Though Saudi Arabia is rich in financial resources, startups there often find it difficult to access to funding especially in early stages. However, the rise of more specialized venture capital firms is altering this situation.
Wamda’s Status of the entrepreneurship ecosystem in Saudi Arabia, highlighted two reasons behind the Saudi ecosystem’s funding gaps: risk-averse investors looking for more mature startups, and entrepreneurs that are not familiar with what the investors really want.
This is why Inspire Ventures urges entrepreneurs to know what they want from them, before applying for an investment.
Three friends launched this firm in Riyadh in December 2016: entrepreneur Farooq Al Jeraisy, founder of digital travel agency Almosafer; investor Rakan Al Akeel who previously worked in providing banking services to businesses; and businessman Fahad Al Mousa.
Inspire Ventures joins a large pool of funding solutions in Saudi Arabia, especially in the capital where more than 60 percent of funding sources and accelerators are present.
While venture capital funding is provided in different investment stages, Inspire Ventures focuses on providing seed investment usually used to fund R&D and team expansion. In return, it gets a share of the startup that differs in each case.
So far, Inspire Ventures has made two investments in Saudi startups: they invested one million Saudi riyals (around US$266,000) in Aamer for booking cleaning and maintenance service workers; and an undisclosed amount in Ngwah for food delivery ordering. The company is also considering investing in two additional startups.
What does a venture investor want from an entrepreneur?
As failure is always expected in the venture investment field, an entrepreneur seeking this type of funding must at least have a minimum viable product (MVP), a feasibility study, and a business plan.
Al Akeel believes a “startup is a temporarily small company that will grow bigger in a few years.” Hence, it should be scalable and reach a big segment of the market through its product. As Inspire Ventures targets the seed stage, it rather focuses on the product more than acquiring users.
The Saudi investment company also focuses on the entrepreneur himself. “We prefer dealing with an entrepreneur who dedicates his full time to his startup, and who has a flexible and an easygoing personality. These are important traits in the business field, especially in the startups’ ecosystem,” said Al Akeel.
He added that the VC firm’s mission is to help entrepreneur through funding, consultancy and training, and not to do the job on his behalf. This means that taking big decisions is up to the entrepreneur, whereas investment companies only interfere in cases they deem necessary.
Al Akeel explained that as an investment company, they monitor their investments in order to limit any potential risks. “When we find that the team is not following the initial plan, we review if their behavior would affect the numbers we had agreed upon. Afterwards, we discuss it with them to agree on what the second move would be,” he said.
Evolution is a must
The Saudi ecosystem has significantly evolved in the past few years. In the same line, the government has increased its support to the ecosystem through the SME Autorithy. This environment has driven founding investments and venture capital funds, including Malaz Capital, N2V and STV, to expands their operations in the Kingdom.
However, the venture capital sector in Saudi Arabia still requires effective steps to evolve, including a change in mentality, planning and execution.
Al Akeel pointed out that the structure of venture capitals in the Kingdom is not as clear as that of investment funds, equity funds, and listed companies. This was made clear when “we invested in Aamer and legal procedures took a very long time”. There is also a need to solve some small administrative procedures that can hold an entrepreneur back such as municipality licensing for example, he added.
The sector’s needs are not only related to regulations. Entrepreneurs also need to be more aware about the field, especially new ones.
Al Akeel said that they encountered difficulties in dealing with several entrepreneurs because they did not know about venture capital or about strategic planning of their startup. Many didn’t even know at which stage their company was.
The startup gets funded depending on its stage. It often starts with bootstrapping and funding from family and friends, then secures potential funding from an incubator and accelerator before getting to venture capital.
There are five stages in venture capital investing: seed stage, launch stage, growth stage, follow-up (bridge) stage, and the later stage (which precedes IPO).
To solve a part of this issue, Inspire Venture launched a pitching platform within their website that allows entrepreneurs to fill an online form to apply for an investment. It should include necessary information such as their company name, the sector it operates in, its value proposition, its financial information, among others.
The pitching platform allows the investment company to access data about entrepreneurs and market trends. Furthermore, Al Akeel believes the ecosystem in Saudi Arabia needs to start their own R&D system to save data, statistics and surveys of the market; something similar to what the SMEA is doing.
Feature image via Stockvault.