Angels are coming forth in the Middle East, more ready than ever to start investing in startups. Over the past year, several new angel investment networks have emerged, while existing networks are expanding their activities, hoping to contribute to, and benefit from the growth of startups and their technology.
What began as a rather informal landscape, with keen investors coming together every so often to invest in startups in the region, has bourgeoned into well-established networks and syndicate structures providing crucial early-stage investment.
Across the startup funding spectrum, angel investment is focused on the seed to pre-Series A investment stage, typically before a startup has a proven track record. Ticket sizes can range from $10,000 to $100,000 and in some cases, reach a few million. Given these smaller cheque sizes, angel investors tend to be more agile than traditional venture capital (VC) firms and respond quicker to new opportunities. And over this past year, many angel investors have taken the opportunities that the pandemic presented.
“We thought that investors might be reluctant to get in on new deals; however, what happened was that we closed one of the largest deals in our history,” says Zeina Mandour, general manager of Egypt-based Cairo Angels, which most recently participated in Opio’s $300,000 seed round.
Launched a decade ago, Cairo Angels is one of the region’s longest-standing angel networks. It has investments in 29 companies across the Middle East and North Africa (Mena) and leverages a network of 80 angel investors. The network, which describes itself as a “club model” based mainly on individual investments, launched a micro-funding syndicate of angel investors in November 2020, with the intent of providing fast funding to early-stage startups.
“There’s a lot more cash in the market that is circulating [and] chasing the talent, which was not the case before. So, it's become a lot more important to deploy cash quickly to good startups, because good startups require immediate funding,” says Nader Aboshadi, a member of Cairo Angels’ board of directors and one of the founders of the newly formed syndicate. “If you're too slow in allocating the funding, you lose out on the good opportunities.”
The syndicate was launched as a way for Cairo Angels to stay ahead of its competition according to Aboshadi.
“We've realised over the past few years the industry is evolving, and we need to evolve with it. The regular club model that we are operating under is no longer enough,” he says.
Most of the region’s angel networks follow the syndicate model including Dubai Angel Investors and Saudi Arabia’s Najd and the women-focused Spark.
“The market is going towards [this] trend - syndicate funds; because it is filling a gap and helping aspiring angel investors join forces with experienced angel investors, who can find the resources, do the due diligence of the good deals, and double down on them with a larger amount of funding,” says Musaab al Hakami, a Saudi-based angel investor.
Angels versus VCs
As a result of Covid-19 and its ensuing economic crisis, VCs are either doubling down on the sectors that boomed like edtech and e-commerce or focusing on their existing portfolio companies instead of backing new startups.
Angel investors can help fill this funding gap, however, the level of experience that both bring to the table is quite different. VCs are better placed to manage funds and carry out the required due diligence while benefitting from the advantages of later stage investment when startups are more likely to have proven their model or have some traction. In angel investing, few startups will have a proven track record and so identifying a good deal is more testing.
“In normal investing, people use debt for leverage, in angel investing, our leverage is people,” said Kushal Shah, founder of Dubai Angel Investors (DAI) during the Angel Investing Forum Riyadh 2020 held virtually in November 2020.
The role of the angel investor, beyond supplying cash, also extends to providing the mentorship and guidance needed to facilitate a startup’s growth.
According to Hakami, the lack of investment experience among many angel investors might be a challenge that could stand in the way of quality deal flow and thereby the evolution of the ecosystem as a whole.
“Unfortunately, what we have is a lot of money and less experience. Financially, the gap will be filled by the angel investors. However, they still lack the experience and the value that they need to add to the startups,” Hakami adds, highlighting the need to have institutions that could provide angel investors with relevant support and counselling.
“For example, many angel investors understand the commercial side of things, yet they need help and support with the legal aspects. [I] know a handful of legal entities who can support them with that aspect. Because most of the international firms usually offer their services at high prices and mainly work with the VCs, so for angel investors, I think this is another challenge,” he explains.
Last month, the Sharjah Research, Technology and Innovation Park (SRTI Park) launched the Sharjah Angel Investors Network (SAIN) to not only encourage more high-net-worth individuals to consider investing, but to also provide them with a training programme to educate them on the key elements of angel investment, how to diversify risks, negotiate deal terms and ways to pursue deals and support emerging companies.
Addressing these issues will require collaboration among angel groups in the region and globally to facilitate access to the market and the exchange of knowledge and expertise, which will ultimately support the growth of the regional startup ecosystem, suggested Saleh Alrasheed, governor of the Saudi-based General Authority for Small and Medium enterprises (Monsha'at) during the Angel Investing Forum.
Regardless of whether these collaborations come to fruition, the pandemic, while a driver for angel investment, will likely accelerate the exit of inexperienced investors according to Hakami.
“I think from a grand perspective, the total funding amount will decrease, however, the smart investment will increase,” he adds.