve come to discover that the existence of the necessary institutions does not matter, if we do not teach MENA entrepreneurs and investors how to build mutually beneficial relationships that are based on respect, transparency, and common values.
Not only will teaching the region’s entrepreneurs and investors how to effectively communicate with each other increase the number of businesses that are funded in the region, I believe it will also build a stronger regional startup ecosystem by extension. Now, our job is to bring these entrepreneurs and investors together, so they can collaborate to establish a robust investment culture together.