The $100,000 Mis­take of Arab En­trepreneurs

Nima Adelkhani Gives Ad­vice to En­trepreneurs on How to Re­ally Get In­vestors on Board

Arabnet - The Quarterly - - Content -

Here’s how to get in­vestors dig deep in their pock­ets

There seems to be a pat­tern brew­ing in MENA when it comes to rais­ing an an­gel round. In­stead of see­ing more in­vestors be­liev­ing in the mar­ket and the op­por­tu­nity it holds and in­vest­ing in great en­trepreneurs to build great com­pa­nies, we see com­pa­nies ac­tu­ally sab­o­tag­ing them­selves by think­ing smaller and smaller and try­ing to raise less and less. Is this out of des­per­a­tion or be­cause of a lack of con­fi­dence in their idea? Or is it just that in­vestors think they are in charge?

I have ob­served some­thing strange over the past few trips to places like Dubai, Cairo, Am­man, Istanbul, and many of the new ecosys­tems of the Mid­dle East. We in the val­ley [Sil­i­con Val­ley] keep say­ing: “Think big­ger.” And in­stead, com­pa­nies are think­ing “smaller.” What is go­ing on?

This is an on­go­ing theme that I keep see­ing…over and over. A com­pany gets on stage, tries to ex­plain what they do (not very well), with no pas­sion and no story, and 9 out of 10 times, it ends with: “If there are any in­vestors in the room, we would love to talk with you. We are rais­ing $100,000. Thanks!”

The sec­ond you say, “We would love to meet some in­vestors,” you have of­fi­cially be­come the girl who doesn’t have a date to home­com­ing the night be­fore the dance. You might as well start ap­ply­ing for a job, be­cause if you are a startup and you are say­ing this, you are as good as dead!

Over the past two weeks, I have heard over 100 com­pa­nies from all over the re­gion pitch (their not-so-sexy com­pany) and ask for $100,000. Re­sults? None! And af­ter ask­ing dozens of in­vestors, none of them were re­ally ex­cited about a sin­gle one of the com­pa­nies, for sev­eral rea­sons. First of all, they have not thought their idea all the way through and are just try­ing to buy time to fluff some more to then waste a bunch more time to raise an­other round, which is 100 times harder and not read­ily avail­able (es­pe­cially in MENA).

Fundrais­ing is a dis­trac­tion, and most CEOS are not good at it—at least not un­til they have done it a few times and they re­al­ize it’s about pack­ag­ing and po­si­tion­ing. The truth is, there is not much pack­ag­ing or po­si­tion­ing you can do with $100,000. So why even bother if you are go­ing to have to do it again in a few months. It is just painful! It will take twice as long and cost three times as much.

Here is the real deal: if you are ask­ing for $100,000, your idea is too small and will run out of money be­fore you start gen­er­at­ing rev­enue or raise an A round— which might as well be called a K Round be­cause it is nowhere to be seen, like Kasper the friendly ghost. How many star­tups ac­tu­ally raise a solid A round in MENA? One out of 1000, maybe less. So, if you are go­ing to try, then take your vi­sion and mul­ti­ply it by 5 or at the very min­i­mum three. Three hun­dred thou­sand dol­lars should al­low you to mess up once, pivot once, and hire a few peo­ple that you didn’t even know you needed.

A good friend of mine al­ways used to say: “It will take twice as long and cost three times as much,” or the other way around (in this case, it’s the same). Point is, if you are go­ing to waste time to raise money, in­stead of fo­cus­ing on prod­uct and busi­ness devel­op­ment, do it the right way and give your­self at least 16-18 months. If your burn rate is $10,000 a month, then by the time you ac­tu­ally build 20% of the rest of your prod­uct it will be $15,000 a month, which equals roughly $300k. Add in a cush­ion of $100k and there you go: you have cre­ated a run­way of 18 months to ac­tu­ally show that you were se­ri­ous. In the US, this num­ber is at least dou­ble, maybe triple!

A CEO—A good CEO—IS a vi­sion­ary who can get an in­vestor ex­cited about the vi­sion, make the in­vestor be­lieve that he/she is crazy enough to

“It will take twice as long and cost three times as much.”

ac­tu­ally ex­e­cute on this vi­sion, and get the in­vestor on board to help ex­e­cute with his ex­pe­ri­ence, net­work, and money—in that or­der!

The in­vestor doesn’t want you to have to waste more time in 4, 5, or 6 months to go on an­other road show and sell a new vi­sion. Good in­vestors find good deals and then they are all in (based on the re­sources and value they can bring); which means that an in­vestor who asks for a board seat for $30K-$100k is not aligned with you and the vi­sion!

Per­son­ally, I think it should be il­le­gal to ask for $100,000. Maybe it is al­ready “il­le­gal” in the sense that it doesn’t work. More­over, no in­vestor wants to hear you say that 40% of the money is go­ing to ads to ac­quire users. If they wanted to in­vest in Face­book or Google, they would buy (prob­a­bly have) shares in them. As a startup that is boot­strap­ping, you should fig­ure out how to ac­quire users for free or or­gan­i­cally; any­one can run ads.

As some­one who has heard over 2000 pitches over the past 5 years, I would not in­vest in any­one of the 100 com­pa­nies that I have met in the past 12 days, not be­cause they are bad op­por­tu­ni­ties; quite the con­trary, I loved many of them, but I am not con­fi­dent that the en­trepreneurs have a grasp on what it takes to build a com­pany and that it is a 5- to 10-year- com­mit­ment; it’s not a cool project and not as fun or glam­orous as it seems.

Un­der­stand that an­gel in­vest­ing is very risky and it doesn’t make money. So some­one will­ing to put in money as an an­gel (at least the good ones) is not do­ing it be­cause they are go­ing to make money; oth­er­wise, the an­gels would be called loan agents or in­sur­ance bro­kers; th­ese peo­ple make money.

What you need to do is get on stage, talk about your team, and ex­plain why it should be you, your vi­sion and your ac­com­plish­ments that the in­vestor should be in­ter­ested it. If some­one is in­ter­ested or im­pressed they will come to you. There is no need to talk about the $30 bil­lion global mar­ket and that you only need to get 1% to be the great­est thing since sliced bread.

And as a good friend of mine once told me, “the more you ask for, the more they re­spect you.” Keep that in mind the next time you get on stage.

“If you are ask­ing for $100,000, your idea is too small and will run out of money be­fore you start gen­er­at­ing rev­enue or raise an A round.”

Nima Adelkhani is the founder of PITME. In his for­mer role, he was head of busi­ness devel­op­ment for the Founder In­sti­tute, a global ac­cel­er­a­tor with op­er­a­tions in over 30 cities. He also helped to man­age The­funded. com and Founder Show­case. Dur­ing his ten­ure, Nima helped launch over 300 star­tups.

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