How To Get Western Venture Capital Firms To Invest In Your Startup
Why we need Western venture capital firms in the Middle East entrepreneurial landscape (and how to get them to invest in your startup).
The startup scene in the Middle East is thriving. 2019 saw US$704 million invested into 564 venture deals, compared to $15 million invested in five deals just 10 years previously in 2009. This growth outstrips even that seen in Silicon Valley in the 1990s, where in one decade, the number of venture capital funds went from 60 to over 400. Much of this growth has come from homegrown venture capital funds such as Wamda, BECO Capital, and MEVP. Latterly, institutional and government money has started to make its way in to venture capital funds, with big commitments from Saudi's Public Investment Fund (PIF) and the government of Abu Dhabi.
The local venture capital funds have had plenty of opportunities. At first, these have been concentrated on the low hanging fruit of e-commerce and marketplaces, which have resulted in big exits for the likes of Souq.com and Careem. However, particularly in light of these opportunities and high returns, Western venture capital investors have been noticeable by their absence in the region. As the co-founder of Dubai-based fintech startup NOW Money, I worked hard in 2017 to get the American venture capital funds Accion and Newid Capital to invest in us. This was the first US venture capital investment into a fintech company in the Middle East. It took a long time, and a lot of work to close, but gave us -and the fintech industry in the region- a level of endorsement that would be hard to replicate in any other way.
In 2019, the world-renowned UK-based fintech venture capital fund, Anthemis, joined our journey. Having got these Western venture capital funds to invest in us, and be with us for the past few years has given me a unique insight into how to get them comfortable to invest into companies in the Middle East, and the role they can play for companies and the funding ecosystem in the region. The thing we've learned about Western investors investing into the Middle East is that this is often a big step for them. There are a lot of uncertainties and perceived oddities about the Middle East for an investor used to investing in the US and Europe- the unknown political landscape, differing company structures, and the very different legal regimes, to name just a few.
As a company seeking investment, this means you have to make getting comfortable with investing into the Middle East the only thing the investor has to work to realize. They will need to be completely comfortable with your industry, the business opportunity, and your founding team by default- so, the only leap of faith they need to make is on the region. Asking them to take a leap of faith on an unknown business model, and an unknown region is simply too much to ask- they won't get comfortable, and they won't invest. In practice, this means targeting only investors that are industry specificin our case, investors in fintech.
We've found that successfully bringing in offers to invest from Western investors often induces offers local investors too. Local venture capital investors tend to be generalists across industries (although the market has grown dramatically in the Middle East, it's not quite big enough for locally focused, industry-specific funds just yet), and as such, they are not comfortable with anything outside of their comfort zone of things they've already invested in and seen success in, mainly ecommerce and marketplaces. Therefore, the endorsement of your business model by an international industry expert is often what is required to get local investors comfortable.
This is something we saw as a result of Accion's investment- a number of local investors have invested in us as their first fintech investment, and others have followed as well. The Middle East now has a number of local investors that are comfortable investing into local fintech companies, driving new fintech companies to be created. This leads to a growing and thriving fintech sector in the region. Other industries will see similar dynamics- those trailblazing companies that introduce Western industry specialists to the Middle East will inadvertently trigger a wave of innovation and growth in that industry in the region.
Now, the Middle East has enough money to invest in its local startups. It also increasingly has high-quality startups in its ecosystem. So, does it need Western venture capital investor money as a supply of capital? No. However, we do need Western venture capital investors to help the money invested to go into a wide range of industries and highly innovative companies, rather than having them all follow the same "safe" bets. This dynamic will lead to the Middle East being a powerhouse of growth and innovation in the years to come.