Saudi startups have wider funding options amid huge fund volumes

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Nawaf Al Sahhaf

RIYADH — Saudi startups would have a wide range of financing options as funding volumes in GCC have increased steadily, with a lot of fresh money flowing into seed and early-stage companies.

In an interview, Nawaf Al Sahhaf, CEO of Badir, said financing options for these startups include without limitation Venture Capital firms, angel investors, accelerators, and incubators in addition to new alternatives such as crowd funding or even P2P lending platforms.

“These options encourage startups to adopt new alternatives for providing flexible funding opportunities, thus assisting them in building and developing investment plans, he added.

He recalled that five years ago, the vast majority of startups relied on family, friends and business angels to provide the required capital to launch their startups, “However, these are no longer the only options available to entrepreneurs and investors. Nowadays, the entrepreneurs have greater options and we believe that 2018 will bring even more government funds to the mix, and inject the kind of investments that will kick-start a new wave of growth.”

Excerpts from the interview follow:

• Have you seen the market evolved over the past 12 months with respect to investment in tech startups in Saudi market?

The Kingdom of Saudi Arabia has seen a boom in tech startup and investor activity over the last year. In addition, several new funds were announced by the Government and VCs that are committed to Saudi young and dynamic technology companies in the market. In fact, the investment landscape in Saudi (Arabia) 1 1has further developed in 2017, and the market has seen intense activities from established and new players alike. We observe more and more competitive deals in seed and series A.

For example, startup Saudi companies incubated by the “Badir” program were able to obtain investments of about $13 million In the first three quarters of 2017 alone which were led by Saudi finance companies and supported by Gulf and regional investment.

Overall, the startup funding market in KSA is changing rapidly and expected to grow remarkably well, with various investors and steadily growing experience.

• Access to funding is still one of the biggest challenges faced by startups all around the region. How is Badir Accelerator helping startups with that?

Badir Accelerator plans to start financing the start-up technology companies in Saudi Arabia with amounts up to half a million riyals beginning in the first quarter of next year, in exchange for a share of equity. The funding will address on the acceleration phase of those companies.

In addition to the investment financing, Badir Accelerator also offers a range of advisory services that include training, follow-up, guidance and workshops, accompanied by continuous guidance, to develop the entrepreneurial innovations and transform them into tangible projects within 90 working days.

For subsequent financing stages of growth, Badir will serve as a linking platform between investors and entrepreneurs during regular meetings to help fill funding gaps. The initiative aims to speed up the growth of Saudi start-ups for a positive impact on the national economy, increase productivity and create more job opportunities for Saudi youth.

• What do you think of the current ecosystem landscape in KSA?

The ecosystem is very vivid and dynamic. Every day we hear news about successes and innovative ideas in the market, in conferences and competitions. The whole startup environment is growing, but naturally it shows all the signs of a relatively newly established environment.

Considering that technology is one of the key non-oil sectors that the government is increasingly focusing on, the Government of Saudi Arabia has been taking proactive steps to build a strong infrastructure for the Saudi entrepreneurship scene and played a vital role in encouraging innovation and fostering entrepreneurship among Saudis.

In recent years, the Saudi government has devoted significant resources and implemented a range of initiatives to boost the growth of startups and there are currently several government and non-profit organizations that are directly or indirectly supporting the Saudi entrepreneurs. The number of startup supporting organizations, accelerators, incubators, funds, etc. – has increased significantly in Saudi Arabia over the last few years. These organizations and companies are ensuring funding, incubation, training, coaching, mentoring and access to market.

To sum up, the startup ecosystem in KSA has become much more structured in recent years and is expected to grow with the support of government and private sector players and to propel the next generation of start-ups.

Meanwhile, Philip Bahoshy, Founder and CEO of MAGNiTT – the largest startup website for entrepreneurs, investors, corporates and founders in the Middle East – when asked about the best time for bootstrapped early stage startups to raise capital, that founders should expect to bootstrap in their early days. If they require funds they should speak to Friends and family rounds or Angels before pitching to a VCs.

“Therefore, it is essential to bootstrap in the early years of a startup journey. In our MENA evolution report we saw on average that the top 200 funded startups across MENA took 2 years to get to SEED stage and 3 and a half years to get to Series A,” he said.

Excerpts from the interview follow:

• How is venture capital going to help drive the startup economy in GCC market?

Venture Capital funding is an essential piece of the startup jigsaw.

Venture Funding is unique, however in its characteristic. I define a startup as a company that is looking to receive funding from a venture capitalist. This means that they meet several basic criteria for growth 1) a strong founding team 2) a solution to a clear and identifiable problem 3) a clear path to monetization and most important 4) a scalable product that has a regional if not global market.

All of these criteria are essential to be eligible for Venture Funding. Many of these criteria may not be applicable or sufficient for alternative funding channels including debt, bank funding or grants.

Venture Funding is essential to grow startups at each stage of funding where they have yet to break even or require further funding to achieve scale and growth.

Unlike other conventional funding sources they take equity in exchange for funding in the growth of the company.

An understanding of this is required from Entrepreneurs when pitching to VCs to better position themselves when asking for funds.

• In your experience, when is the best time for bootstrapped early stage startups to raise capital, and when is the optimal time in a startups age where VC’s can give capital?

Above I articulated the four basic and preliminary criteria that a VC look for before they undertake basic due diligence on a startup.

Founders should expect to bootstrap in their early days. If they require funds they should speak to Friends and family rounds or Angels before pitching to a VCs.

The VCs role is not to help a startup prove a product market fit or to help them hire their founding team. Their investment is used to scale.

Therefore, it is essential to bootstrap in the early years of a startup journey. In our MENA evolution report we saw on average that the top 200 funded startups across MENA took 2 years to get to SEED stage and 3 and a half years to get to Series A.

Bootstrapping allows a founder to answer three of the key criteria posed:

o MVP - Create your Minimum Viable Product which has shown signs of traction. This shows if what has been created has a product market fit. As well shows that it is a solution to a problem.

o Team – Have you found a co-founder. Have you created a strong founding team that is not incentivized by cash but have skin in the game by taking lower salaries but have stock options that bind them to the company.

o Monetization – Important to be able to show how you monetize or how you will look to monetize. Being able to show a willingness to pay by customers for your product shows that it is not only a solution but has a market value

Finally, you have to show a large addressable market. For any startup to be appealing for a VC you need to show that there is a large market that you are looking to tackle. Do your homework. Look at global competitors. Understand how you look to scale and capture the market.

• Do you think that venture capitalists are growing more cautious about new startups?

The role of a Venture Capitalist is to be cautious about its investments. They are not their to give out free cash.

It is important for an Entrepreneur to understand how a VC is structured. They too have investors in their fund who expect a return on their investment. They have a timeline in which they have committed to deliver and their success and track record will allow them to raise further funds in the future.

Therefore, it is essential for all VCs to do the appropriate due diligence when making an investment in a startup.

The region is still at the beginning of it’s investment journey. VCs in the region, many of whom have only been around for 5 or 6 years maximum, have yet to see many exits. Our MENA Exits report showed that on average it takes startups 7 years to exit. And our recent funding evolution report highlighted that 60% of the most funded startups across MENA were founded between 2012 and 2015. And we saw that it takes 3 years, 4 years and 5 years to raise Series A, B and C respectively. So we have a while before we see many VCs make serious exits from their portfolios.

With successful exits we will see two tangible benefits. 1) VCs appetite to invest at an earlier stage increase as they will have made returns on their initial funds assuming successful exits 2) startup founders of successful companies give back. The so called PayPal mafia effect where founders of the company give back to the ecosystem by Angel investing, starting up new companies or joining board of directors/ advisors to support startups that are still developing.

• How is the investment landscape in 2018 going to look compared to this year?

2017 recorded a larger number of investment deals and more investment in startups, when you exclude Souq and Careem as outliers, than any previous year.

We have also seen the emergence of new VCs funds, especially in KSA as well as incrased interest from international investors interested in investing in the region.

A new trend is also the acquisition or strategic investment of larger Global startups into regional startups. Examples include Amazon & Souq, Didi and Careem as well as Go Compare in SouqAlMal.

At the same time governments continue to push to support startups creating policies and initiatives to make it easier to set up and grow your companies while corporates across the region continue to identify ways of investing, collaborating or supporting startups across MENA.

All of these factors provide a healthy environment for continued growth and support of the startup ecosystem.

However, at all levels of startup funding an increase in capital injection is required to spur on growth and governments need to continue to make it easier for founders to set up through reduced licensing and regulatory cost, employee talent and scale across multiple jurisdictions.

• How many Saudi startups registered on MAGNiTT platform?

To date we have 252 listed on the MAGNiTT platform. We believe there are many more and a key prerogative for 2018 is to continue to growth the platform in KSA to capture the market so as to support key stakeholders, whether they are entrepreneurs, investors, corporates or government when making decisions based on facts and information.


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