Why do funded entrepreneurs fail to raise money again (and again)?
This is the third of a series of interviews with top investors from the MENA region, in an attempt to shed light on funding opportunities and entrepreneurs’ resources; read Part I here and Part II here.
Over the past few years, we’ve noticed that many startups have been unable to raise second, third, and fourth rounds. Findings by Wamda’s Research Lab confirmed our suspicions; the first report found that 68% of surveyed companies did not get follow on funding. This may be partially due to the fact that funding is limited, though it could be also due to the fact that their models aren't investment-worthy.
Why do some funded entrepreneurs go on to fail? What constitutes failure? And how can VCs help ventures on the brink of failure? We spoke to six top regional funders:
Dany Farha, CEO at Dubai’s BECO Capital
A great business model, solving a real pressing problem, driven by a strong team, will always be able to raise funds.
Failure happens for many reasons. A lack of clarity of vision and execution are very prevalent. Failure can be defined as failure to meet financial projections. But in the technology space, not meeting financial projections can be mitigated by building a high growth, recurring user base, amongst other KPIs.
VCs can also help by sounding the alarm early on when storm clouds are gathering and by being disciplined about funding and providing for contingent liabilities. [Tweet this]
Ziad Mokhtar, Partner at Egyptian capital fund Ideaveloppers
The problem is that many entrepreneurs focus on growth rather than evolution. While both can happen at the same time, they don't always do so. For example, growth can mean that you have coded more of your product. Evolution means that you launched your product. Growth can be that you doubled your user base; evolution means you have started getting paid by that user base.
If a startup can demonstrate evolution, not just growth, the more likely it will to attract money in subsequent rounds. [Tweet this]
Failure is not necessarily avoidable given that many new companies are creating new markets or disrupting existing ones. I don't think you should avoid it at all costs. Sometimes it will be the right thing to do.
Where VCs need to do a better is how to salvage the value that has been created in the process.
Walid Hanna, Managing Partner at the Lebanese Middle East Venture Partners fund (MEVP)
I can name several startups that shouldn’t have secured any equity funding but I am unable to name one startup that deserved funding and didn’t get any, can you? [Tweet this]
Your biggest potential mistake is to take the money, burn it on marketing, or stop responding to the investor.
Failure is about destroying value rather than creating it. There is no harm in growing well and running out of cash, we always keep follow-on funding for growing companies but do not keep a penny for companies that burn their cash without creating value.
Philip Boignet, VP of investments at the Dubai Silicon Oasis Authority (DSOA)
The biggest mistakes after closing a round made by entrepreneurs are mostly:
- They think that they are successful now
They spend too much money too quickly
- They hire too many staff members
- They think that they now have enough money to break even
Failure is when you fail your employees, investors, and clients; hence you have to let go your employees, the investors has to write off the invested capital, and clients have to look for other service or products.
While funding doesn’t constitute success or in any way guarantee survival, we do not consider a failure to meet financial projections to be a failure of the company, in fact we consider it the norm. [Tweet this]
Khaled Talhouni, Investment Principal at Wamda Capital
The conventional wisdom in venture capital, in a Silicon Valley type model, is to allow businesses to fail and to do so quickly. I believe in the region we cannot afford that approach given that the ecosystem remains nascent and has yet to demonstrate sustainable traction given the limited number of venture-backed companies that achieve positive exits.
VCs need to work more on the commercial strategies of their portfolios. Deal selection is not enough; it is critical to work closely with portfolio companies. [Tweet this]
This is why VCs and entrepreneurs need to realize that once a company fails, all parties involved are better off moving on to another project.
Issa Aghabi, Head of Investment at TwoFour54
VCs don’t have deep enough pockets to continue into subsequent rounds. This is where startups looking for the $3M+ rounds in the Arab World may have a slight disadvantage, although there are some funds popping up looking to address this gap.
If the business is strong enough it will manage to raise follow on funding from VCs, high net worth individuals, or international players. [Tweet this]
The most common “mistake” is not something you can really qualify here as every business is unique. The main one I would say is that entrepreneurs don’t take proper advantage of the first round to grow the business in either user base or revenues. VCs often don’t connect their investees with business opportunities / revenue once the investment has been made.
Failure is quite a natural part of the ecosystem and should be encouraged and considered as an educational process that leads entrepreneurs to build on the lessons they’ve learned.
The challenge in the Arab region is to learn how to celebrate failure and utilize the lessons. This is a task various stakeholders in the ecosystem should partake in, including media, investors, governments, universities.
The MENA region as a whole suffers from stringent and ineffective bankruptcy laws. The process is quite lengthy, unclear, costly, and places a large financial burden on the entrepreneurs. I believe governments are not taking an active role in resolving this but this is only a small part of failure and we shouldn’t just concentrate on it.