Investors and industry-leading startups can do great work together. (Image via MetroMBA)
Entrepreneurs are a gifted breed of individuals who are insanely busy with a seemingly impossible task.
They must balance a surge of new ideas while trying to capture every opportunity to grow their company and master the art of listening, yet also decipher what a bunch of people are telling them to do (thinking they know what is best for the company). And all this while trying to balance their personal lives, stay healthy, remember to eat, remain social and tick off each item on an infinite to-do list.
It's a challenging existence to say the least and top of all that, they need to fundraise.
I’m privileged and honored to meet entrepreneurs from around the MENA region daily who present inspiring ideas and have a strong ambition to grow their companies and achieve massive success.
If almost all the entrepreneurs display the essential ingredients of passion and determination, how then do we at Wamda Capital, as a venture capital firm, decide which of the companies to invest in and which to pass on? Is there a formula that is used? What insight can we provide to entrepreneurs so that they come prepared to pitch to investors?
We know that visionary founders - supported by a capable team, solving real problems in big markets - are ultimately what is needed to attract investment.
We also know that keeping your presentations clear, understandable and honest is important. We know it’s crucial to have a short deck of no more than 20 slides that's not too complicated. Having presentation material that is clear enough to explain to your mother before pitching to an investor is very helpful.
Nobody likes rejection, but VCs say 'no' with good reason. (Image via Bitlanders)
So why do some VC’s still say ‘no' to investing in you?
Venture capital returns are based on investing in extraordinary companies that produce outstanding exits.
It's built on the expectation that most returns will come from a small selection of companies that can produce stellar growth and attract meaningful exits (one that pays 10 times or more on investment) while the majority of investments will lose money.
Companies that achieve only moderate success - anything less than 10 times on investment - are as appealing from a venture capitalist’s standpoint as those that lose money and shut down.
From an entrepreneur’s perspective your company may be about value and values; if you optimize the value your business generates, the money will happen as a side-effect.
Approaching a VC means you are willing to give up a chunk of equity (value) to create greater long term value in the company. It may help to think just how much of an impact your company can make on the VC's portfolio returns.
Put another way, how can you effectively present an outstanding company that maintains an ownership percentage for your chosen VC and generates a spectacular return for everyone involved?
It's critical that everyone wins in these deals and that both VC and company find reciprocal value and are able to build trust and have open discussions together. Anything that may limit the upside potential of the company may be a reason for a VC not to invest.
What we look for
As a VC, we want to invest in industry leaders.
The MENA region offers a lot of opportunity for first movers in many industries. Make sure your company is creating barriers to entry and has clearly formulated ways to stay ahead of the competition.This is an ongoing effort, as incumbents and followers will do everything they can to try to trip you up along the way.
Success is achieved by building a combination of network effects, proprietary technology, branding, achieving economies of scales, and scaling fast in order to grab valuable market share before other followers catch up.
Should you find yourself already existing in a crowded market (for example, ecommerce) with low margins, differentiation becomes the key that allows you to stand out. VCs seek businesses that can do something that other companies fundamentally can’t.
You cannot stand out unless you’re different.
Differentiation purely through price or quality is an almost impossible strategy for entering or dominating a new market. VCs look for more meaningful attributes that single you out of the crowd and can then further assist you to develop these competencies.
Know yourself, know your market and know your VCs - it can't be stressed enough. (Image via UniqueVision.ph)
Know yourself and your industry
VCs invest with you based on the belief that you know your industry and your competencies better than anyone else.
Nothing clearly portrays this as much as knowing your unit economics - we love it when entrepreneurs have calculated their Customer Acquisition Cost (CAC) and Life Time Value (LTV) of their customers and have thought of ways in which they can improve it over time.
Startups initially find it challenging to find the right price/product/market fit, and difficult to identify the appropriate channels to create meaningful traction. These tough and often daunting decisions are needed in order to be VC-ready and amped to scale. Have these sorted out before approaching VCs.
Surviving in the MENA market has its own unique challenges and opportunities.
Unless you are already starting out in the relatively larger markets of Saudi Arabia or Egypt, the rest of the region is fragmented with regulatory and local market challenges in each country. The Wamda Research Lab (WRL) has also found that the two most pronounced challenges facing entrepreneurs in the region are in the difficulty to find, attract and retain talent, and access to finance.
Most of the companies Wamda Capital has invested in have proven their viability within their home countries, and which were usually focused on a specific market segment’s critical pain point.
If your company seeks to scale and attract VC financing, you will need to position your company for explosive growth outside of niche home markets by both expanding into other geographies and formulating a strategy to expand into products that target large ancillary market opportunities which are based on the same core strengths you’ve already built in your home market.
When the fundraising exercise is complete, until the next round, all focus shifts to effective execution.
This means cutting down on non-essential items, keeping expenses down and driving a realistically healthy cash flow focusing on quick small wins to move forward. The last thing VCs want to see is out-of-control spending, the inability to execute properly and coming up with excuses for not achieving the agreed-upon targets and projections.
Don’t over promise to make yourself look good in front of investors, they are risk takers that are supporting you in more ways than one. It’s best to always be clear and transparent.
Remember that the most successful businesses around the world, such as Apple, Google or Facebook, were merely executed better than others.