Capital Gains: How Digital Entrepreneurs Can Master The Essential Art Of Fundraising If you want to be on that fast track, you simply cannot wait for the day when your cash reserves will support you. You must find hungry investors that you can turn into believers.
By Talal Bayaa Edited by Aby Sam Thomas
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The Middle East's governments have always known that startups and SMEs form the backbones of their economies, employing the majority of workers, and producing the lion's share of the non-oil gross domestic product of their countries.
But even by regional standards, recent funding activity has been intensive. In Saudi Arabia, startup investment levels in the first half of this year grew by a staggering 65% over the same period in the previous year, with capital raised in the Kingdom accounting for around one dollar in every seven across the MENA region.
The surge was driven by deals like that of fintech firm Tamara, which closed a funding round led by Checkout.com for US$110 million. And in the neighbouring UAE, fledgling businesses attracted $755 million in the same period. When considering the number of these firms that are technology firms, it is apparent that this is a great time to be a tech entrepreneur in the region. Every government would be delighted to support the next tech unicorn.
Because of the cloud, tech firms have a shorter scaling path, and therefore -under ideal circumstances- a shorter path to an initial public offering. But those ideal circumstances all revolve around funding. Investors back the winner, and market share is normally determined by that backing. So, if you want to be on that fast track, you simply cannot wait for the day when your cash reserves will support you. You must find hungry investors that you can turn into believers. They are searching for a prospect with high growth potential, with the understanding that, for example, growth of just 10% can represent an exponentially greater return on investment for them. Here are some pointers for getting investors on board your enterprise:
1.CRAFT YOUR STORY When assessing the value of your company, investors will look beyond financials to your story and vision. Uber, for example, may be valued at much less when examined as merely a ride-hailing platform, than when viewed as a logistics powerhouse. So, your story needs to be about where you are going, rather than where you are, or even how far you have come. Take your pitch deck, preliminary data on financials, cap tables, market studies, and an information memorandum, and talk to potential backers. Build your story based on their feedback, rather than wasting precious hours and days crafting a message that may not resonate.
2. PROTECT YOURSELF (LEGALLY) Be careful not to give away the farm, in terms of articles of association, shareholders agreements, and veto powers, for investors. Consider legal advisors as one of the most important investments you will make. Do not settle for the cheapest one; rather, hunt for the savviest one. From seed rounds onwards, seasoned legal experts that specialize in venture capital and are part of a global firm will be invaluable in protecting you and other shareholders.
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3. BUILD YOUR NETWORK OF INVESTORS Many seem to believe they need to wait for introductions to investors, as if cold outreach is unthinkable. This is not an optimal approach. You do not need to reach out just regarding upcoming fundraising rounds. Try to have a call with a potential investor or investment banker every two weeks, to keep yourself front of mind. As you build your network, it helps to categorize investors. Identifying an initial set to test your pitch on can give you invaluable feedback that you could then use to iteratively refine your proposition, to the point where it is watertight by the time you approach the investors you're most excited about. Also, do not be afraid of keeping in touch with those who rejected you in previous rounds, perhaps on a quarterly or annual basis. The investor conversation then tends to be that much easier to have than a pure sales pitch.
Most investors are open to hearing your story, even if they are not ready to invest in you yet. Unlike consumers or businesses who may not be in the market for a given product or service, investors and venture capitalists are actively looking for companies with potential. When you start to get serious and enter "fundraising mode," however, make sure you are talking to the decision maker. Many funders use factfinders as a buffer, and the person you talk to may just be building metrics and gauging the market on their behalf, or assessing you against one of your competitors. Always remember to leverage your shareholder network to make sure you are face-to-face with the decision-maker.
4. GET THE TIMING RIGHT Timelines -getting all your investors to align around expressing interest and signing letters of intent- will be one of your greatest challenges. An advisor from an investment bank can prove useful in moving things forward. But while some regionally-based professionals will be prepared to help you with rounds in the $10 million to $15 million range, you can get away without using them up to the Series C round. From Series C onwards, however, investment bankers can prove not only useful, but necessary, and their absence can even deter investors from fully engaging.
At the end of the day, remember to raise as much as you can in each round of funding. Seek more backing than what you project you will need for the coming 18 months. Always try to close each round before the fourth quarter, so you can deploy the funds in the new year. Concentrate on your growth, as year-on-year progression remains a strong indicator for investors. The region is awash with success stories, and you can be one of them. With the right narrative, told well to the right audience, you can build your network, bide your time, and mount your funding campaign with confidence.
