Venture capital or vulture capital?

A story of a fundraise in MENA

The raise

Note: all the characters, events and quotes in this story are real, the names have been dubbed for obvious reasons.

It is a natural part of the evolution of any startup to raise funds, the more your business grows and the more valid your business is, the more money you want to bring in to scale it, expand it and dive deeper into the business opportunity.

This forces you to find investors and, because you are running a startup, those investors have special characteristics they should meet. Ideally, a startup investor is a risk taking, forward thinking, “unicorn creating” entity, that will help and support you throughout the journey to unicorn-land and have your back for better or worse because after all “it is not about the money for us! It is about finding the right idea and investing in the right founders.”

Now this, like most of the things in this day and age, cannot be taken for face value. This version of the VC world is just as unrealistic as the perfect looking burger from McDonald’s you would see on a TV commercial.

 I, however, am about to take you through a real story of what it is like to raise funds in this region and the different characters, events and situations you could come across on that path.

The Beginning

You start a fundraise by reaching out into a long list of self-proclaimed “movers and shakers” and “startup enthusiastic” VCs. When you start doing that, you will find that many VCs, especially in the MENA region, have no focus and near 0 risk appetite. You will hear things like “we invest in anything and everything if it makes sense,” this in itself is a bizarre statement that should raise a lot of red flags to any serious founder. While you are reaching out to VCs you will find that rarely is your deal ever taken seriously because “we are really busy as we have so many deals in the pipeline now but I will run this by the team and get back to you if we find it interesting” - that’s the VC version of “I have a boyfriend.” 

So how do you start the conversation? Let’s look at the anatomy of VCs.

How VCs in MENA are Built

A big portion of the VCs in MENA are built this way: Ivy league guy comes back from the US with the “I want to change the world” vibe, pitches a couple family offices with the “I was in the same Starbucks as the guys who started uber!” flexes a pipeline of imaginary returns and a spray and pray model of “we will invest in 10 if only 1 becomes a unicorn we will all be in Mykonos by years end!”

Another way VCs are put together in the region is an actual institutionally backed fund, which is either backed by one of the SWF’s or banks, and those happen to be more bureaucratic bank-like institutions that start the investment with “we are going to be your best friend” and end up with them being your “best auditor.” People who work at those VCs are usually ex-bankers who are really good at asking the “but what is the guarantee that you become a unicorn?” kind of questions.

All in all, in layman’s terms, you have a bunch of people who took someone else’s money and promised them that they will make a billion dollars out of it by investing in the next big thing. Because of the lack of good deal flow and an overflow in capital, they start shifting their burden from the bad investments and put weight into the good ones, applying more pressure on the good investments to make up for all of the bad investments that they had, which puts forward crazy expectations and almost no room for experimentation for the upcoming generation of startups, this should teach you that most VCs will invest in you based on their situation not your situation, so dont take it too hard if they dont budge. 

Now that you know how a VC is composed, your best way in, is to reach out to the family that invested in that fund, for them to introduce you to the CEO, or CIO who all of sudden becomes your best friend and tells you that your deal is “the hottest thing since sliced bread” and over a brotherly dinner in DIFC  promises you that he will personally run it through the team and revert to you.

The process starts with asking you for a data room, aka VDT. Now as a startup in its early stages, you might not have a data room, you might not even know what a data room is, so you google that and start throwing together financial models, paperwork, and virtually any kind of document that has your company’s logo on it. You share that with the VC, who in turn will take their sweet time considering the document, telling you that their process is underway, and in some cases will reach out after a month and tell you “the file did not open.”

If you reached out to ten VCs, three of them will come back to you and spark up a serious conversation. Usually, everyone throws in the comment “I have doubts about how you got your valuation,” this is usually because there are no clear metrics for how to valuate. Some people use multiples of certain figures like GMV, others use discounted cash flows and you as the founder have to try and bridge the gap to arrive at a number that satisfies the fact that you shouldn’t lose 50% of your business raising a round and the fact that you need to close the round before you close the business.

Another thing you need to know about VCs in the region, is that dealing with them is very similar to an episode of Gossip Girl. As soon as you start having a conversation with a VC, everyone knows you are raising and everyone knows the nature of the deal. If you ask, you will be told that it is not true because you sign NDAs, but then again, it is one of those things where you are told “keep it between us but…” and eventually “between us” becomes between a lot of us…

The fact that your raise becomes public information, it allows for some very odd things to take place, so odd that I’m not sure if they are common practice in some VCs, but we experienced them ourselves. Naturally, running a business in the consumer space entails people using your services, and on a fine day your customer service team starts receiving calls from people saying “Hello my name is Mr. muscle from XYZ VC, and I need to get a discount on the service that I want to book” or things like “Hello I am Mr. more muscle, I work for a VC and all my friends are in VCs and if I don’t get a refund on my booking I will tell all my VC connections to never invest in you”.

Regardless of Mr. muscle’s deep superiority complex, and the fact that he at the end of the day is merely a guy that gets abused by his board and is taking that out on you, as Mr. muscle probably never built anything from himself you can take solace in the thought of that in a couple of years when you make a great exit, Mr. muscle will still be trying to hustle a free service from another startup.

Now back to the raise conversation The valuation ultimately becomes the center of the conversation and every smart analyst will try to get the best discount they can from you, so you will get on the receiving end of things like “we understand the valuation but it is quite risky to invest at this stage.” Well maybe you should have been a real estate broker, there is a lot less risk in that…

Other investors will try and de-risk the deal as much as possible as well with things like “maybe when you hit 5x your revenues we will give it a look.” You reply to this guy by saying that when you hit 5x your revenues you will get a US VC onboard and block his number.

Other people will come at you with the “in our experience the business model needs to change,” always ask the question what is your experience? Have you built a startup before? Have you started anything before? You will often find out that the answer is a no but because they have a 50” screen with some fancy chart on it they think their experience counts.

Now a very common punch line amongst VCs is that “we bring strategic value.” Always ask them to expand on what that means, because as far as I have seen the strategic value ends at them posting your logo on their LinkedIn page with some touching script about how they invested in you to help change the universe and not to meet their investors’ expectations…

You will also be faced with a lot of “we think it is great but don’t think it can be a unicorn.” This usually comes from a guy who never invested in a unicorn, their best investment to date was probably a treasury bond purchased before the recession and they think that is enough track record to judge what can or cannot be a unicorn.

Eventually if you and your investors get to an agreement you start discussing the term sheet and how they “need to be actively involved to help you and not to slow you down.” This basically means you got married to the wrong person, who is now trying to steer your business for you, and you will end up investing more time managing the relationship than managing the business.

All in all, my fundraising experience in MENA has been great, we have managed to close good rounds with great investors and with great returns for all parties involved. That being said, I realize that for someone without access to the proper channels through which they can connect with the right investors will have a very hard time and might end up in positions where they won’t be able to sustain their business due to complexities that happen in funding.

To all the founders reading this, I hope it gives you a little bit of insight on how things look like up close while raising, and to all the VCs/investors who are reading this, I hope it leaves you with a little bit of perspective on what a lot of founders go through in the process.