How To Get The First Investment In Your Idea-Stage MENA Startup The MENA region is a fertile ground for startup innovation, but entrepreneurs must be smart about how they pursue initial rounds of funding.

By Zach Ferres

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In early May, nearly 2,000 people flocked to the ArabNet Digital Summit in Dubai. The throngs of entrepreneurs, investors and experts who gathered to discuss creativity and technology represented a microcosm of the plentiful startup energy that flows through the Middle East and North Africa (MENA). When I attend conferences such as this around the world, I never fail to notice the wild misconceptions of how startups actually get started and who finances "ideas." At flashy events, these things can be easily misrepresented. But for idea-stage entrepreneurs, understanding this process is crucial to success.

The investor's eye view

Before diving into the age-old question of where to get financing for an idea, let's look at things from an investor's point of view.

Although they often launch with lean, scrappy teams, startups are not your average small businesses. These companies have high growth potential and can achieve valuations of $100 million or more in their first five to seven years. However, startup equity -ownership of a company- is one of the riskiest alternative asset classes for investors. These companies have a high likelihood of failure, are not liquid and have a long payback period.

High risks can also yield high returns, though, which is why venture capital firms exist. VC firms can earn a 30 percent or higher internal rate of return, according to Industry Ventures, even when eight of their 10 portfolio companies fail. Startups remain attractive to VCs because they can return profits that far outweigh investment.

With all of this VC money floating around, it should be no problem to ask a VC for capital for your new startup idea, right? Not so fast. More than 80 percent of VC dollars go to companies that generate at least $100,000 per month in revenue. VC money can help you grow your startup, but it won't allow you to start from scratch -- MENA entrepreneurs must invest in the pre-seed stage themselves or look at other means to finance their projects.

Related: Seven Ways To Fund Your Startup On The Sly

Raise the right amount

Research by MAGNiTT indicates that MENA investments are quickly approaching $1 billion, highlighting the tremendous amount of money available to regional startups. It's certainly exciting for entrepreneurs to have their ideas validated by multimillion-dollar investments, but it can also give them a false sense of confidence.

Founders must first know what it takes to get from the idea or pre-seed stage to their first rounds of seed funding. It helps to have some context for the typical pre-seed and seed funding deals in your given ecosystem. A founder whose ask is completely out of whack with regional trends might appear uninformed or grandiose, neither of which inspire confidence in investors.

In the MENA region, MAGNiTT research shows that the average pre-seed deal is about $300,000. Seed stage deals average $1.2 million, which is consistent with seed investments across Asia. Structuring your ask within this context undoubtedly increases a startup's chances of landing investments.

Related: From Seed Stage to the Last Mile: All You Need to Know About Fund Raising for Startups

Funding a pre-seed MENA startup

So where does a MENA startup go to fund its pre-seed stage? If the founding team has the skills needed to bring a minimum viable product to market, the company might be able to hold off on asking for money. But if a startup requires capital to hire staff or build software, its founders must seek funding. Here are the options:

  1. Work for equity (aka free-ish labor): Millennial entrepreneurs in the MENA region are notoriously ambitious- a report by HSBC Private Bank indicates they work an average of 12.5 hours per day. They are also young, with the average founder clocking in at 26 years old. Founding teams might not yet have families, homes and car payments that require a steady paycheck. This combination of youth and drive could motivate entrepreneurs to work for equity rather than a paycheck until they get to the seed stage.
  2. Founder investment: Many entrepreneurs fund their companies with their own money. A poll by Wells Fargo and Gallup found that 77 percent of small business owners use their personal finances to cover early-stage expenses. Founders considering this step should switch to investor mode before committing to this path, though. Investing more than 20 percent of their total net worth in a startup could make their personal investment portfolio lopsided and risk-heavy.
  3. Friends and family: This is the most popular way that pre-seed deals happen around the world. A whopping 82 percent of early startup funding originates from founders' families, friends and personal networks, according to Small Business Trends. When Anker founder Steven Yang launched his company, for example, he skipped VC in favor of a loan from his mother. Money can complicate personal relationships, so pitch to your social circles with the same level of transparency and due diligence you would provide professional investors.
  4. Angel investors: Angel investors are a tough sell at the pre-seed stage; they like to see early traction before breaking out their checkbooks, as evidenced by the growing volume of seed and angel-stage investments globally. That said, a company with a strong concept and a unique market opportunity might be able to persuade an angel investor to come on board at the pre-seed stage- especially if there is a preexisting relationship.
  5. Corporate partners: While large corporations certainly can get involved, I'm talking more about small and midsize businesses that increasingly are interested in working with startups. One study by MassChallenge and Imaginatik found that 82 percent of surveyed organizations see such partnerships as being "somewhat important"- 23 percent of respondents categorized them as "mission critical." Innovating within a corporate setting is tough, so many of these organizations are open to partnering with startups to innovate outside the office.
  6. Grants, prizes and pitch competitions: Pitch competitions and grant programs offer great opportunities for startups to increase their brand visibility and secure funding. The upcoming GITEX Future Stars event, which will take place in Dubai this October, will include innovation challenges that could land startups on investors' radars. Actively seeking and participating in pitch competitions and similar business challenges can help founders make transformative professional connections.
  7. Customer-funded startups: Bootstrapping a company solely through user fees and customer revenues has worked for a number of companies, including Braintree. I funded my first tech startup using this approach. This strategy allowed me to preserve my equity and forced me to learn how to sell.
  8. Accelerators: MENA entrepreneurs strapped for cash can also find a pot of riches by applying for regional accelerator programs such as Flat6Labs or Oasis500. These accelerators typically include either funding or mentorship on how to secure necessary investments.

Save yourself from the wild goose chase by knowing what options actually work. Getting the early steps right can position businesses in the region for long-term growth and big exits, lifting us all.

Related: Raising Capital In The MENA Region: The How-To

Zach Ferres

Advisor, Board Member & Investor

Zach Ferres is a serial entrepreneur, speaker and technology executive passionate about developing entrepreneurial communities around the world. He built and sold his first tech company at 24 and was the CEO of Coplex for eight years, where he supported the creation of over 200 startup companies.

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