Looking Further Ahead: Your Business May Do Better With A Non-Traditional Funding Route After initially self-investing, Founder and CEO of Genpharm Karim Smaira realized they needed outside funding to drive future growth.
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After initially self-investing, it became clear that we needed outside funding to drive the future growth of Genpharm. With a strong strategic plan and a wide network, my co-founder, Kamel Ghammachi, and I evaluated alternative capital sources. It is vital for entrepreneurs to have a well thought-out business plan, a communication strategy, and a pre-definition of the investment conditions. We wanted investors with expertise that we can benefit from, not only funds. We needed an executive board to advise and challenge our strategic decisions. However, it was also clear that we were only willing to relinquish a minority stake and keep management control.
1. START PREPARING TO RAISE EARLY ON
Entrepreneurs need to give themselves enough lead time. Raising capital is a very challenging and long process, and it certainly distracts founders from operations. Having to move hastily due to lack of funding can force entrepreneurs to make unwarranted concessions. It is vital to start the process early, long before funds dry up. We explained our strategy and pitched to VCs, PEs, banks, family offices and angel investors. The process took nine months and served as a key learning for future investment rounds.
2. ASK YOURSELF IF THE NUMBERS SUPPORT YOUR CASE
Before embarking on a new venture, ask yourself if the numbers support your business idea. In our case, we saw that the healthcare sector in MENA has witnessed tremendous growth. The population here has risen to around 350 million, and incidence of chronic and lifestyle diseases such as diabetes and cardiovascular ailments have reached epidemic proportions, forcing governments to implement national health programs. Increased life expectancy, awareness and public demands for better services led to radical health reforms. Specialty hospitals have multiplied and access to treatments expanded through insurance schemes.
This growth brought major investments into the public and private health sectors. Some funds specialized in healthcare, and entrepreneurs who had shied away, started funding clinics, homecare services, pharmaceutical products distribution, nursing and health education. Al Masah Capital has counted 91 healthcare private equity deals worth US$1.7 billion mostly in UAE, KSA, and Egypt. The same report estimates that healthcare spend in MENA will hit $144 billion by 2020 up from $96 billion in 2013. Although investments in the sector have tripled since 2003, the potential remains significant since 4% of MENA GDP is allocated to healthcare, a 10% world average.
The UAE has been a core platform for these investments- the competitive and open business environment (including free zones focused on healthcare and financial services) have allowed entrepreneurs to launch ideas and attract capital. Most pharmaceutical MNCs have set up regional headquarters in the UAE.
3. KNOW THAT EVERY SECTOR HAS ITS SHARE OF CHALLENGES
Nevertheless, despite a multitude of investment opportunities, hurdles persist and some regulations remain unclear. Lawyer Essam Al Tamimi of Al Tamimi & Company recently called for an overhaul of the aging investment law to increase transparency and facilitate access to capital while protecting entrepreneurs from personal liabilities.
This creates a risk-averse culture where failure is unacceptable. According to H.E. Abdul Aziz Al Ghurair, the Chairman of the UAE Banks Federation, some SMEs decided to leave the country in 2015, accumulating bad debt of $1.4 billion. Moreover, the cost of doing business is on the rise (licenses and administrative fees), similar to the cost of personnel.
4. UNDERSTANDING THE INVESTMENT ECOSYSTEM WORKED IN OUR FAVOR
Having a good working knowledge of the investment ecosystem, the regulatory process, and benchmarking the alternatives is a must for entrepreneurs. The current entrepreneurial climate in MENA suggests that sourcing capital remains the biggest challenge for young and unproven entrepreneurs.
• Startups usually need funding either early on or in later years to scale, hence timing is a critical factor. Based on some of the public data, 74% of funding in MENA targets companies that are three years old or less.
• Institutional investors such as VC and PE impose conditions that severely limit the long-term prospects of the business. VCs and PEs usually tie their funding to aggressive returns with an average five-year exit strategy, and this timeframe can be quite short for healthcare investments. PEs and VCs have specific investment size criteria so young SMEs can fall outside of their scope.
More importantly, VCs and PEs tend to aim for a majority share and seize management or board control, and this doesn't always come with added expertise. A recent study by Wamda confirmed that only 30% of entrepreneurs believed their funders are offering more than financial value. This is disconcerting for founders who see themselves reporting to investors without previous healthcare experience.
• Other alternatives are banks, family offices and angel investors, but these too present entrepreneurs with other sets of challenges. Banks are another source of funding but usually comes in the form of debt rather than equity. High interest rates, collaterals, risk-averse regulations and personal liabilities are discouraging factors. A World Bank survey states that only one in five SMEs in MENA have access to bank credit lines or loans.
This has created a niche for crowdfunding and crowdinvesting and platforms like Beehive, offering more advantageous conditions. They don't require founders to dilute ownership early on, but instead allow for precious time to launch an idea, create value for the founders and ultimately for investors. Moreover, several public initiatives have recently been launched to fund SME ideas and promote innovation.
5. EVALUATE ALTERNATIVE CAPITAL INJECTION ROUTES
MENA entrepreneurs need to consider family offices and angel investors. There is an impressive amount of wealth concentrated in the hands of family-based funds and wealthy individuals. These can come as both debt and/or equity. Attending specific networking events and managing these relationships will open the door to a larger network of angel investors.
6. STUDY MARKET SIZE BEFORE EMBARKING ON A NEW VENTURE
The MENA pharmaceutical market was estimated at $20 billion with projections to double over five years to $45 billion. Patented drugs account for 60-80% of sales in MENA despite pricing and generic pressures. Having a pharmaceutical executive background, we identified an unmet market need, and it was against this backdrop that we co-founded Genpharm four years ago.
Globally, there are seven thousand diseases classified as "rare." Most are of genetic origin and are prevalent in MENA due to several factors. Nevertheless, there is a significant lack of awareness amongst the general public in terms of prevention, diagnosis and access to treatment. Our mission focuses on serving a bigger purpose: educating the community and improving the quality of life of these often debilitated patients by providing access to the most innovative, effective and safe medicine.
7. STRATEGIZE YOUR FUNDING
We have successfully concluded our first capital raising thanks to angel investors. The alignment between our strategic thinking and their investment criteria allowed this to materialize, particularly because the funding needed was relatively modest.
It was clear early in the process that VCs and PEs were not our preferred route, since we aimed to keep management control. Protecting shareholding dismissed the concept of a short-term exit, as we wanted to first maximize the potential and create significant value. Nor were banks an option.
The unwillingness to take burdensome debt with stringent terms made bank financing a last resort. Our strategic thinking was aligned more with the investment criteria and the mindset of family and angel investors. These major differences with VC, PE and banks have great implications on the structure of the pitch and the communication strategy.
Institutional investors are mostly looking for control and lucrative exits. Having to deliver strong financial return to their clients, their investment decisions are purely based on financial considerations. Although financial returns are important to angel investors, their considerations are usually broader. They are usually directly or indirectly acquainted with the entrepreneur and hence emotional factors might come into play. They are familiar or know of the previous track record of the founder.
In my opinion, angel investors are usually more patient since they partly see their contribution as support to the founder and his or her business idea. They are frequently willing to take a longer-term view on their investment and their returns. As we grow in value and consider the injection of substantial future funds, we expect a better alignment between the founders' vision and the investment considerations of institutional investors.