KHALEEJ TIMES, Saturday, Apr 10, 2021 | Shaaban 27, 1442
Startups’ engines rev up for pivotal 2021
Emirates:
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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