The Rise of the Big Fund

With More Funds Be­ing Raised in the Re­gion, In­dus­try Lead­ers De­bate the Ram­i­fi­ca­tions

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As more funds are be­ing raised in the re­gion, in­dus­try lead­ers de­bate their ram­i­fi­ca­tions

In Au­gust 2013, the Cen­tral Bank of Le­banon (BDL) sur­prised the whole en­trepreneur­ship ecosys­tem, in Le­banon and be­yond, with its re­lease of a rad­i­cal of­fi­cial cir­cu­lar that al­lo­cates an un­prece­dented $400 mil­lion to de-risk eq­uity in­vest­ment in Le­banese in­cor­po­rated star­tups. A few months af­ter this an­nounce­ment, news came out of sev­eral funds be­ing raised in the re­gion. Sil­i­con Ba­dia ex­pects to close the Ba­dia Im­pact Fund of $30 mil­lion by the end of this year. Fadi Ghan­dour, Founder of Aramex and Ex­ec­u­tive Chair­man at Wamda, was quoted in the Wall Street Jour­nal say­ing that he has launched a new VC fund that aims to close with $75 mil­lion, although when we re­cently asked about the size of the fund, Wamda de­clined to an­swer. Mid­dle East Ven­ture Part­ners (MEVP) an­nounced the launch of their lat­est fund, the Im­pact Fund, of $50 mil­lion. Bery­tech Fund is plan­ning to launch its sec­ond fund with a tar­get size of $30 mil­lion. IMENA Hold­ings has $30 mil­lion ready to be de­ployed, with a goal to raise that num­ber even higher. And Lon­don Mayor Boris John­son un­veiled plans for a $166 mil­lion fund to en­cour­age en­trepreneurs in the Mid­dle East to go global with their busi­ness

“Two or three years ago, none of th­ese funds would have thought of rais­ing this amount of money,” says Omar Sati, Man­ag­ing Direc­tor at DASH Ven­tures. “Even though there hasn’t been any ex­ists, like for ex­am­ple Mak­toub, I be­lieve the rea­son they are rais­ing this amount of money to­day is be­cause they have proved that they know how to deploy this money ef­fi­ciently. And there are op­por­tu­ni­ties out there for cap­i­tal to be placed. There are com­pa­nies that are do­ing very well, hir­ing lots of peo­ple, gen­er­at­ing healthy rev­enues, build­ing real prod­ucts and solv­ing real prob­lems. That is why I be­lieve the big play­ers want to go out to LPS (limited part­ners) and oth­ers and say: we are the right peo­ple to raise this money and man­age this fund for you,” added Sati.

Khal­doon Tabaza, Founder & Man­ag­ing Direc­tor at IMENA Hold­ings, agrees that the mar­ket has po­ten­tial and “can even sup­port up to $500 mil­lion,” but thinks the real prob­lem is de­ploy­ment.

Rais­ing Funds ver­sus De­ploy­ing Money

“De­ploy­ing money ac­cord­ing to deal flow gen­er­ated by star­tups in the mar­ket, in my view, doesn’t work well in the MENA re­gion as it does in de­vel­oped mar­kets such as the US,” says Tabaza. “There might not be that much deal flow that war­rants large amounts of cap­i­tal. In IMENA’S par­tic­u­lar case, we are not limited by deal flow that comes to us from the mar­ket, but we’re rather proac­tive, so we build our com­pa­nies and en­gage into part­ner­ships and make in­vest­ments.”

“So many funds have been an­nounced re­cently,” con­tin­ues Tabaza, “but it’ll take a sig­nif­i­cant amount of time for th­ese funds to be de­ployed.”

Sara Chem­maa from MBC Group con­curs with Tabaza. “We be­lieve this money will be used for larger ticket size in­vest­ments, pre­dom­i­nantly on Se­ries B for star­tups that have proven their busi­ness model and were able to show trac­tion. We don’t see many of th­ese sto­ries in the re­gion so far, and we think that it might be chal­leng­ing for [ VCS] to deploy the money.”

Dany Farha, CEO at BECO Cap­i­tal, dis­misses any con­cerns re­gard­ing de­ploy­ment is­sues. “We are now mak­ing larger in­vest­ments of more than $3 mil­lion per ticket for fol­low-on rounds for our port­fo­lio’s com­pa­nies, as well as new in­vest­ments in Se­ries A stage, which wasn’t the case two years ago,” he says.

Other in­dus­try lead­ers agree with Farha. Walid Hanna, Man­ag­ing Part­ner at MEVP, con­firms that they are wit­ness­ing deal flows of much higher qual­ity than pre­vi­ous years, and Habib Had­dad, Found­ing CEO and Gen­eral Part­ner at Wamda, sees the mar­ket “ma­tur­ing, and so is the level of en­trepreneurs.”

Omar Sati voices their op­ti­mism say­ing: “There’s suf­fi­cient deal flow in the re­gion to­day, and with new funds and cap­i­tal, more deal flow will spur in the re­gion.” He ex­plains that the lack of deal flow in the past was trig­gered by the lack of funds, which led many promis­ing en­trepreneurs to just turn away and not bother. Now, the story is dif­fer­ent. “In­stead of talk­ing to 5 po­ten­tial in­vestors, we can now talk to 10 or 15 in­vestors,” states Sati.

Many peo­ple be­lieve there is a de­fi­ciency in deal flow be­cause there is a big gap in the evo­lu­tion of the fund, ac­cord­ing to Sati. So far, star­tups in the re­gion were able to get money at dif­fer­ent stages in their life­cy­cle, up un­til they need $2 mil­lion or $5 mil­lion to scale and grow fur­ther. “There is ab­so­lutely no fund to date in the re­gion that can pro­vide them with this sort of fund­ing,” ex­plains Sati. “This is where the big funds come in to meet this de­mand,” he adds, and Had­dad agrees. They think the real prob­lem was on the sup­ply side (money), and what we are see­ing to­day is sim­ply the sup­ply fol­low­ing the de­mand.

The Ef­fect of Com­pet­i­tive Funds on Co-in­vest­ment

With more funds read­ily avail­able in the mar­ket to meet a limited de­mand, one might won­der how this will af­fect the re­la­tion­ship be­tween “sup­pli­ers.” Most in­dus­try lead­ers be­lieve that rais­ing big­ger funds will have no ef­fect on coin­vest­ment. In fact, Farha be­lieves we will see more col­lab­o­ra­tion and coope­ti­tion. “As the deals be­come larger, they need syn­di­ca­tion across trusted part­ners. Fund sizes are still too small to take on the larger rounds alone,” says Farha.

“We think co-in­vest­ing is al­ways

“I be­lieve the rea­son they are rais­ing this amount of money to­day is be­cause they have proved that they know how to deploy this money ef­fi­ciently.”

needed to re­duce risk,” says Chem­maa. “We see that each in­vestor brings a dif­fer­ent value propo­si­tion to the startup, which is by far much more valu­able than pure money, and we be­lieve that this will re­main.”

Hanna agrees. “Co-in­ves­ments will not in­crease or de­crease as th­ese are usu­ally caused by VCS look­ing at the same trans­ac­tion and will­ing to share the risk and dou­ble the added value,” he says. Tabaza joins him say­ing that more co-in­vest­ment will hap­pen in the fu­ture “be­cause of spe­cific added value that those in­vestors are bring­ing to the ta­ble, be it geo­graphic or in­dus­try spe­cific, not be­cause of lack of sup­ply or need to add more in­vestors to the round.”

On the con­trary, Sati be­lieves co-in­vest­ment will ac­tu­ally de­crease. “Th­ese are struc­tured funds with spe­cific cri­te­ria, and most im­por­tant of this cri­te­ria is the re­turns. Many of th­ese funds have to de­liver re­turns for their LPS, and de­liv­er­ing th­ese re­turns means when you see an op­por­tu­nity, you will want to op­ti­mize your in­vest­ment. So, rather than co-in­vest­ing and shar­ing, you will want to max­i­mize re­turns in­stead,” ex­plains Sati. “Now that funds have all this money, there’s go­ing to be no need for them to di­ver­sify their fi­nan­cial risks,” he con­tin­ues. “The num­ber of re­ally at­trac­tive star­tups that pop up a year can be counted on your hand. Funds are go­ing to fight for th­ese op­por­tu­ni­ties. You’ll still have co-in­vest­ments; the re­gion is small and there’s a lot of men­tal­ity of help­ing each other, but it will de­crease, and funds will be­come more com­pet­i­tive,” claims Sati.

Will Val­u­a­tions Be Pres­sured by In­fla­tion?

In­dus­try lead­ers seem to have con­tro­ver­sial opin­ion about the ef­fects of big­ger funds on in­fla­tion. Ac­cord­ing to Sara Chem­maa, val­u­a­tions al­ready started to be in­flated, but she be­lieves that things will even­tu­ally get cor­rected, and Habib Hadad shares her same view. Walid Hanna sees no es­cape from in­fla­tion, say­ing: “In­creased funds means in­creased com­pe­ti­tion, and this will di­rectly drive the val­u­a­tions up­ward.”

Omar Sati thinks in­fla­tion in val­u­a­tion is only nat­u­ral be­cause of

the com­pet­i­tive­ness of the funds. He ex­pects in­vestors to be will­ing to pay lit­tle bit of a pre­mium to win a deal, but is con­cerned that in­fla­tion might re­sult in “greedy en­trepreneurs.” “When you start com­pet­ing and val­u­a­tions in­flate,” ex­plains Sati, “that’s when I be­lieve en­trepreneurs might start ask­ing for much higher val­u­a­tions than they de­serve. When this hap­pens, deals don’t get closed, and the ecosys­tem gets hurt.”

On the other hand, Dany Farha and Khal­doon Tabaza see no in­fla­tion­ary pres­sures. “In­fla­tions hap­pen in more ma­ture mar­kets, and I don’t see the driver that would lead to in­fla­tion in val­u­a­tions,” says Tabaza.

What Does All This Mean for the Re­gion?

All play­ers in the ecosys­tem ac­knowl­edge that the big num­bers be­ing raised are steps for­ward to­wards the “devel­op­ment of the tech­nol­ogy econ­omy in our re­gion,” as Farha puts it.

“The in­creased avail­abil­ity of cap­i­tal will de­crease the risk of fail­ure, since the en­tre­pre­neur is well sup­ported fi­nan­cially and mon­i­tored by the in­vestors,” says Walid Hanna, who also be­lieves the re­gion will see more exit op­por­tu­ni­ties and more ven­tures launched by ex­pe­ri­enced ex­pats and.

How­ever, Hanna and the oth­ers are eye­ing the roll out of th­ese funds with cau­tion. Sara Chem­maa em­pha­sizes on the need for the money to be in­vested care­fully at rea­son­able val­u­a­tions. “The end aim should be growth and sus­tain­abil­ity rather than pure exit, as this is still not an exit mar­ket,” she states.

Omar Sati concludes by say­ing: “All the out­comes of th­ese large funds are a nat­u­ral evo­lu­tion of our startup ecosys­tem. Good things and bad things will come out of them. The im­por­tant thing is for us to learn from case stud­ies that hap­pened in other mar­kets, like Sil­i­con Val­ley and Sil­i­con Al­ley, and make sure we don’t re­peat their mis­takes.”

Omar Sati, Man­ag­ing Direc­tor at DASH Ven­tures

Dany Farha, CEO at BECO Cap­i­tal

Khal­doon Tabaza, Founder & Man­ag­ing Direc­tor at IMENA Hold­ings Habib Had­dad, Found­ing CEO and Gen­eral Part­ner at Wamda Sara Chem­maa, from MBC Group Walid Hanna, Man­ag­ing Part­ner at MEVP

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