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The year 2021 will prove to be an exceptional one for regional startups as the sector matures and begins to reap the gains from business-friendly policies launched in the first quarter.
The venture capital space has indeed imparted lessons to both startups and venture capitalists to continue mobilising investments in the startup sector.
According to a research from Wamda, startups in the Middle East and North Africa raised $170 million in March, a six per cent rise month-on-month, across 43 deals. This takes the total amount raised in the first quarter of this year to $396 million across 125 deals, marking a promising start to the year so far.
The UAE once again led the charge in terms of amount invested in March, with $130 million invested in 11 startups. This was primarily down to two companies, agritech firm Pure Harvest ($50 million) and last-mile delivery service Lyve ($35 million). Fintech attracted the highest number of deals with 10, but it was agritech and logistics that raised the highest amounts thanks to the aforementioned duo.
“We believe that 2021 will be a pivotal year in the startup ecosystem, not only in Dubai but the wider region. Dubai has been a leader in developing the venture capital space, and while Covid has had its challenges, we have seen resilience and adoption of technology as key to the growth of our economy,” Khalfan Belhoul, chief executive officer of the Dubai Future Foundation, said.
“2021 will be a year in which we see further strengthening of our position as a leading city that attracts startups, innovators and investors alike globally.”
The region is seeing an increase in the potential access to capital as more investors are interested in the venture capital space. However, that is also offset against more startups raising funds than ever before. Ultimately valuations will rise when a company is highly sought after, creating competition for access to the company, said Philip Bahoshy, CEO of Magnitt.
The region is seeing a strong influx of external investment as a result of strong and consistent success stories. Ajinkya Tanpure, founder of CrossVal, said: “Valuations are never a time-sensitive need for a startup but they definitely need to be accurate and should be explored before raising investment and/or onboarding key employees.”
“An accurate valuation enables startups to rise quicker, keep the founders and early members motivated with a good amount of ownership and enable investors to make their return on investment. In addition to the valuation, investors look at the structure and credentials of the team, development, and IP of the technology, strategy of the business,” he added.
Mohammed Ali Yusuf, Regional Manager - MENAP, Checkout.com, said: “Since Checkout.com launched in Mena back in 2014, we’ve witnessed the UAE startup ecosystem flourish, supported by progressive policies from the government and a strong local talent pool. The valuations that businesses in the region have yielded mark a maturing startup system, and a virtuous cycle of growth. Successful fundraising is the start of the journey.”
In general, startup valuations around the world are very buoyant and can seem a little bit excessive given traditional valuation metrics. Each lead investor in a startup funding round must take the critical step to determine what the valuation is of the company. These are not publicly-traded companies where the marketplace is setting a value; these are companies where the skill and the intuition and discipline of the venture capital firm or venture capitalist or angel investor must determine what the fair market valuation is, explains Jon Medved, chief executive officer of OurCrowd.
“There are various methodologies we use to do this very difficult and complicated task. The art of this exercise is to arrive at a fair value, but since we are minority investors and investing in management teams rather than taking over a company with a control mechanism, we, therefore, look to leave in the early stages, the lion’s share of the equity with the management team and are very concerned that they are properly incented and have enough upside for which they are working.”
Startups need to continuously raise money as they are typically unprofitable in the first three to five years of their life cycle. The venture money is designed to take this risk. The valuations help to anchor the dilutions, and base-lines for venture capitalists to report to their underlying limited partners.
Kushal Shah, senior partner and head of the digital practice in Asia at Roland Berger, said: “The lead investor typically drives the valuation and key terms. Some of the new capital is in the form of convertibles and not yet priced [except for post-money cap definitions]. Other investors generally do not have any other choice but to follow the lead investor from a valuation and key terms perspective. In some rare cases, special terms are offered to value-adding investors as they bring more than funds such as business, skills, resources and etc.”
VCs in the region are a bit more grounded than in other markets and are generally looking for a launched product and various different signs or customer and revenue traction.
Hasan Haider, managing partner at Plus VC, said: “We have started to see an increase in the number of startups looking to raise funding, which is an amazing sign for our ecosystem. Startups are being considered a much more mainstream path to take than in the past few years, which allows us to uncover new talents and founders in the market that previously would not have considered starting a startup.”
“Unfortunately, many of them lack guidance when it comes to fundraising and will try to raise $2 million to $3 million on the back of a presentation with no product or traction. This seldom works. We have also seen amazing support for the ecosystem, both VCs and startups from many government entities in Abu Dhabi, Dubai, and Sharjah. This focus on enabling the ecosystem, investing in VC funds, and supporting startups in the early stages is amazing to see.”
The UAE is increasingly getting more comfortable with higher valuations. This confidence is supported by recent exits and increased competition from VCs for quality deals.
Vijay Tirathrai, managing director of Techstars, said: “Valuations in the UAE are vastly lower than, say, the United States and this has to do with the scalability of the addressable market, risks appetite, and maturity of the venture capital markets.”
Tirathrai says startups must get past technical, legal and financial due diligence to reconcile with the agreed valuations. If doesn’t pan out, then often this may require renegotiation and or at worst VC walking away from the deal.
“Once a deal is done, investors will insist on key milestones against future goals, capital expenditure, anticipated next raised, and an exit strategy if applicable. Above all, as companies mature and raise more capital, there will be increase scrutiny around reporting and increased governance and oversight,” added Tirathrai.
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