Are startup investors ready for the Middle East?
This past Spring, I had the pleasure of joining approximately 100 startup investors in Bahrain to see some of the Middle East’s best early-stage companies. From Lebanon to the Emirates to Egypt and beyond, 45 startups — many recent graduates of top accelerators — presented their traction and visions of the future. Most were good; some were exceptional. And despite being immersed in frigid Gulf-quality air-conditioning for their pitches, the energy of the entrepreneurs and readiness of the investors was palpable.
With concepts ranging from using drones to survey construction sites in Saudi Arabia, to equine marketplaces harnessing the Gulf’s equestrian passions for profit, a key point was the massive untapped business potential permeating the region. There are customers here, with unique problems, and they’re ready to buy.
Yet all that was just one part of the conference.
Over the course of several days, investors from two dozen countries explored Manama’s business community and discussed ways to better finance the Middle East’s future. One of the most exciting outcomes was the announcement of the MENA Angel Network, a consortium of the region’s angel groups working together to fund each other’s companies and drive new angels into the market.
Orchestrated by Hasan Haider, a Venture Partner at 500 Startups and CEO of Bahrain angel group Tenmou, “the MENA Angel Investors Network (MAIN) aims to bring together the various angel investment groups operating in the MENA region in order to exchange best practices, share deal flow, and encourage the development of more angel investment groups in the region. The first step, which was to bring everyone together to get to know each other, has already been achieved.”
This announcement underscored the reality of undercapitalization that startups face. Despite the tremendously deep pockets throughout the Gulf, potential investors often eschew startups as an asset class. “The biggest challenge facing the angel investment landscape in the Emirates is the current preference for immediate gratification,” explained Elissa Freiha, Cofounder of Womena. “The country has come so far in such a short amount of time that the population is impatient. As an angel, you must accept the high risk associated with early stage investing and be willing to wait a substantial amount of time — 5 to 10 years — to potentially see returns. That’s a hard sell when you consider that most real estate developments, Burj Khalifa for example, take five years and provide more of a guarantee for returns.”
Part of this is a demographic disconnect, with the older, wealthier generations avoiding startups. The exception to this — like much of the rest of the world — lies with the youth, who’ve grown up surrounded by technology and recognize its ground shaking changes on the horizon. But the youth don’t yet have the capital to make a difference. Per Hossam Allam of Cairo Angels, “those who understand startups and the VC investment model are usually younger and have not yet acquired the personal wealth to support a thriving angel community. Those who are wealthier are mostly of a different generation and mindset than to make time for angel investing.”
In fact, as one Saudi-based attendee explained, the older generations can be a bigger roadblock than one might think, given their extensive control over family wealth. “If a Saudi grandson finds an exciting startup he’d like to invest in and asks his grandfather for $250,000 to do so, the answer is most often no, that it’s seen as throwing money away. Yet if the same grandson asks for $250,000 for a new car, the answer is often yes.” This disconnect, rooted in generational differences, is remarkable yet oh so familiar to many young startups in the region.
The good news? The investment climate is changing.
The rise of the MENA Angel Network is a major step forward, and I’m excited to see its progression and impact over the next few years. Recent acquisitions like Talabat ($170M) and Amoun Pharma ($800M) have permeated the newswaves, garnering more attention to the financial promise of MENA startups. Middle East accelerators like Flat6Labs and Oasis500 are graduating quality entrepreneurs and making an impact on their communities. Geeks on a Plane is lending global attention to the region and conferences like RiseUp are helping founders forge their communities. Groups like Womena are increasing the numbers of women startup investors throughout the region, offering expertise and community to advance their role and presence.
Oh, did I mention that their Startup Weekend participation rates are through the roof? And that they have one of the highest rates of women participating in entrepreneurship? 27% growth in Startup Weekends in the region since last year; over 50 cities, 1500 community leaders, and 10s of 1000s of entrepreneurs. Yeah, all that too. Demand and drive is off the charts, forcing more wealthy individuals to take note.
But is the investment climate changing fast enough?
Many of the region’s wealthy are sitting on piles of cash but aren’t investing in the future. Real estate projects only add so much value to an economy. A new Maserati adds even less. And in the Gulf’s case specifically, the oil won’t always be there. A recent article posits that Saudi Arabia may go broke in the next couple years. With a population that’s tripled since 1980 (from 10 to 30 million) and a rather small sovereign wealth fund with respect to that population…that’s frightening. If anyone should start seriously investing in startups and the digital future of the region, it’s some of the country’s 7,000 princes.
Hopefully, a few of them are taking note. And from what I saw in Bahrain and the discussions with the region’s angels and angel networks, it sounds like more investors in general are emerging across the Middle East and North Africa.
That’s good, as the region’s entrepreneurs are clamoring for capital now, not ten years from now. And the market potential is massive. “The region is relatively untapped for tech-related startups, and with close to 100% smart phone penetration rates in the GCC this is a key area of growth”, says Hasan Haider. And from Elissa’s perspective, “We are now in the most exciting time to invest in the MENA region: technology has never been more widely accessible and MENA based entrepreneurs have faced and overcome decades of unique challenges; these are core to creating innovation that could dramatically change the world.”
This is a carte-blanche environment for innovative leaps forward. From fintech and e-commerce to agricultural productivity and education to Arab content and modernized tourism, the sand is the limit. The more entrepreneurs that recognize problems unique to the middle east, in need of a unique solution, the more they’ll need fast-acting local capital. And lots of it.
To any potential investors eyeing startups of the Middle East: the time is now. Opportunity is nearly everywhere, your fellow citizens are taking entrepreneurial risks, and some of them will change the Middle East and the world. If you wait to see a string of successful exits in the region before you start investing, you’ll be too late. Yes, it’s high risk. But do you want to risk being left behind? Is it worth risking your economy falling behind?
The smart money is currently writing checks to MENA startups. They’re taking risks on the global businesses of the next decade. They’re underwriting the entrepreneurs of tomorrow.
Will you join them?