A new class of investor in the Gulf looks to bridge the gap between seed-funding and venture capital. What will this mean for the region’s entrepreneurs?
By Kartik Ram
Last week, I met up for coffee with a friend, Feroz Sanaulla, who leads Intel Capital in the Middle East, Turkey and Africa. We spoke about the myriad deals on his plate, both funded and under due diligence, his although his judicious optimism was heartening, he identified a common thread amongst many of these companies: the lack of seed capital available to them prior to seeking an institutional round. Was there, I pondered, an opportunity here?
Despite our enviable technology infrastructure, entrepreneurs don’t have it easy in the Middle East. The anemic venture capital industry died on the vine before it even began to ripen, and many companies that invested in start-ups off their balance sheets found themselves fighting for their own survival. However, these dark clouds have finally formed a silver lining.
A new class of early-stage investors, dubbed "super angels," has risen in the GCC, and this motley crew is shaking up some stubborn paradigms around start-up investing in the Arab world. From sophisticated investors like Feroz to high-net-worth Arab residents who wish to put their money to work in the burgeoning digital marketplace, super angel investing is here to stay.
The Super Angel model bridges the gap between the seed money raised from traditional “angel” investors and the much larger investments made by venture capitalists. Super angels generally invest in relatively nascent-stage enterprises and don't put in the millions that venture capitalists pump will. This benefits both parties as it de-risks the investor and encourages the entrepreneur to become more capital efficient.
While Silicon Valley has historically abounded with angel investors – high-net-worth individuals who invest their own money on the side – super angels have helped entrepreneurs cross a critical chasm in their own, unique way despite their similarities to institutional venture capitalists. Now this trend seems to be migrating to the GCC, where the digital marketplace seems to be taking off in a hurry.
Super angels, many of whom are successful technology entrepreneurs or veteran tech executives, have begun adding to their own investments by raising funds from external sources. Unlike traditional angels, they also adopt a hands-on approach in grooming and maturing their investments.
Not long ago, Ron Conway, one of the Bay Area’s best-known angel investors, presented the results of an audit of his 500-plus investments over the past 12 years. Conway’s strategy focused almost entirely on the performance of start-ups and the returns that angel investors like him have achieved. While the distribution of his returns was significantly higher, most angel investments average a 22 per cent internal rate of return (IRR), outperforming not only public equities and property but also venture capital.
Well-known super angels include former entrepreneur Mike Maples, who has invested in web start-ups such as Chegg, Digg and Twitter. He successfully runs Floodgate, a firm that manages a $35 million-plus fund. Last time I exchanged emails with Mike, he was in the process of moving offices and bringing on a partner as he had too much deal flow!
No one will mistake the Middle East for Silicon Valley any time soon. However, the buzz around startups is unmistakable. Yahoo’s 2009 acquisition of Maktoob.com has been a tipping point for GCC entrepreneurs. Without access to venture capital, Maktoob's founders had to grow their modest portal on borrowed time until a US-based hedge fund underwrote them.
Since Maktoob, the bar for what an Arabic start-up can achieve has been permanently raised. There has been an exodus of innovators leaving their cushy, tax-free jobs to build and capitalize their visions. Pulse Technologies, Jeeran and BeeCell are all such upstarts targeting underserved market opportunities in the Arab world.
In its most recent annual Venture Capital Attractiveness Index, Ernst & Young ranked the Middle East fifth out of eight regions, ahead of Eastern Europe, Africa and Latin America. However, the Middle East has accounted for only 3 per cent of the world's 197 initial public offerings so far in 2010. This is most likely due to a crushing lack of angel funding and not due to a drought of sustainable ideas that could be monetized.
The role of the Arab super angel is getting increasingly relevant – and potentially lucrative. Carpe diem.
Kartik Ram is the Dubai-based Senior Vice President for One97 Communications, an Intel Capital backed telecom enterprise. A serial entrepreneur, Kartik has been a founding executive at leading Silicon Valley start-ups. He holds an MBA from the London Business School.