Early-stage funding has long remained an issue facing startups in the Middle East. The pandemic has further exacerbated the issue with some investors now more inclined to take less risk and place their bets on established players with a proven track record.
Other investors however, now attuned to the potential of the digital sector, are beginning to emerge and several have established angel funds and networks to plug this funding gap and invest in promising pre-seed or seed startups whose tech-enabled solutions are likely to gain market traction.
Among these networks is the recently launched Iraq-based KAPITA, which is touted as the country's first angel investor network that aims to support home-grown entrepreneurs amid a faltering business landscape.
Heading up KAPITA is chief executive Mujahed Waisi and Ali ِAl-Suhail, the network’s fund manager. The angel network is sector agnostic, but to be eligible for funding, startups must have solutions specifically designed to fit the Iraqi market.
“There are no funding opportunities for startups to access. There is no organisation or investors that are willing to invest in startups during such an economic situation globally, including Iraq,” says Waisi. “Most of them [startups] are tech-based and they do not even have a physical location and thereby cannot get the necessary investment, especially at the earliest stages.”
The idea of establishing the angel network was already in the works for almost a year prior to the Covid-19 outbreak as a way to help the local ecosystem develop.
“We explored setting up a fund and then investing with a war fund structure. We had talks with the World Bank and other entities about putting a fund as a VC. But looking at the current state of the Iraqi ecosystem, we found that establishing an angel network is the best funding option for the emerging entrepreneurs,” says Al-Suhail.
With the world’s second largest proven oil reserves, a gross domestic product (GDP) of $224 billion and a population of 40 million of which almost half are below the age of 19, Iraq’s economy at the surface seems to be thriving. But corruption is rife, the World Bank ranks the country 170 out of 175 in the corruption perceptions index ranking by Transparency International and while the oil sector accounts for 90 per cent of government revenue, it employs just 1 per cent of the population. For those with the ideas and access to some capital, entrepreneurship has proven to be a way to escape the high levels of unemployment, but the ecosystem is still very nascent and underdeveloped.
The establishment of a network like KAPITA can have a substantial impact on the ecosystem. For KAPITA, its agenda goes beyond investment and focuses on enhancing founder capabilities. Through the network, founding teams will undergo an incubation programme to help them take their business from the idea stage to a revenue-generating business.
“The network will also serve as a place where entrepreneurs as well as investors can seek mentorship. It helps both founders and investors develop an understanding of the different practices across the ecosystem and at the same time, it gives the investor the opportunity to learn about investment best case practices so they can have the confidence to go and invest even outside of the network and start thinking about better ways to invest and help the ecosystem grow.
Iraq’s private sector is dominated by a family business and now as the second generation starts taking the reins, they are becoming more interested in the tech sector and are looking to diversify their investments. The problem however, is “they do not know exactly the right mechanisms or how to do proper investment into the sector”, says Al-Suhail.
Part of this interest in tech startups has been driven by the coronavirus pandemic, which has given rise to the gig economy in Iraq.
“Most of the tech startups are focusing on the business-to-consumer (B2C) services, and there is a big window for so many software-as-a-service (SaaS) startups related to providing services business-to-business. Because now, most Iraqi companies and even the public and private sector companies need to promptly digitise their businesses,” says Waisi.
E-commerce and online marketplaces are gaining momentum due to the pandemic with people turning to social media platforms to sell products as a way to boost their income.
“The already established key players are growing really fast but the other niche e-commerce players are also emerging. This trend is paired with the culture of selling items through Facebook stores and that can range from anything from a beauty product to very niche [products] like spare parts for cars,” states Waisi.
The last-mile delivery sector has also seen tremendous growth as a result. However, startups in this sector had to grapple with the implications of the curfews imposed by the Iraqi government in the wake of the Covid-19 outbreak in the country.
“E-commerce players were striving to keep doing their job during the tight curfews imposed by the government. They were not doing anything illegal, yet they had to have agreements with people from ministries of health and security to get around during the curfew times so they can be able to deliver items to their customers. This is a testament to how the market is hungry for such new tech-based solutions, explains Waisi.
With more than 80 per cent of the population remaining unbanked, cash on delivery still dominates e-commerce transactions. Establishing an online payment infrastructure is vital to enable other online businesses, paving the way for financial technology (fintech) startups.
“The banks in Iraq are very archaic in terms of the way they do business. The culture of online payments has just started picking up,” says Al-Suhail. “If you talk to any commercial platform, they would not even discuss the percentage of sales that they do online since everything is done through the traditional delivery fashion, which places a burden on companies that provide online services because you cannot get paid through an online portal. It creates room for fictitious sales and orders. And that is just very troublesome for startups and tech businesses.”
KAPITA is currently in talks with the Central Bank of Iraq (CBI) and MasterCard to establish payment gateways and activate these fintech services for tech startups.
“Now this is the time to encourage startups to get the payment gateways in order to start educating people on using online payment,” concludes Waisi.