I believe that the 2023 vintage may be the best of this decade.
We are raising a $60M fund – our 3rd fund – and… are some of you are raising eyebrows now? It is a bold move given the times we are living in, but the timing is right. Other VCs are raising north of $100M – I say that’s ambitious but let’s hope they make it.
Each time a VC is raising a fund they will tell you now is the best time to invest. Of course they have to tell you that… But I’m going to tell you something else: invest in all vintages.
Why should you invest in all vintages?
Just like prevailing climatic conditions determine how a specific harvest year will turn out, VC funds are influenced by the prevailing market conditions in its vintage year.
Let’s look at IRRs of early-stage venture funds based on their vintage:
There is no linear correlation between S&P 500 Annual returns with dividends and Median Net IRR of early-stage venture funds (r = 0.04). Is there any other way we can predict performance of a specific vintage? Yes. The prevailing valuation environment.
Deploying in a lower-valuation environment like the one we’re in right now (2023 vintage) should allow VC funds to ride on a wave of economic growth in the next season, and it typically signals a better vintage performance. Down-rounds and flat-rounds during the 2008-11 financial recession outperformed the up-rounds (and the opposite happens in bull years).
Let me explain the evolution of MENA’s valuation environment through our funds:
AVC I (2015 vintage) started looking at deals in 2014 when MENA’s VC market was in its early days. There were very few startup investments happening because the space wasn’t crowded (that’s why we label ourselves one of the earliest VCs in the region). It was hence the best time to start investing and we made 17 investments in the coming 4 years, mainly in the region plus a few outside. AVC I had its investment period over by end-2018 – in parallel with our growing regional ecosystem – and that turned out very well for us: 5 great exits (Careem, POSRocket, Tamatem, Wrappup, Onfleet) and 4 more to go in the near future inshallah. Take-away lessons: A well-balanced portfolio of 17 startups (majority in the region); T&L (TruKKer, Armada Delivery), e-commerce (Mejuri, The Luxury Closet), mobility (Careem)… coupled with low valuations at entry and strong markets during exits took us a long way. If you ask me if we can duplicate this stellar fund performance, my answer is no because MENA VC 2015 vintage was a very strong one due to a mix of specific attributes (an untapped ecosystem with a limited number of VC players and plenty of first-mover startups) that I don’t think we will get to see again soon (or ever).
AVC II (2019 vintage) offers a different story. Our ecosystem was growing full steam ahead in 2019. Regional governments began backing VCs and incubators. Global PE/VC had a lot of dry powder. Valuations kept soaring and some entry points became very expensive. AVC II was done investing by mid-2022 – at the peak, and since then the global as well as regional startup valuations have been in decline. Take-away lessons: Deploy funds throughout the investment period even if you can deploy faster (i.e., 1-2 years). Despite AVC II’s exit window finding itself in a low/lower-valuation environment, the fund’s solid foundation and our balanced-portfolio strategy will ensure that the fund will sail through intact and generate good returns. We invested in a few not-so-tech startups like Citron and Haseel – to keep the portfolio balanced. E.g., Haseel supplies food (veggies & fruits) – and food is needed at all times. Moreover, 48.6% of the fund’s volume went into KSA-based companies, hence the market impact is expected to be less severe since KSA (i) has the ability to attract talent (regional and international), (ii) has a solid financial sector and (iii) has just started its growth journey.
AVC III (2023 vintage) is deploying in a low/lower-valuation environment and we got 3 warehoused investments (Nearpay, Money Fellows, Hala). Our strategy remains largely unchanged: we are industry-agnostic in our approach, sticking to MENA + adding a small allocation for Pakistan. The current, more reasonable valuations allow us to target good deals at “the right price”. We strongly believe that an investment in the GCC is and will be the most secure and stable investment for the next 10 years (x US facing economic challenges, de-dollarization, banking instability; x high inflation in Europe; x talent relocation from Europe to UAE & KSA). The GCC is where we should invest because of political stability, strong financial markets, strong currencies, visionary leaders and talent influx…
Many regional VCs were created in 2019 and afterwards – and since these vintages are not going to perform as expected, some of those VCs might not be able to raise again… expect seeing more zombie funds. Also, less funding means less competition. So – like in 2015 – future funding rounds should be priced reasonably, and that’s one of the many reasons why we’re expecting AVC III to have a very solid fund performance.
We’ve recently seen how badly “all-eggs-in-the-same-basket” can turn out. Investing directly in “once-upon-a-time” hot startups proved unbalanced and risky for many around us.
But there’s a solution to getting the best even out of a “worse” vintage: Invest in any and every vintage regardless of the current market status. Definitely don’t invest all your money in one year. Very importantly – make sure that the fund manager of your choice has a track record of well-balanced portfolios that survive both good and bad times. Our funds prove to have that strength.
Companies that survive 2023 will emerge stronger, more efficient and more sustainable.
We’re ready to continue backing and building.
TL;DR (too long; didn’t read)
I show why it's important to allocate your money across all vintages and with a fund manager who has a track record of well-balanced portfolios. I focus on the evolution of MENA's valuation environment since 2015 and explain what Arzan VC has been doing to ensure solid fund performance even when it’s a recession time outside the window. Vintage 2023 should turn out to be the best of this decade and pave the way to real sustainability.
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- Associate Growth Product Manager at Zid (Riyadh)
- Business Development Executive at Cartlow (Riyadh)
- Principal Frontend Engineer at Money Fellows (Cairo)
- Senior Developer at CarSeer (Amman)
- Product Owner at Qoyod (Riyadh)
- Accounting Associate at Retailo (Karachi)
I’ll be in UAE on May 24-25 along with our CFO Adeel. See you around🥤?