I am a strong believer that entrepreneurship can bring positive change to a region plagued by economic challenges. For the past 5 years I have been working on building the angel investment ecosystem in Bahrain and the broader MENA region. But while much effort has been devoted to building the start-up ecosystem, there is room for improvement when it comes to the funding ecosystem.
The economic situation in the MENA region today is less than ideal. The World Bank states that the MENA region must create 100 million jobs by 2020 to accommodate the burgeoning youth population below the age of 25. This demographic makes up 60% of the overall population. Oil prices have collapsed, from around $100 to the region of $45, reducing government budgets and income in oil producing states considerably.
As a result, some local governments have jumped on the creation of SMEs (small to medium sized businesses) and entrepreneurship as a solution to these crises (at varying speeds and effectiveness). I believe this is the right path – diversifying the economies of the region so we become less reliant on government jobs and salaries, and lifetime employment in large, usually state-backed, companies.
However, the majority of programs I have seen have positioned entrepreneurship as an option other than employment. While this is an important aspect to building a startup culture and ecosystem, most of the programs are also focused on debt financing and entrepreneurship education, and are limited in their ability to fund and build startups that scale.
The more important, and typically ignored, aspect of building out a start-up ecosystem is the funding ecosystem. Silicon Valley works in part due to the high availability and concentration of capital. In a small area with a population of under 9m people, Silicon Valley leads the world in innovation and building startups that scale massively. IMO, one of the key reasons for this success is the fact that Silicon Valley has a fully functional funding ecosystem for startups.
The Funding Ecosystem and its Importance
Silicon Valley’s funding ecosystem includes angel investors, accelerators and seed funds, to series A and B and higher growth funds, Pre-IPO funds and an active base of larger companies acquiring younger, more nimble startups. This funding ecosystem is the key to building a fully sustainable entrepreneurship ecosystem. This is what most government programs in the MENA region have not focused on or achieved.
Let’s use an example: Airbnb. It was started by 2 guys bootstrapping, went through an accelerator program, raised an angel/seed round, Series A, Series B, C etc. It’s now one of the largest companies in the world, having raised more than $2.3bn in financing and valued at $24bn. That startup would not have survived or grown to the size it currently is without a full equity funding ecosystem supporting it.
Now let’s move to back to the MENA region. Promising startups, coming out of great accelerator programs, with strong teams and early signs of traction, have very few options available to them for funding. There are perhaps only six active angel investment groups in the MENA region. Only two or three seed stage funds. A growing number of series A funds have launched this year, and one series B or higher fund. There isn’t enough funding available for startups across the stages of their development, and it’s really the investors that are at fault.
Laying down the bricks
I founded Tenmou – one of the first angel investment organizations in the MENA region – in 2010 in Bahrain. At that time, no one was aware of what equity financing for startups was, let alone angel investment. I studied at various models of angel groups in other parts of the world, and developed something different – a hybrid model between a fund, a network and a mentorship program. And it worked!
Setting up the organization as a captive fund allowed the group to make quick decisions without having to write individual checks, and it diversified the risk of investing by giving each investor access to the whole portfolio of investments, rather than just one or two.
Additionally, by investing in batches and taking startups through a mentorship program, we provided help and advice where individual angels wouldn’t have due to time constraints. Investors had ownership over their investment decisions, allowing them to develop deeper connections with startups and spiking the likelihood of future follow-on investments.
Today, the World Bank and Babson College uses Tenmou as a case study on models for angel investment groups in emerging markets.
In the MENA region, governments tend to like big headlines and numbers, but that’s not what we need. We must build out an active group of smaller funds that focus on the seed stage, where many startups can’t find funding. Build out 5 to 10 smaller funds, with perhaps $5-10m in committed capital, train fund managers and help them as they grow their funds and move upstream to later stage investments. Even $25m-$100m invested across a variety of funds would have a significant impact on the regional funding ecosystem.
From my perspective, to help the MENA region overcome its economic challenges, it must build out:
- Accelerator Programs – These programs would be the first step for many entrepreneurs to get on the path to funding, investing between $10,000 – $50,000 for small equity stakes. Most of the startups going into these programs will be at the ideation stage or with an early product. We should be targeting around 300 startups graduating from such programs around the MENA region every year,. aboutPerhaps 50% of which would raise follow on funding.
- Seed Funds/ Angel Networks – The next step in the funding lifecycle would be angel investors and seed funds, investing between $100,000 to $250,000 once the startups have some early signs of traction. We should be targeting around 150 startups per year in the MENA region getting to this stage. Most seed deals are taking place at valuations between $1m-$2m in the region. Perhaps of them would 20% would raise follow on funding at the series A level
- Series A funds – These funds would step in and significantly accelerate the growth of the startups they invest in and would be more hands on – taking board seats and actively advising the founders. We should be targeting 30 startups across the region each year reaching this level. In the region, Series A deals are taking place at valuations between $5m-$6m, but this ranges depending on traction. Series A investors are investing between $2m-$5m. Perhaps 50% of the startups that receive this level of funding would be able to raise growth funding.
- Growth funds – At this stage, many more traditional PE funds would be able to step in, investing significantly larger amounts at each successively higher round and valuation. This part of the ecosystem is very nascent in the MENA region, however this should be the easiest stage to raise funds for.
- Liquidity/ Exits / IPO paths for startups – This is one of the most important aspects of any ecosystem – when investors are able to get their money back. In more developed markets, M&A transactions done by larger companies in the ecosystem are the most prevalent form of exit. Unfortunately, larger companies in the region have yet to start looking at startups as potential acquisition targets to import innovation and talent to their organizations, and so we’re mostly looking at acquirer from outside the MENA region looking to expand into the region being the primary driver of exits.
500 is joining the movement to spawn a healthy funding ecosystem in the MENA region. We’re bringing together a “Who’s Who” of the MENA region’s major players, from accelerators to angel networks and VC funds, in Bahrain together, for the first time at our Premoney conferenceon the 6th of December. We’re also going to be building out networks and meeting active investors aboard our Geeks on a Plane tour of the region. Destinations include Bahrain, Abu Dhabi, Dubai, Amman and Cairo.