VC Excitement in the Middle-East and North Africa

MENA takes its place in the new global tech innovation economy, on its terms

 

The general sentiment in start-up spaces is that as long as the idea or concept closely matches an already existing Western construct, business or investment venture; the more likely it is that a founder wins an investment. Christopher M. Schroeder, Co-Founder of Next Billion Ventures and network partner at Village Global, and Mark Heynen, Founding Advisor of Next Billion Advisors and Vice President of Business Development at Stellar.org, discuss the multi-faceted dynamics of moving away from the Western construct of digital development with investors who are committed to the Middle-Eastern and North African markets (MENA).

Mark states that emerging new founders play a pivotal role in the current investment cycle with models first and foremost about their markets – perhaps with some inspiration from the West, Asia and beyond. As new entrepreneurs with ideas motivated to solving large local/regional problems at scale emerge, so do investors. Western investors continue to play a role but remain slow when contributing to emerging markets. Home-grown investors, however, are growing in number and size and leading business progression. The Startup Rising: The Entrepreneurial Revolution was the first and best-selling book documenting this rise, and authored by Schroeder, and notes that even his most positive predictions “have been blown through subsequently in the last couple of years alone.”

 

Below are a few highlights from this Clubhouse talk:

 

DIGITAL IS THE SOLUTION

Hana Besbes, Venture Partner at Mindshift Capital, says solutions to so many intractable problems in the region are now being answered digitally. Mindshift Capital invests in early stage women-led tech start-ups in MENA as well as globally in foodtech, healthtech, edtech and fintech. The Middle East is working on creating a circular economy of self-sufficiency through technology as a solution. Foodtech is a key focus of that. With regards to healthcare and transforming health, the solutions are anchored in the next innovations of futuristic health equipment and processes that operate in ‘speed mode.’ According to Hana, the same logic applies to edtech and fintech. 

Sacha Haider, Principal at Global Ventures, discusses the importance of focusing on the post-Covid-19 era which is to see a significant acceleration of almost every trend from the pre–Covid era. She mentions that their interests are in the digital solutions to the future of work, agriculture, education, e-commerce, and health. Global Ventures are in search of key players transforming emerging markets. She adds onto Hana’s example and goes on to say that, for Global Ventures, healthcare needs to be tackled from a ‘holistic approach’ that includes digital efficiency such as electronic records, medical education and unique data sets, rather than simply focusing on healing equipment.

Sarah AlSaleh, a Senior Associate at Saudi Technology Ventures (STV), focuses on MENA’s ‘white spaces’ that she describes as the digital supply and demand across all sectors which currently display a glaring gap in the region. White space companies disrupt existing or create new large markets, are often unfamiliar to investors in the West and can scale across similar markets in MENA and beyond. She and her team’s goal is to invest in companies that can be the ‘champions of these white spaces.’ With $500 million in capital, the largest fund in the region by far, STV aims to back and scale the region’s most disruptive technology companies. 

 

UNIQUE PROBLEMS, UNIQUE SOLUTIONS

Falgu Shah, Partner at Next Billion Ventures (NBV), stated that each space has a unique set of problems that require unique solutions. Spaces in MENA have a very young and tech-savvy population that face basic problems. Some of the unique struggles of these spaces include infrastructural issues, inadequate pay structures and alternatives, electricity and internet deficit; which are problems that are not commonly experienced in mature markets. Next Billion Ventures takes a business model approach to their thesis to identify those gaps across all emerging markets, but is always sensitive to what is unique and special within a given market. The team invests in founders tackling these struggles in their local markets to localise the solution.

During the session, one of the attendees noted that he has faced investment rejection in the Middle East several times while presenting what he considered to be a unique and potentially large solution. He states that when he shared his business ideas, investors would ask questions such as “who else is doing this?” wanting comfort in models that are successful elsewhere. He goes on to say that the very reason why he was rejected by the investors was that “if the West has not ventured into such a project, we would not want to take such a risk” which undervalues so many opportunities unique to MENA and other emerging markets. He then asked when or if a time would come when investors are not looking for a ‘copy-cat’ model of a business product or idea and look to fund innovations that are taking risks in the region.

Both Sarah and Falgu agreed that many VCs still look for role models and success cases. However, there are more and more bottoms-up innovations. Founders are now building for very specific problems unique to the region and it is clear that there are no playbooks. While there is still a gap today, investors are starting to realize that and are more receptive to new approaches. 

For example, Helium Health, a healthtech provider in sub-Saharan Africa, wanted to solve the problem of healthcare data, i.e. collect and aggregate data. While visiting hospitals, they noticed healthcare professionals were still using pen and paper; meaning their initial digital product would not be viable. Hence, Helium Health looked into building a specific software for these hospitals that operate one device, experience power outages, and have unreliable internet connections. It has meant having to adjust existing digital products that otherwise would have worked in developed countries. 

Falgu added that it is important to place the consumer at the fore when venturing into business. Consumer influence and consumption patterns are crucial to understanding. She gives the example of how WhatsApp plays a huge role in consumer influence and product marketing in emerging markets compared to the United States. It is embedded in the infrastructure that it takes local innovation to build on top of those rails. There needs to be a close appreciation of that consumption pattern and this has to be locally innovated. She goes on to say that it is “critical to think about the market dynamics of the one you are operating in.” Unique spaces present unique opportunities.

 

REGULATORY ENABLEMENT DRIVING INNOVATION

Schroeder states that if a conversation was to be had three years ago, they would be talking about Saudi as a lucrative market that other regional start-ups were trying to get into, less about entrepreneurial startups themselves. He appreciates that entrepreneurs are now growing within MENA as well as in Saudi itself and wonders: “How global should they think?” He adds that global here could refer more broadly to the region or to other emerging markets — i.e. “the new definition of globalism.”

Falgu responds “Issues at the regional level are so big and so complex that founders in sub-Saharan Africa or founders based in the Middle East are increasingly looking to each other’s markets to find the next opportunity.” Fundamentally, people believe in a global digital economy and this requires an infrastructure to support it. “People and capital move in ways that we have never seen before.” Her response pins the point that global ambition is present and enabling these corridors is critical. 

She explains that this can be achieved via regulatory enablement. There is a need to have more discussions on these such as how to open the playing field, how to talk to each other about equity and enabling opportunity. She states that UAE, Saudi and others are working with investors and entrepreneurs to “get it right, to think smartly about a regulatory environment that could enable not only innovation but more particularly financial inclusion.” 

Sacha explains that governments in the region are visionaries. “The young population is not banked the same way as their peers in more developed countries. For instance, they fall short when it comes to financing dynamics such as Finance 2.0. or Credit 2.0, i.e. buy now, pay later.” The result is exciting– there are more and more supportive frameworks and innovation hubs to locally develop markets. 

 

WHAT VCs LOOK FOR IN FOUNDERS

Mark Heynen brings up the topic of input vs. output. The goal of investing in founders is to produce quality results. He asks the investors where founders come from and the desirable traits that they hold when looking to invest.

Sacha responds that most founders they look for are experienced in the respective sectors of investment whether through education, background or hands-on experience. She admits that there seems to be a ‘cookie cutter’ factoring in of the founders having worked in “blue-chipped companies or top tier schools in the United States or Europe,” which can pose a challenge for founders who are not from this particular mould to rise. She goes on to say that investors should challenge themselves and work towards removing some of those biases, to be more objective when looking and speaking to local founders.

Hana stresses that every VC would get more certainty and security were they to find serial entrepreneurs. However, in MENA, this is not always an option. Mindshift Capital tends to favor founding teams versus single-founded companies. She admits they found success with this method.

Falgu Shah re-emphasizes that a founder ‘must have an understanding of the market.’ She gives an example that in Egypt there are 530 eCommerce-enabled shops whereas in Pakistan the number rests at 11,700 (Pakistan being one of the top 25% countries globally in that space). An investor must have the skill to tell a story and provide a picture of the market based on these numbers, to be able to come up with tailor-made digital solutions. 

These responses tie into the point Sarah had made earlier about being able to identify the market in a duo-aspect: countries with high volume vs. countries with high spending capital. Such analysis skills lead founders to have an in-depth understanding of the market and strategies to implement.

 

FUTURE PROJECTION

Schroeder poses the question that if a Clubhouse was to be hosted 3 years from now, what would be the situation regarding the MENA ecosystem? Hana Besbes predicts ‘stronger local talent and fewer copycats.’ Sacha Haider would like to see ‘more exits to produce talent,’ and ‘later stage funding’ while Sarah AlSaleh would appreciate more policies rolled out in favour of the entrepreneurship process. Falgu Shah would appreciate investment into ‘technical talent’ and general development. VCs are good at deploying capital and will continue to do so. However, there is now a greater need in creating value. 

All clubhouse guests agreed that the future is anchored in digital development, particularly the post-Covid era. They also agreed that unique solutions need to be implemented for unique problems in the Middle East and North Africa, as these cannot be compared to Western development. The solution lies in local technical talent, problem spotting, solution-driven innovations as well as infrastructural support. 

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Next Billion Advisors. Advising companies who onboard the next billion users in emerging markets. More info here: www.nxtblln.com  

Next Billion Ventures. Investing in start-ups serving the needs of the next billion digital consumers and businesses in global emerging markets.  More info here: www.nextbillionvc.com