VC funds in MENA are for institutional investors
Spade Ventures managing partner Loulou Khazen Baz on VC trends in the emerging markets
Dear investors,
This is Anastasia from Emerge Club. Welcome to the second issue of our Substack. For these bi-weekly newsletters, ex-Forbes deputy editor-in chief and ex-head of Forbes Under 30 (that’s me) handpicked great founders’ and investors’ stories, global VC trends and news for the past two weeks, as well as investment opportunities and invitations for online discussions.
First of all, many thanks to everyone who has filled out our first survey. If you haven’t shared your thoughts about this newsletter and topics you’d like to discuss, please do it! The EMERGE Club newsletter survey takes just a couple minutes to complete. I’ll be happy to hear from you.
I hope you remember the rules of the Club — for every issue I talk to one of the most successful and influential investors and angels from all over the world asking them to share their insights and experience.
This week my special guest is Loulou Khazen Baz, the Managing partner at Spade Ventures (formerly Kickstart Ventures). This angel syndicate invests primarily in early stage technology startups operating in the Middle East, North Africa and Pakistan. We chatted with Loulou about VC trends in the emerging markets and raising funds in the MENA region.
Let’s start with what’s hot on the VC market. Here are some handpicked VC news and insights which attracted my attention this week.
VCs have a huge problem raising funds from international investors in China due to rising geopolitical tensions between Washington and Beijing. The Communist Party is tightening control over Chinese tech companies and global investors feel increasingly ill at ease entering the market. The Information reports that one of the biggest Shanghai-based venture capital and private equity firms - CMC Capital - couldn't complete the fundraising process for their $1bln fund. Beforehand in China, the process took a couple of months. The total USD funds raised by China-focused VC and PE almost halved over the last two years. Check the entire story here.
The second story I want to share with you is not a news-story indeed, but it’s a sizzling hot topic to discuss. Almost everyone in my VC network is arguing about the state of the early stage VC market, whether it's alive or dead. I loved the round table at 20VC podcast with Sam Lessin, Co-Founder and Partner at Slow Ventures, Frank Rotman, a founding partner of QED Investors and Jason Lemkin, the Founder @ SaaStr. Experts discussed if the seed model was broken and what might come now, what YC model of funding was and how to deal with round contraction and VC value added at Seed. Listen to the podcast here. Should you wish to dive deeper into the topic, check Sam’s earlier blog post about seed investing here.
However, there is another opinion about pre-seed investing. According to Carta, pre-seed startups that use Carta raised $972 million in the Q2, 17% more than they did in Q1. It looks like a recovery even though funding to pre-seed startups remained above the $1.40 billion mark throughout the first half of 2023. The number of pre-seed rounds Carta recorded in Q2 was 1,608.
Not big news, but still — the numbers of dry powder are insane! US and European VCs miss deals not to participate in the fast-moving rounds. According to The Information, VCs are canceling or delaying capital calls to LPs and US VCs are sitting on a $271 billion “dry powder”. As a result, many big-names funds like Tiger Global and Sequoia are going small with their new funds.
Last but not least. Dealroom.co came out with a fresh report covering startup demographics. What’s interesting? Startup Demographics looks at startup birth rates, survival rates, and success rates. Every year, about 12.5K startups raise their first VC round. Dealroom Signal has identified a pool of 40K new and not yet funded startups. That being said, Dealroom points out that only 5% of that number actually succeeds — getting to high profile exits (5X) and 1,5% reaches unicorn status. 25% gets to smaller or undisclosed exits, 70% of startups get little or no return. According to the report, in a normal year, roughly 200 companies reach a $1B valuation. Check the report here.
As I announced earlier, the topic of this issue is VC trends in emerging markets and raising funds in the MENA region. For this issue, I spoke to Loulou Khazen Baz, the Managing partner at Spade Ventures.
Loulou shares her thoughts on VC global trends and emerging markets
💡MENA VC trends
Dubai's Magnitt, a startup investment data hub, just published its Q1 2023 report highlighting a sharp 41% drop in Venture Capital investments compared to last quarter
The top industries receiving VC funding remain unchanged despite a 50% YoY decline. In H1 2023, funding went to 1FinTech, E-commerce/Retail, Transport & Logistics, Enterprise Software and F&B
The region and particularly the UAE continues to attract talent from all over the world with a noticeable increase from the Russia/ CIS markets. There is a concern that more entrepreneurs relocating to the UAE may put pressure on an already declining venture capital spending in H1 2023 vis-a-vis the $4Bn invested capital in 2022
Emerging Saudi Arabian startup ecosystem has secured 42% of VC investments in the MENA region and surpassing the UAE for the first time, ushering in a new era for Saudi entrepreneurs and further establishing Saudi Arabia as a vital market for scaleups
North Africa and particularly Egypt continues to emerge as a significant player in the MENA startup ecosystem with several a $260Mn mega deal by fintech MNT Halan
The decrease in VC funding is testing both entrepreneurs and investors. New startup founders are hustling longer to secure funds, while existing players are optimizing costs and seeking extra cash to keep going. Some are even facing lower valuations, adding extra challenges to the mix
💡Personal VC experience in H1 2023
I continue to be focused on investing in entrepreneurs building companies in MENA and solving regional problems. I do not see us investing outside of MENA unless we are able to bring value beyond cash or there is a clear future MENA angle
This year, we saw our portfolio companies raising bridge funds or closing existing rounds. We have looked at several new deals but did not make new investments so far. We have been spending more time negotiating terms, seeking a clear path to profitability and generally spending more time in due diligence
Given the fragmentation of MENA markets (22 countries), there remain a lot of opportunities to digitize basic services and make them available for the majority of the population. We invested in Baly, a super app in Iraq that is solving the mobility challenges and digital payments within a country that has 99% of consumers using cash, so there’s no digital economy at all in contrast with the UAE where you have a smart digital government
💡About AI as a global trend
A lot of VCs are looking very closely at the implementation of AI across industries and the disruption that will ensue. I am personally in the wait and see camp, trying to understand and learn more about the implementation, limitations, regulations and disruption that AI will lead. There will certainly be winners, the question is do you invest at the beginning of the curve or do you wait until you see some promising use cases? In general, a first mover does not necessarily mean a clear winner especially in nascent technologies and ones that cause a shift in consumer behavior.
💡If you are an LP, look for a diverse GP
We see a lot of VCs coming from the investment banking/ finance industries here in the MENA region. There are several successful tech entrepreneurs that are investing as angels in a personal capacity but very few of them turned to VC.
I believe that founders turned VCs are extremely important especially in our part of the world given the fragmentation I spoke of earlier. Founders have to manage varying regulations, cultures and dialects as well as digital fluency. In some cases, you could see stark differences in consumer behavior or regulations between two large cities or states. Overall, GPs should have a mix of operational and financial experience as well as a diversity in thought and background. Like startup founders, GPs need to have complimentary skills and strengths. Lastly, it is crucial to have chemistry with the GPs. Ultimately as an LP, you are trusting these GPs with your hard earned dollars for 7-12 years and typically LPs end up re-investing in the same GPs as they raise new funds.
❓Questions to ask about potential GPs
What have they invested in before?
What is the performance of their portfolio?
Who are the entrepreneurs they have supported and can you talk to them?
How much due diligence do they do? Do they have any IP?
How do they source deals?
Do they have a large network that can help open doors?
❓Blitz questions
🔹Where does the future of VC lie: individual LPs or institutional money?
VC funds in MENA, at least for the near future, are reliant on institutional investors like Sovereign Wealth Funds. 4 of the top 10 largest global Sovereign Wealth Funds are in the MENA region. These funds become the typical anchors for VC funds.
Family offices also play a big role in anchoring VC funds. Family offices typically sit on large conglomerates and are looking for diversification and preserving their leadership status by investing in the next generation of disruptors.
We do not have large endowments in the region or pension funds that are investing in VC. Some regional VCs are also tapping into developmental organizations like the IFC to raise funds, others are tapping into global LPs with a specific interest in the MENA region.
Separately, the entry point into any VC fund is typically high, $250K+ is probably the minimum for the majority of the large funds so becoming an LP in a VC fund has a high financial bar.
Syndicates like Spade Ventures make investing for accredited investors more inclusive with an entry point of $20k.
🔹Share your fuck-up story
I think there’s a lot of FOMO in the VC industry and as a result some investors may prefer to co-invest with other VCs without doing much homework. When you are in the process of investing, especially through a syndicate you tend to ask; are there red flags? What is the probability of success? Do we have confirmation bias or subject to groupthink? I once invested in a startup based outside of MENA, already a challenge due to my lack of (physical) access to the founder. The founder was overzealous but there was something off about our interactions. Despite feeling uneasy, the investment had traction and we closed the deal.
The investment turned out to be a bad one, my relationship with the founder was strained. Luckily we managed to exit 3 years later with a modest return but I learned a great lesson and that is; even if we’re far down in the due diligence process and even if the deal has traction, if there are red flags or even orange flags, it is ok to pull out. I should always trust my gut even if others are investing, ultimately this is what separates good investors from the mediocre ones.
🎁Loulou will be at EMERGE and you can have a personal chat with her, and that's a good reason to purchase your ticket now with a 30% discount! Use a special promo code for tickets — CLUB30.
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