Angel and Venture Capital Investing in MENA vs. Developed Countries

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Angel and Venture Capital Investing in MENA vs. Developed Countries, a report by TresVista Financial Services, reveals the gap in funding caused by a recent boom in entrepreneurship in the region, combined with the economic downturn. The report also illustrates the development of angel networks in the region, and the prospects for the future expansion of investment vehicles.

Executive Summary:

In a region known historically for its commercial and mercantile prowess, entrepreneurial activity, which is more a process than an event, is rapidly proliferating. The increasingly affluent and young population of the region is a growing consumer market waiting to be catered to, resulting in products and services customized and “Arabized” for the region.

Despite attempts made by the investment firms in raising funds focused on Venture Capital and Growth Capital during the period 2008 to 2010, the overall decreased risk appetite and liquidity shortage in the region did not allow for these funds to raise capital as quickly as they expected. The desire to curtail risk caused investors to be attracted to later stage investments, creating a funding gap in region. With 16 funds catering to the needs of seed, start-up and early stage investment companies, there are very few funds that focus solely on the seed investment stage.

The closed nature of MENA markets lends opacity to investors, hampering growth of the enterprises. Alongside, the region is governed by private companies and SMEs who are reluctant to place funds with external investors. As a result, most deals in the region are sourced through private networks. For an investment environment to flourish and nurture enterprises, especially for companies seeking funding in the seed and startup stage, the establishment of professional networks that facilitate exchange of ideas and information is essential.

The emergence of Angel networks in the region alongside government initiatives is in the process of gradually building an innovation system and knowledge economy that supports the launch of startups. However, the growth of Venture Capital within the region is yet to happen as the attention is yet to move towards focusing on the growth financing needs of companies.

In comparison, the number of Angel networks and related individual members has been increasing in the United States and European markets. With the US markets leaning more towards post seed stage and start-up companies, in the Angel as well as VC space, the prevailing trend is not favorable, especially in an economy in need of job creation and resurgence in economic stability. Europe on the other hand is focused on more local deals, with the UK having seen a significantly huge shift to co-investment, leading to a sharp fall in the number of investments with a single Angel.

The oil rich MENA region is different in several aspects from the developed regions of the United States and Europe and is characterized by its distinctive “Arabized” products and services. With the MENA shifting its base from family businesses to a corporate environment, the comparison to the developed markets of US and Europe brings to light the need for organized and focused development cells or ecosystems for nurturing enterprises and ventures in the region.

The current planned and strategized launch of regional networks focused on creating an ecosystem of investors, incubators and accelerators for entrepreneurs should make a gradual impact on the region. It is expected that with the emergence of Angel networks in the region, the current lack of transparency and reliable information in the region should be dispelled.

Entrepreneurial stories of Orascom, Maktoob and Rubicon among others have drawn global attention to the potential in the MENA, attracting further investments into the region. However, given the pace of activity in the region, support by way of government initiatives and policies; existence of stable macroeconomics; favorable legal and regulatory conditions; adherence to corporate governance and transparency in transactions; creation of a knowledge intensive environment and a transparent market environment supported by research and knowledge creation will enable the overall development of the region.

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