Is a competitive funding landscape good for the ecosystem?
Covid-19 has been the ultimate stress test for all businesses, including startups and venture capital (VC) firms. While the pandemic has played havoc across financial markets, tech investors continue to pour money into startups they find promising and have a clear path to profitability - albeit at a lower valuation these days.
In 2020, total investments raised by the Middle East and North Africa (Mena) startups fell 7 per cent year-on-year to $654 million according to Wamda, the result of a more cautious investment community.
Most investments in the second half of 2020 focused on the pre-seed and seed rounds, yet despite the smaller cheque sizes, investors continue to remain bullish on the early stage startups with high growth prospects. Throughout the past year, several new VCs and angel networks have launched their own early-stage focused funds in order to help startups raise investment while capitalising upon the region’s growing tech market - a trend that’s likely to continue this year.
To understand the startup funding scene better and how competition might play out in the technology sector, we spoke with Issa Aghbi, founder and managing partner of the recently-launched early stage venture capital fund, Access Bridge Ventures (ABV).
Prior to ABV, Aghabi headed the venture capital activities of the international Finance Corporation (IFC) in Mena and Pakistan.
ABV’s primary focus is on high-growth startups in healthtech, edtech, fintech and SaaS from Saudi Arabia, the UAE, Egypt, Pakistan and the wider Mena region.
Why is now a good time to invest in Mena startups?
We all saw how the Covid-19 crisis increased the use and adoption of innovative technologies, which are here to stay with us long after the pandemic. We would not have had food in our houses if it wasn't for startups. Now more than ever, there’s an ever-mounting need for innovation and skillful techies. And given the massive layoffs happening due to the ongoing prevalence of Covid-19, a growing number of people who lost their jobs have swooped into entrepreneurship to start their own businesses and earn a decent living.
Also, the quality of businesses and entrepreneurs behind them has improved. The regional startup ecosystem has rapidly evolved during the past few years and we are seeing a growing number of entrepreneurs in Mena who have already gone through the entrepreneurial cycle a few times. These founders and startups are paving the way for a new breed of entrepreneurs. They have already de-risked several elements of the process of setting up and doing business and are setting a successful example for other startups or emerging businesses can learn from.
Why are investors focusing more on the seed-stage startups?
Many would say that early-stage funding is abundant, but I think it still lacks maturity. There are certain markets with good access to capital, but most of the region still lags behind when it comes to the availability of funding, especially at the earlier part of the value chain. It takes entrepreneurs a long time to raise these rounds. That's why we're focusing on that stage because this is where the gap is. There is a good chunk of interest at the Series A, pre-Series B and Series B stages, it is a well-served market. Earlier stages and later stages need more of the cash injection.
From an investor’s perspective, I think coming in early at a decent valuation is one of the fundamentals of making money. I have exited six startups and have had another couple of portfolio startups go public; many of these were pre-seed startups when I invested.
There are now more investors than ever, how will this competition play out?
Historically, entrepreneurs had to go with what they could get and didn’t necessarily find the best investors for them. When the investment scene becomes more competitive, there will be more supply and demand on both fronts, which is a positive thing for the ecosystem and entrepreneurs will not have to settle and will instead have a choice of options. On the investor side, we will start seeing more specialist and more focused investors who understand certain sectors more than others.
However, the competitive landscape could create a bubble, or overinflate startup valuations, which poses a big risk for both startups and investors, but even if that happens, the market will eventually correct itself.
Does the current level of competition increase the risk losing out on good opportunities?
All in all, there's no harm in passing on opportunities. You can lose some deals that may work or may not work for you. Not every fund in the US invested in Facebook, or Dropbox, or PayPal, etc. and that is fine. You don't have to get all of the good startups, you just need to get a good chunk of them to make money.
At AVB, for example, we have very strong stakeholders, so a lot of the deals that we get come from entrepreneurs themselves. For example, I was recently in the middle of advanced negotiations with one entrepreneur in Egypt who was trying to make room for us in his financing round but it was oversubscribed and competitive. Things didn't work for us because the cheque size was too small and the valuation was too high, but we ended on good terms and he's referred four other deals our way. People respect our brand and who we are as investors, and that helps generate value our way. We prefer to either collaborate, not compete.
What are the top trends that will play out in the near future?
The ecosystem has transformed, and the quality and DNA of entrepreneurs has changed. The growth and relevance of the region are also becoming a lot more prominent. The problem currently is that startups solve for very hyper local issues, making them illimitable across other geographies, so the ability to solve problems here and to expand is becoming more acknowledged. As a result, there’s growing global interest in the region’s startups, but perhaps more importantly, I think other stakeholders from traditional businesses, family offices, governments are realising, SMEs and technology-driven startups are the future. So we are going to see them either work with startups or start investing in them and that will help create a healthy and viable ecosystem.