How are you coping?

In a parallel world, I’d like to take a more holistic look at cap tables – their shape and health, because some cap tables out there could benefit from some tidying up

Fixing (un)investable cap tables

Your cap table (CT) may not always look like your dream team, but a messy CT structure is sometimes the sole reason why an investor decides to pass on an investment.

Before I get to the types of messy tables, recall my recent address to founders: You should treat your equity like gold (or diamonds?). It’s about finding a balance between how much you want to own and how much faster you want the business to grow. Not striking that balance can often turn into an obstacle and render your startup uninvestable. Have no fear though; most messy structures can be tidied up over time. I think it should always be a joint effort of all shareholders – founders & existing owners/investors alike – to work together to avoid a state/situation when the startup becomes uninvestable due to an unhealthy ownership structure and cannot raise – which will negatively impact ALL existing shareholders.

Types of messy cap tables & how to fix them:

– Founders with <70% before Seed. Imagine a startup with 3 co-founders holding collectively 75% of shares before Seed, while no investor on the CT has more than either of the 3 co-founders… – this is quite a common scenario. What could raise an alarm are founders with <70% before Seed and an investor with a relatively high share standing out from the rest of investors. Founders that find themselves over-diluted before Seed may not feel as motivated and incentivized as founders with healthy ownership. That’s why it’s important to achieve the MVP phase without giving up too much equity for a relatively small amount of funding (usually hundreds of thousands of dollars). If you need to raise that initial round, use SAFE notes or vesting schedules. Also, be careful about the initial valuation and ensure it reflects your peers and the prevailing market conditions.

– An investor with a major stake. An investor with a stake of >50% can pose a clear threat to the health of the startup’s overall ownership structure and its investability in the future. Examples include startups that are products of spin-offs. Or startups that relied heavily and/or repeatedly on one investor. Example: a post-B startup with founders owning collectively 5% (over-diluted!), a major investor owning >50%, two other investors collectively owning 30% each and an ESOP pool. If new investors are to come aboard, it will be imperative for them to bring that one majority owner to a healthier% – perhaps through a secondary where the already-very-small founders’ ownership won’t suffer from dilution.

– No ESOP for C-level employees. Example: a startup owned by another company (55%) and a pool of investors (45%). The startup’s CEO has no shares although, in a fair world, he would have been given the co-founder title a long time ago. Unfair practices should have no place in 2023. (Don’t pick on my use of “a fair world” – we’re all aware that the meaning of that phrase has recently become a kind of mirage.)

– Unhealthy amount of inactive equity. Inactive equity belongs to shareholders who are not actively involved in the startup. Shareholders such as Friends & Family (F&F) and/or business angels who came in at a very low valuation in the founding phase. I’d like to argue here against the proposition that ex-founders’ equity should also be also considered a kind of inactive equity, because – in case of any founder – we shouldn’t forget their long-lasting contribution in the early years of the business and, as thus, they cannot be simply put in the same basket with F&F and other actual inactive equity owners.

– Too many investors. Having a CT resembling a colorful palette is not uncommon and it doesn’t have to be a bad thing as long as all investors are aligned with the founders’ vision. And quick to sign documents.

Any other (un)investable tables that you’ve seen out there?

Dtonic Corporation’s $1.5m investment in Retailo

Swvl’s FY2022 results

#PeopleOfEndeavor: Ahmed Wadi

Another proud #MadeInSaudi brand

Decoding fintech jargon

+1 photo from this week’s /MoneyTech in Kuwait:

• Treasury and ALM Manager at Money Fellows (Cairo)
• Strategy Lead at TruKKer (Dubai)
• Senior Graphic Designer at Subsbase (Cairo)
• Senior Payroll Specialist at Hala (Riyadh)
• Quality Assurance Engineer at Gameball (remote)
• Content Validation Specialist at Cartlow (Cairo)

Adeel will be leading NIC Karachi’s FI Session 13: Investor Pitch Review on November 17, where he will be mentoring startups participating in the NIC Karachi FI Summer 2023 Semester.

Take good care.

Hasan

We’re physically heading into winter (at last!), the VC world has been in a funding winter for some time now and instead of the predicted M&A wave one could assume it’s an M&A winter. Except that… in MENA, it’s more like autumn.

Signs of life in MENA’s M&A market (Q1-Q3 2023)

If you want to see MENA’s M&A numbers right away, scroll down to the pretty info-graph. If you want some background first, continue reading.

General observations:

– M&As are an inevitable product of the current economic environment and the declining trends in VC funding (although October numbers are painting a better picture – at least in MENA)

– The anticipated surge in startup M&As in 2023 remains anticipated

– Carta saw 543 startups shutting down due to bankruptcy/dissolution since the beginning of 2023 (a record high compared to any previous year) – more here

– Growing regulatory pressure in US and Europe has brought big tech M&A activity to a halt

– Europe witnessed more tech acquisitions than the US in Q2’23, and that’s a continuation of a trend of the last 6 quarters

– Between Q1’22 and Q2’23, US tech M&A revenue multiples dropped from 16.3x to 7.3x

– Alternative deal terms such as earnouts and seller notes are becoming more common

– Hot M&A areas: healthtech, cybersecurity, fintech, AI

And the region?

Our inhouse data indicates that the # of startup M&A deals in the region has been tumbling. There were 37 M&As in the ecosystem since the beginning of 2023 vs. 60 during the same period a year ago.

Even though that’s a drop, 37 is a decent number given historical stats. Only in 2022 had the same time period registered a higher figure of deals.

Where does this leave the founders?

Though there have been several new-fund announcements in the past couple of weeks, these funds will take some time to deploy and overwrite the funding slowdown. Until then, startup founders will (i) keep trimming their operational costs and (ii) be more likely to opt for the next logical option (-> get acquired) to overcome their inability to raise.

If you don’t think your company is sellable (e.g., you got high burn, team deficiencies, high customer churn, etc.), explore this option: trim the product fat, focus on whatever works from the current offering and spin it off as a standalone product. And also…

What’s your runway?

Exiting early is not what most founders envision for themselves – and the scenario can be often avoided. Stay conscious of your runway and start planning for the next fundraise earlier than you initially planned to.

P.S. We got one freshly cooked exit in our Fund II. Details to be revealed soon.

Made in Egypt apps feature Money Fellows & Lucky

Khazenly in Batch 1 of 500 Global Scale-Up Program in Egypt

LinkedIn’s Top 10 Startups in Saudi Arabia

300,000 insurance claims

Merit + Riyad Bank

A newsletter for class providers

• Software Engineer (Ruby on Rails) at Qoyod (Riyadh)
• Machine Learning Engineer at Carseer (Amman)
• Head of Growth at Money Fellows (Cairo)
• Credit Collections / AR Specialist at TruKKer (Riyadh)
• Junior Accountant at Cartlow (Cairo)
• Last Mile Coordinator at Khazenly (Zamalek)

 
Gitex? Dealmakers (Cairo)? Ping us.

Hasan

Pardon my French but this one’s a good entrée:

“As an industry we’ve become experts at content marketing the shit out of our wins, the shiniest versions of what venture and startups can be.” (Hunter Walk)

Content marketing remains a powerful weapon, but I feel like “the shiniest versions” are no longer welcome. Real > Shiniest. No more of that unhealthy FITYMI (= fake it till you make it).

Spoiler alert: You don’t have to fake it to make it.

A guide for those who don’t want to fake it until they make it (to prison, sometimes)

I’m sure each one of us knows at least one FITYMI story. Remember Elizabeth Holmes and the Theranos saga? That’s an extreme case of course; her FITYMI didn’t quite work and Holmes’ fraud cost her 9+ years behind bars. But it shows how far FITYMI strategy can take us…

Fake it until you make it is a way of life in which a person shows themselves as a success before they become one… They’re faking the confidence they need to get to where they want to get. That’s relatively healthy, until it isn’t. Often they end up faking much more than confidence: tech prowess, product viability, numbers, even customers…

I’m not saying you can’t get away with faking, but I feel like those who fake it almost always cross ethical lines… and the ecosystem became really cautious about “the shiniest versions”, the exaggerations and the overshot Moon landings. On the other hand, professional investors should make the effort to poke through the unreal façade created by certain founders. Posing specific, in-depth questions will reveal the founders’ true knowledge, put things in the right perspective and bring everyone safely back on Earth before any casualties may occur.

It’s clear to everyone that the bar for success is being continuously raised – because we’re maturing up.

So how can you make it without resorting to faking it?

The following steps may seem to you like a very repetitive preaching, but with the amount of pitch emails the team keeps receiving, I think we still need to do some more preaching:

1. CAN I SOLVE IT LIKE NO ONE ELSE? Don’t rebrand an existing solution. Yes, it usually takes an effort to find unique problems out there. Seek an “a-ha” moment. And once you find it – ask yourself: Can I solve it like no one else in the market? Yes? What are the barriers to entry for someone else? Can my unique solution transform into a unicorn? If you don’t have a strategy on how to deliver us the moon, then you shouldn’t promise it.

2. YOUR TEAM SHOULD BE SMARTER THAN YOU.

3. BUILD A TEAM BASED ON ACHIEVING MILESTONES IN YOUR OVERALL STRATEGY. Avoid recruiting a full-fledged team when you have no traction or validation.

4. SHOW US THAT YOU AIM TO MAKE REAL MONEY and not just burn it. Can you be profitable? When? What kind of customers will pay you? Can you win them over? How?

5. DO YOU KNOW WHAT YOUR BEST MARKETING STRATEGY IS? Your customers. They are never “just” your revenues and profits.

6. OPTIMIZE FOR THE NEXT STEP. Work today on optimizing for tomorrow. Like in business, like in life.

7. NURTURE HEALTHY CONFIDENCE.

The same applies to VC funds. I believe there’s no room for faking things and misleading. I also believe in showing all your cards to your investors. Are you scared to tell them about your little red flag? They’ll most probably find out about it anyway… and by then it could grow into a big red flag. So why not tell them from the start? Transparency breeds trust. While it may not be easy to inform your investors about a setback you’ve encountered, once they are aware that you’re addressing it and being honest about it, they will not only support you but also develop a deeper respect for you.

Imagine you’re consistently feeding your LPs with overvalued portfolio data and then one day one of the investments collapses. “Oh, it was only 6% of the fund size…” True. But it was much more of your TVPI, wasn’t it? This one failure ate up a big slice of the TVPI cake.

Transparency > eye-candy numbers. For startups and VCs alike. So that each one of us can enjoy the cake.

From us to you…. Our summer 💌:

$100M for healthcare

Who’s the people’s choice? Money Fellows.

Retailo & Hala got WIRED

Subsbase put on a new coat

Repzo + Al Fakher (Iraq)

The road to an IPO

• Software Engineer (Ruby on Rails) at Qoyod (Riyadh)
• Machine Learning Engineer at Carseer (Amman)
• Head of Growth at Money Fellows (Cairo)
• Credit Collections / AR Specialist at TruKKer (Riyadh)
• Junior Accountant at Cartlow (Cairo)
• Last Mile Coordinator at Khazenly (Zamalek)

 
See you next week at Reflect Festival in Cyprus. Αντίο! (read: Adío!)

Hasan

Some time ago Hasan Al Shami tagged Arzan VC in his post about the levels of SaaS founders’ equity at IPO – what’s the average ownership% and whether the founders share it equally – and Hasan was wondering if we got some data on MENA founders…

Thank you for the idea, Hasan. We do like good homework summer break or not. 🧮

Founders’ equity at exit (and before it)

Founders’ motivation to conceive and keep building their startups has different fuels. One of them is equity.

My focus here is the equity of not only SaaS founders but MENA founders in general. When I say “founders” – I’m referring to all available founders in one company, so it can mean either solo founders (in case of 1 founder) or a group of co-founders (in case of startups with multiple founders).

In case of multiple founders it’s not a rule that each of them gets the exact same share of equity, and my research will confirm that. The truth is: equality is quite rare and, in case of 2 founders, co-founder A (the lead “founder”) tends to get higher share than co-founder B (and there are similar inequalities among 3/4+ co-founders). For example in the US, only 41% of 2-founder startups split the initial equity equally (50/50).

Let’s have a look at the life of founders’ equity from the startup’s inception until several stages later. Note: MENA exit equity data doesn’t grow on trees, so we’ll have a hint of that + the equity trends before exit.

Founders, it’s all about finding a balance between how much you want to own and how much faster you want the business to grow. Equity decisions should be made early on, before the business is worth a lot. 1% today can one day become few hundred grand, if not few millions. Aim at having a bigger stake for as long as possible although, when the right time comes, higher dilution is a natural course of your equity’s life. Because when the exit comes and you’re left with only a small piece, that 15% you got at exit is probably valued at more than your 50% several stages ago. The pie value changes much faster than your share of pie.

Jason Lemkin’s study of 27 pre-IPO startups showed that 62% of them had founders with equity less than 20%, and the avg. founders’ ownership was 15%, while only 11% had shares less than 10% at the pre-IPO stage.

How much equity do MENA founders give away with each round?

Let’s break it down by stage, and before we do, bear in mind that the sample of companies is diverse in its sectorial make-up and it entails of 30 startups. Most data lie in Pre-Seed to Series B, with only 2 entries per Series C and D.

22 out of the 30 startups (73%) have multiple founders (mostly 2). And only 6 out of those 22 (27%) split the equity equally among the co-founders. Like I wrote earlier, this finding was expected. Not all co-founders contribute equally – moneywise or timewise.

And here’s the dilution% stage by stage, based on the median founders ownership at each stage. The dilution% is pretty much even, with an avg. of ~20%:

I won’t be name-dropping, but one business stands out too loud thanks to its acquisition before Series A, which is quite early in the game. Its 3 co-founders (with equal shares) parked whopping 61% collectively. You can tell this company is an outlier because both average & median for Pre-Series A are in 42s%. I should add that it was a strong exit and each of the co-founders walked away with millions of $ (you need 2 hands to count them).

3 startups reached an exit/IPO stage with an avg. of ~22% in founders’ equity. This pattern matches with the rule of thumb that dictates founders to park no less than 20-30% collectively for themselves at exit (in an ideal world). Some companies may raise 5 rounds and arrive at exit with 20% left, some may raise 7 (including extensions and bridges) and walk away with much less % but much more $ in their pocket if the valuation rose with each round.

For comparison, 3 other startups haven’t yet reached an exit/IPO stage and, contrary to the rule of thumb, their founders are already well-below the 20% threshold. One of them is actually below 10% but that’s still acceptable because: it’s a single founder so he doesn’t have to split his share, the company is beyond Series C, nearing profitability and considering few M&A options.

Final notes:

1. If you’re a founder, get to know the cap table mechanism inside out and don’t think twice about asking for help. We’re here for that. Also, try out some modelling and keep your actual cap table tidy and up to date.
2. Make equity decisions early on.
3. Get familiar with anti-dilution protection to weather down rounds. Just in case.
4. Did I say you should keep your cap table tidy? It helps all the parties.
5. There are no written rules to giving away your equity. Remember: the value of the pie usually changes much faster than your share of it. Here’s to mighty rich pies! (I mean rich in flavour, too :P)

Dook by Taker: 3, 2, 1… launched!

Cartlow’s Nour Sleiman among Forbes’ 20 Women Behind ME Tech Brands

Merit’s footprint across 150+ countries

TruKKer Academy ⛟

Mamas & Papas love Citron

Klaim + Lendo

Recognized at Seamless: Money Fellows

• Senior DevOps Engineer at Money Fellows (Cairo)
• Senior Software Development Engineer (PHP/LARAVEL) at Cartlow (Cairo)
• Senior Software Engineer (Backend) at Hala (Riyadh)
• DACH Region Sales Head at TruKKer (Berlin)
• Senior Marketing Operations Specialist at Qoyod (Riyadh)
• Commercial Supervisor (Saudi Nationals Only) at Retailo (Riyadh)

Till next month,

Hasan

2023 vintage may be the best one of the decade, but will it be clean enough?… friendly enough to our environment?

Although cleantech is already on the region’s radar and already helping counter & prevent environmental damages and climate change in the region. I will tell you which verticals show room for growth.

A clean slice is served below.

Cleantech 2.0 meets MENA

Could the future major cleantechs come from the Middle East? Yes.

Achieving energy efficiency is no longer a luxury. It’s a necessity. Especially in our region – one of the most vulnerable ones in the world when it comes to the impact of climate change. Water scarcity, rapidly increasing waste levels, uneven access to reliable electricity, food insecurity from the agricultural point of view… But – who knew that one day the cheapest energy on our planet would come from the Middle East? (Solar, not oil.)

The next great disruption in MENA could be about access to clean, affordable energy and clean water. And good clean things are well underway. Back in 2016, Morocco had 28 renewable energy mega projects – the most in the region at that time. Much changed ever since – and more so in GCC:

Saudi Arabia pledged to implement a 50% renewable energy mix by 2030 and achieve net zero carbon emissions by 2060. NEOM aims to run on 100% renewable energy. Just few days ago Saudi Arabia’s Regional Voluntary Carbon Market Company announced plans to launch a carbon credit trading exchange in early 2024, and the kingdom’s Ministry of Investment has also signed a $5.6 billion deal with Chinese electric car maker Human Horizons. And the Strategy of Resolve that Saudi Arabia embarked on together with UAE is another milestone. The newly established UAE Carbon Alliance aims to support the transition of companies to a green economy, as set out in the UAE Net Zero by 2050 Strategic Initiative. And the Emirates recently announced a project for solar-plus-desalination plants. Qatar is not lagging behind; its carbon-neutral 2022 FIFA World Cup is just the tip of the clean-berg. The country’s Minister of Environment and Climate Change recently inaugurated the Environmental Pioneers initiative, although Qatar Airways’ CEO sounded doubtful about the aviation industry achieving net-zero emissions by 2050. Bahrain, GCC’s smallest oil producer, aims to double renewable energy targets to achieve 20% of the total energy mix by 2035. Interestingly, Bahrain’s F1 Grand Prix 2023 was the circuit’s most sustainable race ever with all circuit usage for F1 being covered by clean energy. When they say hydrogen, think of Oman, because it plans to become a competitive low-emissions hydrogen supplier by 2030 with 1 million tons produced annually, and 8.5 million tons by 2050 (which would be more than total hydrogen demand in Europe today). They also aim to phase out all fossil fuel powered vehicles by 2050. And then there’s Kuwait which has set out to achieve carbon neutrality in O&G by 2050, with 15% of renewable energy within its energy mix by 2030. It has also unveiled plans for XZero City, a sustainable net-zero community for 100,000 residents in the south of Kuwait.

Let’s talk about the local ecosystem. I analysed 104 cleantech startups in total and most of them are active in circular economy (waste) and renewables (mainly solar and some wind). In terms of geography, a quarter of the pool is based in Egypt, followed by UAE (15%) and Lebanon (14%). Have a look:

ROOM FOR GROWTH: Energy storage and decarbonization show much room for growth, while resources (hydrogen), built environment (construction) and energy storage remain largely untapped.

By now we all know that cleantech investments can be profitable. For communities and for investors alike. As far as Arzan VC goes, I’ll be blunt and say that we don’t have a clear-cut cleantech investment strategy, but we have already invested in cleantech via our Fund II. For example, Cartlow (UAE) is a re-commerce platform which tackles the environmental damage caused by e-waste.  

Here’s to the Cartlows of tomorrow. We need you.

‘Fintech Leader of The Year’ = Klaim’s Karim Dakki

Qoyod + SlneeIT

5 years of Citron

Summer internship programs by SubsBase and Lucky

Mejuri is coming to Miami!

+1 photo with Armada Delivery team

• VP of Technology and Product at Klaim (Dubai)
• Scrum Master at Money Fellows (Cairo)
• Business Development Specialist at TruKKer (Jeddah)
• Junior Accountant at Khazenly (Cairo)
• Account Manager (Americas) at Merit Incentives (remote)

Happy vacations.

Hasan