Going to seed

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HANNA: DIC's fund will act as lead investor in some of the deals to give its potential co-investors more confidence.

The Arab Business Angels Network (ABAN), set up to encourage entrepreneurship, has made its first investments, but still wants more members.

The Middle East is often criticised for its perceived shortage of entrepreneurs, a class of people that is vital to any economy. Start-up businesses also play an important role in the private equity food chain. A flood of new businesses springing up would create extra deal flow for the region's venture capital firms and more scope for investors.

A major problem facing aspiring business owners is a difficulty in securing finance in the early stages. The Arabian Business Angels Network (ABAN), a subsidiary of Dubai International Capital (DIC), the private equity investment arm of Dubai Holding, aims to address this funding gap.

"People have been investing in start-up companies for thousands of years," says Walid Hanna, CEO of ABAN.

"The asset class was there, but formalising it through a network and doing what we are doing - which is inviting start-up companies to pitch for investors, then helping them in a professional way to close a deal, and providing them with all the financial and legal support - that is our added value. We provide them with the tools to close a deal together."

ABAN was formed with the intention of bringing together early stage businesses and potential investors. Members, which can be individuals or companies, pay an annual fee and are invited to view presentations by businesses looking for funding.

Target investments are between US$100,000 and $1 million, which will be divided between syndicate members.

The first pitch was held earlier this year and has led to three companies receiving funding from ABAN. DIC, through a $10m seed capital fund and a $5m fund focused on ventures led by women, will act as lead investor on the deals, as a way of attracting co-investors.

"That's our model in this part of the world because it's new and investors are not used to investing in start-up companies," says Hanna.

"They see the risk as being too high, so they need someone else to lead the game, and when they see us putting in our own money and structuring in an efficient way, maybe they will be comfortable enough to put in some of their own money."

The risks involved in early stage investing are high and capital can be locked up for a long time, but the potential rewards are great. Investors in the first rounds of funding are likely to be awarded a larger stake of the company and a higher potential multiple than those who come in later.

That is in addition to the diversification benefits it can bring to a portfolio.

"If the company years from now become a listed company, this stake you have got will be worth easily 5 times or 10 times that if the company is successful," says Hanna.

"I'm not talking about Google successful - an average company. If it's in a good sector with very good growth it can make more."

ABAN is not sector-specific. "We do anything with innovation and potential," says Hanna. However, it will try to avoid real estate and retail, since Hanna sees little innovation in importing goods and distributing them, and says the real estate sector is successful enough already.

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