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

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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

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.

Concluding thoughts

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.

TOP 30 fintechs. Money Fellows and Hala landed on Forbes Middle East’ list of 2023 Top 30 Fintech Companies in the region.

Hello Saudi! Khazenly announced the launch of their newest service Cross Borders that provides customers with a legit setup to sell in the KSA, including full-fledged logistics.

Hello Saudi! (#2) Citron launched its collections in Saudi Arabia as well as a local website.

Share with uni students and fresh grads: Gameball has opened applications for its fourth Summer internship program “Elevate”. This is a paid opportunity targeted towards university students and fresh grads. Apply by May 30.

Charity e-giftcard. Merit Incentives partnered up with the Noor Dubai Foundation as their Charity E-Giftcard Partner in the UAE.

Car reports on OpenSooq. CarSeer partnered up with OpenSooq to provide customers with Carseer reports directly from the platform.

• 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🥤?

Hasan