An Outlook On Fundraising From Middle Eastern Investors

One billion dollars stacked up in US$100 bills would be taller than the tallest building in the world, Burj Khalifa, by 1km. So what?

The main implication here is that, one billion dollars is just an illustration of the very own cash in the region, higher than the world’s most popular skyscraper, that is deployed anywhere in the world, but in the regional ecosystem.

As dramatic as it sounds, we also know that there are billions floating here and there. And that for every one billion dollars that is spent outside the region, there’s another one locally awaiting.

Fun fact apart, countries do international businesses in several industries, this is not something new. I’ve notice though, that the world is becoming a bit more explicit in coming to the region for fundraising. Tech companies, venture capital firms, different continents and segments are discovering the Middle East region (a bit late, don’t you think?).

This first encounter gave me so many insights regarding similar patterns that I identified in both foreign entrepreneur and investors coming for funding that I need to raise a flag here: fundraising in the region is different than Silicon Valley.

I spoke to several late stage entrepreneurs and venture capitalists during the first quarter of this year, and it is clear to me that they are not ready to raise funds in the region. Amongst many hints I saw here and there, one of them is that they expect to speak at one event for the first time and manage a lineup of meetings and dinners to raise capital. It is doable, but most of the time it doesn’t work this way for a few simple reasons:

1. Being humble never hurts nobody

You may be the rock star in your country, but whoever has the money has never heard of you. So be confident, but most importantly, be humble when talking to investors despite your achievements and media coverage.

2. If you are the king, show the crown

It may sound the opposite as the one above, but if you are so amazing as you tell investors that you are, why couldn’t you raise from your own country? Whoever is fundraising either needs to have a convincing argument or already show track record for local relevant investors to create a more solid proposal.

3. Be sensitive to the culture

No matter how cosmopolitan a few cities in the region are or how mature you are in your business or even how much used to Silicon Valley dynamics you are, one common trait while doing business in the region is how you build relationships and gain trust from investors. Expect to visit the region a few times, having a longer time frame, and extra time and effort than expected to make it work. You are building long-term relationships. It takes time but once you make it, you make it.

4. Harvesting and replenishing

You may come and take money away from the region, however a good practice is to always invest in the region as part of the deal. According to the 2017 Global Investment Report by UNCTAD, the United Arab Emirates, for instance, is the ninth largest FDI recipient in Asia with UK, India and Saudi Arabia as main investors, mainly related to other industries than tech, startups and venture capital. It’s a good practice for companies of countries that are new in doing business in the Middle East could consider.

Although there’s availability of capital in the Middle East, access to capital is not quite easy, especially for startups, growth businesses and risk capital players, such as venture capital.

Recently, one entrepreneur from the region asked an investor from abroad if the capital he is raising would be partially deployed in the region. The answer was that all capital is going to be used outside the Middle East. Before you jump into conclusions, I must confess that both sides have a valid point:

The ecosystem in the region struggles. While there’s great incentive in infrastructure, awards, more accelerators and better funding scenario than two years ago, more availability doesn’t mean it is easier or qualitative. Entrepreneurs still find painful to raise funds in the region and there are great solutions and teams. However, the fragmented market, the conditions and the maturity of the ecosystem needs to be improved. Once the capital is raised from the region, entrepreneurs and investors from abroad could dedicate part of this investment for the development of the regional ecosystem- whether improving the ecosystem to become a R&D center, investing in talents, expansion of businesses or co-investments. At the end of the day, whoever is providing the capital should care about it the most, and they usually do ask what can be offered to the region, and it can be a surprise to those who do not have regional exposure or background.

The opposite is also quite tricky. How can an entrepreneur or investor from abroad commit to invest in the region if, by any chance, it won’t make sense based on their respective criteria and plans? How can they justify the opportunity cost of investing in businesses that may not capture a market as bigger as others that they oversee? Or to expand to Latin America first if they are based in Brazil?

If you compare it with a tree, whenever you cut it, plant a new one. I do see the need of better ties for the entrepreneurial ecosystem in the region. The region needs to exchange more with other markets. To learn, to share, to collaborate. By making sure that whatever deal they do on a global scale, it touches the ecosystem in the region somehow, not necessarily financially, but also commitment of intellectual capital, it will, over time, prepare the regional ecosystem to be attractive enough for more investments coming from overseas and from the region, to the region.

Related: Setting A Precedent (In The MENA Funding Landscape)