Business financing was the subject of debate at last month’s edition of the Arabian Business ‘Startup Academy’.
Speakers from venture capital, financial services and incubation companies looked at how to fund the different stages of a startup and how and when to approach institutions for capital.
Alvaro Abella, managing partner and CFO of BECO Capital, started by offering some words of encouragement. “It’s the cheapest it’s ever been to raise capital and it’s the cheapest it’s ever been to test your value proposition,” he told an audience of entrepreneurs and owners of startup businesses.
Licensing, long a burden for entrepreneurs, he added, is becoming more affordable. Abella cited initiatives such as Astrolabs and Flat6Labs Abu Dhabi, which help reduce the hefty costs associated with business licensing and registration.
“Even from a licensing perspective, we’re seeing more and more cost-effective options across the region and here in Dubai. Services such as Astrolabs easily allow you to start with a spot in the tech centre for a minimum fee a month and you have more and more accelerators popping up in the region that allow you to really launch your business. I think these are all great options that entrepreneurs should consider when starting their business,” he said.
Ali Farahani, founder of Loop Design solutions, who joined Abella on stage, also said today’s ecosystem makes it much easier to start a business. “I think it’s the best time ever to start a company,” he said.
“You can get service space from AWS [Amazon Web Services] to get the website running for $10 a year. I think we’ve innovated on certain platforms so it’s much easier to start a business, that’s number 1. Number 2 is it’s much easier to bootstrap a business, so you don’t need that much capital to test your initial value proposition or your initial product market. So I definitely think that services such as AWS [help],” said Farahani, who started his business two years ago.
On the all important question of funding, Abella echoed other speakers when he said that the early stages of a company should be self and family funded.
“VCs have a specific entry point,” he clarified. “Do your homework before you approach institutional money to see where you fit.”
Once they are in the market for VC money, entrepreneurs must be clear about how much they want and what they want it for. “You must have an initial proposition and data to back it up. Until you have that, don’t ask for institutional money,” he said. BECO Capital’s investment portfolio includes Careem, Propertyfinder and Jadopado.
“Companies sometimes take money just because it’s on offer…,” added Farahani, “and you might end up working with people whom you’re not comfortable with.”
Other words of advice included the need to understand that an exit may not happen quickly and that even five years may be too short.
“Five years may look good, but putting a time period or exit target on a company is typically a mistake,” Abella said. “You have to have flexibility [in VC funding agreements] on terms.”
Amjad Ahmad, managing partner, Precinct Partners, reiterated that VCs do not fund companies at the seed stage. “Family, angels and debt fund seed,” he explained.
Once past the seed stage and ready for VC funding, companies looking for a VC partner need to have a strategy.
“Look at the stage of the company, how much money you need and the landscape of investors,” Ahmad said. “We invest in emerging leaders in a space.”
Precinct Partners’ portfolio includes Lamba, an Arabic language mobile gaming company; Mumzworld, a mother, baby & child e-commerce platform; and mrusta, a site that connects maintenance companies with people who need a job done.
Khaled Talhouni, managing partner, Wamda Capital, urged enterpreneurs to keep their presentations to VCs clear and concise. “It sometimes take several slides to get to what the company does,” he said. “You need to explain your business and your plans quickly. You must be clear, crisp and to the point.”
Wamda Capital, chaired by Aramex founder Fadi Ghandour, has invested in a succession of regional startups. It recently joined Step Group’s US $2 million Series A funding round; Lunch:on’s $500,000 seed round; and Compareit4me’s $2.4 million funding round last year.
Both VCs were clear that entrepreneurs should know what they are getting into when they take VC funding.
“We are not a passive investor,” explained Ahmad. “We want to get involved and help you develop the business.”
In fact, Precinct is keen to assist in all aspects of its portfolio companies’ business, including strategy, product development & refinement, marketing and recruitment.
“We can be an extension of your team,” said Ahmad.
“You should have open and healthy relationships with your investor,” Talhouni added. “We build long term relationships and really understand the needs of the business.”
Ahmad felt it was a great time to think of starting a company in the Middle East, with investors keen and willing to support emerging companies.
“You are seeing more risk capital,” said Ahmad. There’s substantial growth in interest in investing in startups and early stage companies.”
Whereas it would once take two years to raise a fund, he said that the timeframe was now closer to three months.
“The institutional base here is very thin. As we develop a track record in VC, more money will be allocated to it,” Ahmad said. “There’s always money for good businesses.”
Regarding the attitude of entrepreneurs, Talhouni said, “entrepreneurs often play safe, they take a middle of the road approach. Sometimes, they perhaps need to be less afraid of what could go wrong.”
Echoing Abella’s earlier comments, the two VCs said companies dreaming of an exit strategy need to play the long game. Exits, Ahmad said, will take time and will not come easy.
“Patience is key. The average VC fund is 14 years. Even in developed markets, it takes time,” he said.
Abu Dhabi Islamic Bank (ADIB) offered the audience the traditional bank view on business funding. Firas Raai, head of business and product development at ADIB, outlined six stages of business funding, starting with personal savings or one’s own salary in the early stages, moving on to friends and family, followed by angels, VCs and, finally, banks.
“Banks become interested when you start to make money,” explained Raai.
“The main criteria for the bank is risk; there is a very high risk in the early stages.”
Banks adhere to what he called the five Cs when assessing whether or not to lend to a business. These are: Character, namely the borrower’s reputation; Capacity, the ability to repay; Capital, the net worth of the business; Collateral, in the form of the company’s assets; and Conditions, the amount being asked for. Raai urged business to make themselves more attractive to lenders by keeping up the books, right from inception. “When you start, please keep records, track expenditure and establish an account for company expenditure, if you are doing this alongside a full-time job, separate from your personal one.”
In order to have a chance of unlocking bank funding later in the cycle, businesses need to invest in accounting systems and conduct annual audits, Raai stressed. He also urged businesses to remain focused on their field of expertise.
Craig Moore, founder & CEO of Beehive, the regional peer to peer lending network, also had words of encouragement for budding startups. He said that it is easier than one might think to raise sums of up to several hundred thousand dirhams without recourse to institutions or credit cards.
“If you’re looking for around three to four hundred thousand dirhams, there are lots of options,” he told the Startup Academy audience. “People will increasingly be raising smaller amounts from individuals. High net worth individuals here will write you a cheque for 100K if they like your idea.”
He offered his own company as an example. Beehive was able to raise around US $2.5 million in capital from individuals without recourse to an institution. Moore said that being able to raise capital in this way requires networking, relationship building and persistence.
Beehive helps match early stage businesses with investors looking for higher rates of return than conventional investments. Businesses seeking funds must have minimum annual revenue of AED 2.5 million and have been in operation for two years.
Companies must borrow at least AED 100K with repayment terms of between six and 36 months. Those sourcing funds through the platform include Pixelbug, an augmented reality company, Koita Organic Foods and The Camel Soap Factory.
The economic climate is improving, Moore said, and this could only be expected to continue. “There was strong growth at the back of 2016 and companies are now looking for growth capital,” he concluded.
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