The UAE is proving it knows how to build an entrepreneurial ecosystem, with co-working spaces, incubators and accelerators popping up at pace, local universities increasing their entrepreneurship courses and more and more people preferring to launch their own businesses.
From the government to the private sector, there has been a concerted effort to make it easier than ever to start a venture. But as with any growing movement, things are still yet to come up to speed.
In Dubai’s case, one area which is yet to be fully realised is that of angel investment.
The current angel market in the emirate is fairly invisible, with members usually operating on their own or in small, ad-hoc groups, relying on word of mouth to find investment opportunities and making decisions in isolation.
But according to two entrepreneurial friends, this is about to change.
“There are so many entities that are focusing on entrepreneurs, which is incredible. But nobody is servicing the needs of investors,” says Elissa Freiha, an Emirati of Lebanese and American descent, who co-founded Dubai-based women-only angel group, WOMENA.
“Our focus is on educating and incubating investors. We’re not here to accelerate or incubate start-ups, we have partners whose job is that. We are here to fund start-ups.
“We are very happy with bringing these fragmented entities together and fulfilling all the needs that they have.”
The other part of the charismatic duo is Chantalle Dumonceaux, an American whose vast experience in the angel investment process stems from her work with start-ups and angel groups in Zurich and New York.
Their initial idea surfaced in the summer of 2013, with a view to bring to the emirate’s table a concentrated view on how an angel network should be.
“I was already exposed to the whole ecosystem from the start-up side to the financing side,” she says.
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“I was already very passionate about it and its effect on the economy and how it forwards innovation, how it creates jobs. I wanted to be a part of that.”
Bringing informed and streamlined investing through an organised and professionally-managed angel group to the region goes hand-in-hand with another insight the co-founders have spotted as a potential stumbling block in the country’s entrepreneurship ecosystem – the fact that, in spite of enormous media hype, entrepreneurship is not for everyone.
“I knew I wanted to do something entrepreneurial, but sometimes it is better not to be an entrepreneur because you don’t have the same drive or you don’t have the time because you have a family or a nine-to-five job," Freiha explains.
“Angel investing allows you to be entrepreneurial without having to take those risks or sacrifice the time.
“It’s really about that awareness that angel investing can help you be part of that entrepreneurial experience without many of the struggles of entrepreneurs, and to get to learn to do something and then start [your own company].”
From the origins deriving from theatre “angels” who funded Broadway theatrical projects in the 1970s, “business angels” have been identified in the US as affluent people who are first in line to financially support a fledging business after the entrepreneur has exhausted his/her own funds or whatever amount family and friends have managed to support him or her with.
In addition to providing much-needed capital in lieu of ownership equity, business angels are usually rational and hands-on investors allowing entrepreneurs to benefit from their advice, insights, knowledge and contacts.
Various surveys show that an angel-funded start-up is significantly more likely to survive for at least four years or raise additional financing.
While angel investors have a long history, angel groups are a quite recent phenomenon but one that is developing at a fast pace – the number of angel groups located across the UK has increased from 40 at the turn of the millennium to around 100 registered in 2014, according to research by the University of Glasgow.
The benefits of coalescing into informal or formal angel groups, which include pooling deal flow, capital, domain expertise, and investing experience, have also been attracting new angels making them more visible and accessible to entrepreneurs seeking finance.
Following this trend, the WOMENA co-founders consider that opening group angel investing as a new avenue for all entrepreneurial individuals in the region will unlock often invisible funds and foster the entrepreneurship ecosystem.
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“We really don’t think that there’s a lack of funding but there’s a lack of entities that are bringing quality entrepreneurs with the right structures in front of the right investors. They tend to miss each other,” Freiha asserts.
With 100,000 households in the Middle East qualifying as accredited investors, the market for their services is obviously there but Freiha points out the importance of the right timing, having learnt from the failure of previous similar groups.
“We saw very quickly that their focus was too much on entrepreneurs and they ended up becoming something more like a business plan competition or their focus was too much on marketing for the entrepreneurs and not marketing enough for investors,” she says.
“After two years they had barely 30 members.
“There is a very diverse set of reasons but, to be honest, I think it was just too early. Before the crash, there wasn’t enough of a strong entrepreneurial mind-set that would support any sort of investment so any investments that were being made weren’t being made in companies that could sustain themselves or grow so they tended to keep failing.
“The timing is definitely right for us.”
Another observation they got from their initial market research was that the industry was, not surprisingly, male-dominated. However, the region is no exception to the rest of the world since by various 2014 estimates only about 22 percent of angels in the US were female, which is, nevertheless, significantly up from about eight percent in 2005.
Having in mind global trends and the fact that 22 percent of the regional wealth is controlled by women, Freiha explains why they decided to focus on the group which has traditionally been timid to get into the investment field.
“One way that we’ve adapted to the region is by focusing on women. So this was not just a differentiating factor for us. It was something that we saw as a need that could be adapted, “she says, adding: “For example, men here have their Majlis, and unorganised angel groups, or angel groups that are here have very low percentage of women.
“It’s because culturally there is some sort of disconnect from the numbers and analytical side of the finance world or some sort of insecurity in voicing your opinion in the room full of men exactly because it is a room full of men.”
In order to establish WOMENA as an angel group for women investors where they share expertise and networks, learn and co-invest together, the two co-founders decided that the main focus should be on offering an educational platform on angel investing.
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“Members need to get educated to get comfortable investing. Confidence building to ask questions, to trust their gut,” Freiha says.
“It’s not ‘we’ll tell you what to do with your money’ but ‘we’ll teach you how to best utilise the money that you want to invest’.”
Angel investors seek an average return of at least seven times their initial investment, over a period of seven years, making the average return somewhere between 20 to 35 percent.
Although most of them are often unusually patient, learning how to choose good deals is, therefore, crucial since investmentuk.net further states that statistically about 39 percent of angels lose their money and gain no investment return on their portfolio.
Dumonceaux explains: “On the point of education, basic points on how angel investing works is that the majority of start-ups fail and you need to diversify your portfolio which means putting smaller amounts in a wider number of start-ups rather than making one big bet based on gut instinct or similar.”
“We’ll vet and source the best deals that we can find and present them to them [WOMENA members],” Freiha adds.
So how does the group function? A potential investor will apply or be invited to join the group, and after a basic vetting process, she’ll become a United Arab Angel by paying a joining fee.
The vetting process is intended to determine whether a candidate has the financial ability to invest between $5,000 and $50,000 in at least one company per year.
Freiha explains: “We don’t want to bankrupt anybody. Somebody who wants to be part of WOMENA has to be able to actively invest.
“If they pay our membership fee and after a year or year and a half, they haven’t invested then maybe they are not comfortable being an investor or maybe we are not the right vehicle for them.”
Of no less importance are personal features since the co-founders seek for women who are driven and motivated to make an impact by investing ‘smart money.’
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Dumonceaux says: “We want our members to understand that they are strategic investors as well and that they could help these start-ups with their networks to help foster the growth of their business.”
However, Freiha points out that women are usually more interested in people development: “What we’ve experienced is that they want to feel the connection with entrepreneurs and with their story, the vision for their company. So whether they are actually an investor or not they are happy to help them.”
In addition to locally-based Freiha and Dumonceaux, the team consist of two other members working from overseas, while their large network of partners is also actively involved in the filtering process of all interested start-ups.
“We saw that there was the lack of due diligence on these start-ups and a lot of people based it [investing] on gut instinct or relationships. We are starting to circumvent that by doing due diligence and vetting start-ups since there is a high correlation between returns and due diligence time.
“It shows the importance of removing yourself from personal aspect. We‘re trying to fill in that gap of the lack of due diligence in the market, which also ties in the fact that it’s entrepreneurs-focused,” explains Dumonceaux adding that the exits where investors spent 40-plus hours on due diligence had a 7.9-times return.
A start-up has to have a proper legal structure put in place, and a failure to do so Freiha points out as one of the currently “big issues” in the market impeding numerous investment intentions.
For that reason, while registering WOMENA in Dubai Internet City in the fall of 2014, the co-founders insisted on going through the same process as the start-ups they intended to invest in in the future.
She says: “We set up in DIC because we wanted to be close to where the start-ups were. We made sure that we go through this whole process ourselves without hiring someone who might be able to facilitate it because entrepreneurs that we are funding are doing the same thing.
“We have our own strategic investors that have invested in us, we have the same struggles as those companies and we really wanted to understand.”
Freiha adds that they have opened up the deal flow to the entire region, and says: “We have to because the ecosystem might be set here but entrepreneurs are not all here.
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“Angel investors tend to invest locally and regionally because they can relate so since you have members from Palestine and Lebanon, for example, they’re going to want to invest in companies that are also from there.”
Going further, a start-up’s strong and committed team should have bootstrapped certain amount to develop an idea aimed at solving a big problem within an underserved market. The co-founders also prefer that some sort of proprietary technology or other kinds of barriers to entry for other companies have ensured the start-up’s competitive advantage.
“There’s no such thing as no competition. They might not be exactly the same as you but that doesn’t mean that they’re not out there,” explains Dumonceaux.
Once the start-ups are selected, WOMENA organises monthly dinner meetings during which three to five entrepreneurs are invited to present their businesses to the members, and the evening ends with the assessment of the group’s interest in presenters.
In case of a positive outcome, follow-up meetings and due diligence will be scheduled but the co-founders stress the importance of a timely decision process for usually over-burdened entrepreneurs.
Although the group will officially launch in March 2015, it already has roughly 130 women on its charter member list but Dumonceaux asserts: “When it comes to actually making an investment, that is to be seen.”
When asked about the financial sustainability of their business model, Freiha explains: “Our business model is primarily focused on membership fees and sponsorships.
“A smaller part of the business model is taking a success fee when the start-up gets funding. So we don’t charge entrepreneurs any sort of upfront fees, and when we are negotiating terms we are doing that on behalf of members. That’s three percent and it’s taken out of the funds that they receive.”
Dumonceaux adds: “Regarding the equity stake, we take 10 percent of whatever equity the members get, and we negotiate this on a case by case basis. This is really to show solidarity with the entrepreneur and the investor. It’s a very small part of the business model,”
The market insights and WOMENA’s set up prove that the co-founders are really on the ball – an important feature for starting out in a hits-based business, and one which will surely see them succeed in boosting female investment across the region and helping start-ups looking for AED500,000 to AED2 million.
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