Chapter 8: Private Equity and Venture

Capital in the MENA Region

 Introduction: Private Equity Funds
1. Private Equity Fund (PE) is pooling of financial resources of institutions and high net worth individuals
(HNWI) in a fund managed professionally. The private equity fund invests in existing companies at
various stages of development but not in startups or listed companies. PE investments tend to be
medium to long terms.
2. Managers of PE firms are often referred to as general partners (GPs), while investors in the PE funds
are known as limited partners (LPs). This indicates the limited liability of the investors, who are risking
their contribution to the PE but not their entire wealth. LPs have representatives on the board of the
PE but they do not interfere in the day to day management of the fund, this is left to the GPs.
3. While listed companies are liquid, transparent and open for all investors to use (you do not have to be
wealthy to own listed stocks), PE firms tend to have portfolios that are illiquid, expensive and
exclusive for the rich (minimum ticket of $500,000).
4. With the developed stock markets becoming increasingly efficient and information more widely and
instantly available, it is challenging – if not impossible – for fund managers operating in efficient
markets to gain an edge and deliver alpha on a consistent basis. This efficiency is less pronounced in
the world of private equity investing given that:
• The majority of PE investments are directed towards unlisted private companies where
information, by definition, is less freely available
2
Typical Lifetime of a PE Fund of 10 years during which PE
Investments go through 5 stages:

0–1Y
Formation

1–2Y
Fund raising

1.5 – 4 Y
Investment

2–7Y
Management of Portfolio Companies

4 – 10 Y
Exit

1 2 3 4 5 6 7 8 9 10 Years
3
 The Five Stages of a PE Fund
1. Formation/Organization stage: Here the GPs organize the firm, prepare prospectus with
lawyers detailing to the partners. 1) Minimum capital commitment from the LPs, 2)
Partnership agreement, 3) Capital and life span of the fund 4) Staffing of the PE fund ,
5)Focus of the fund: targeted sectors and companies, and 6) Exit strategies
2. Fund raising stage: PE firms do not advertise in newspapers or online to raise funds, instead
the GPs reach out to LPs and other investors they know including family offices, SWF, HNWI,
pension funds, Insurance companies and HENRY (High Earnings Not Rich Yet). Reputation
and connections of the GPs are paramount for the success of the fund raising effort.
Investment banks are sometimes called upon to act as placement agent for a fee. PE firms
use excessive leverage as a funding method and in order to reduce their taxable profits
(benefiting from the tax advantage that debt has over equity)
3. While LPs make funding commitment to the GPs when joining the fund, only a small portion
of their committed capital is immediately drawn upon (Capital Call 1) to reach first closing.
There would be second and third closing dates. The drawdown of the capital through
successive capital calls allows the GP to maximize the IRR on the investment. The IRR is
measured from time of drawdown till exit.
4
4. Investment stage:
- After the first closing, the GPs approach existing companies requiring growth capital as targets
for investments. Experienced PE managers can identify potential targets, including family
businesses, who need additional capital to expand but are not yet ready for an IPO.
PE firms may be invited to participate in a club or syndicate deal with other PE firms. This would
allow them to diversify their exposure and share the risks on a transaction that requires more
capital than what could be provided by one firm.
- Valuation of unlisted companies is one of the most challenging aspect of investment analysis. -
The PE invests at the agreed upon valuation, using leveraging when acquiring a target.
5. Managing Portfolio Companies: Companies stay in the portfolio of PE firms from 2 to 7
years before exiting. During this period the GPs: 1) Put in place the right management., 2)
Establish a professional board with appropriate corporate governance (audit, internal
control, etc.), 3) The right business plan and strategy , and 4) Follow on investments if and
when more capital (debt and equity) is needed.

5
6. Exit Strategies:
- Most PE firms target a minimum IRR of 25%-35% annually over the life of the fund. When a
liquidity event happens it allows the PE firm to exchange its shareholding for cash either
through :
1) IPO on the country’s exchange or a regional exchange (Nasdaq Dubai) or internationally (LSE
or NYSE).
2) Trade sale: an outright sale to a strategic buyer (e.g a large company operating in the same
field), Proctor & Gamble buying Fine, Uber acquiring Careem, Amazon buying Souk.com, etc.)
3) Secondary buy out: sale by one PE firm to another PE firm.
4) Management buyout: management of the company will acquire debt financing amounting to
80% to 90% of the value of the company to buy it, using the company as a collateral, then turn
it around to become profitable.
- Once the investment is liquidated the PE firm distribute the proceeds as follows:
1. LPs receive back the capital they invested + the hurdle rate of say 6% - 8% as specified in
the limited partners agreement.
2. Any excess profits are then allocated among LPs and GPs (80% to LPs and 20% to GPs).
The GP’s 20% is called performance fee paid on top of the 2% management fees paid
annually on the committed capital.
6
 Committed Capital of PE Fund of $100 million
Management fees
of 2% annually of
the committed First closing $50 million GPs will start
capital is paid to (capital call 1 immediately) investing the funds
GPs to cover
expenses

Second closing $30 million

(capital call 2 after 3 years)

Third closing $20 million

(capital call 3 after 5 years)

Exit of total investment Less management

fees paid to GPs (years 7 to 10)

7
 The Rising Importance of Private Eqyuity Firms
Since the 2008 financial crisis, Blackstone, Apollo Global Management, KKR and Carlyle among
others have refashioned themselves into the supermarkets of the financial industry. They span
areas of traditional finance long dominated by banks and asset managers.
Globally, private equity firms managed $6.3 trillion in assets in 2021 — more than four times
what they oversaw before the financial crisis in 2007. Over the past three years, shares of
Blackstone are up more than 145%, while Apollo and Carlyle are up more than 85% and KKR is up
about 130%.
The belief that private returns will be superior reflects a variety of contestable arguments: that
investors can earn an “illiquidity premium” for having their money locked up in assets that do
not trade freely, or that private markets are less efficient than public ones, allowing skilled
managers to exhibit consistent outperformance. 
But the financial crisis provided PE with two key catalysts. First, record-low interest rates for
more than a decade have pushed investors to seek out higher returns through riskier
investments. Second, as government regulations forced banks to pull back from riskier areas,
private equity firms jumped into the field and started offering private debt.

8
 Is Private Equity Overrated?
Investors have poured more than $1 trillion into global private equity funds in the past 5 years. That
amount exceeds the cash directed to venture capital, real estate funds, private debt, hedge funds and
just about any other form of alternative investment.
It’s not hard to see why: Investors have been told over and over again that these private equity funds
produce the best returns, far outperforming the stock market (and just about everything else). As a
result, private equity has become the hottest home for institutional money, whether that of pension
funds, endowments or sovereign wealth funds. Lately, retail investors have also bet big on the strategy.
As of December 2021, private equity funds had produced a 17.2% annualized return, net of fees, over
the previous 10 years, compared with 13.7% for the S&P 500. Private equity is sitting on a mountain of
cash. At the end of the first quarter this year, U.S. private equity funds had $841 billion in so-called dry
powder, or money that was still to be invested.
In 2021, private-equity (PE) firms sealed over 13,000 deals globally, worth a combined $1.8 trillion,
more than in any previous full year. Private buyers have bought Sydney airport, Italy’s phone company,
the French football league and Saudi Arabia’s pipelines. Private-capital firms have raised $1.1 trillion
from end-investors last year, not far off the highest-ever annual level recorded in 2019 (see chart 1).
 

9
 Private Debt funds raise $191 billion in 2021
The global private debt funds raised $191.2 billion in capital in 2021, constituting an
increase of 12.1% from $170.5 in 2020, and the number of private debt funds
reached 185.
On a regional basis, funds in North America raised nearly $124.3 billion in 2021 and
accounted for 65% of the total, followed by funds in Europe with $57.4bn (30%), in
Asia with $5.7bn (3%) and in Oceania with $3.8bn (1%).
Further, there were 51 private direct lending funds, or 28% of the total number of
private debt funds in the market in 2021, followed by general debt and real estate
debt funds with 33 each (18% each), mezzanine and credit special situations funds
with 20 each (10% each), distressed and venture debt funds with 10 each (5%
each), infrastructure debt funds with 6 (3%), and bridge financing funds with 2 (1%).
In parallel, global private capital dry powder, or the amount of capital available for
PE’s fund managers to deploy, reached $175 billion at the end of 2021, compared to
$166.8 billion at the end of 2020. 

10
11
12
 The Rising Importance of Digital Platforms for PE Funds
1. The emergence of Fintech helped bring together potential investors (Limited Partners) with
PE managers (General Partners) through digital platforms, thus broadening the universe of
investors to include the less affluent ones. Digital platforms can also allow the investor’s cash
to be spread across several opportunities available on the PE platform thereby diversifying
their risk.
2. In addition, the private equity fund manager (GP) will gain higher operational efficiency by
‘outsourcing’ the Know Your Customer (KYC) function to the platform. Interested investors
will utilize the platform as a search engine for potential investments, allowing private equity
managers to promote their proposition to a new customer segment .
3. Typically there are several elements which are collated by the platform into a single score for
any enterprise: These include 1) Direction/Trend score that measures the individual
performance of a target company relative to its peers using information from social
media, news sentiment, mobile usage, web traffic, hiring trends, and customer engagement
among others, 2) Financial Score, considers the financial strength of a company based on
corporate capital structure, financial history, investor quality and cash burn.

13
 RealBlock as an Example of a Platform for Global Distribution of PE Funds
RealBlocks is a technology enhanced, custom white-label primary fund and feeder fund platform
that allows PE funds and other alternative fund managers to automate the on-boarding of global
investors, connect with global placement agents and third party marketing firms to accelerate
fundraising efforts, and access secondary trading. The platform provides a la carte technology
solutions for alternative managers to simplify the administration of alternative investment
solutions. Its Value Prop include:
1) Allowing for global distribution of primary PE, Real Estate and Alternative Investments funds
to high earning investors (not necessarily HNWI)
2) Delivering automated subscription and investor onboarding
3) Providing built-in secondary trading to allow for enhanced liquidity to investors in liquid funds
4) Provide faster, cheaper cutting edge delivery of alternative products to market
5) Expanding Distribution: Reduced fund set-up time, and costs
6) Online Onboarding: Automated investor onboarding ( KYC/AML), In-platform subscription,
fund administration, Customized, white-labeled interface
14
 There are more than 20 large PE firms in the Region
Managing 120 funds. The Largest 9 are:
1. Investcorp (Bahrain)
2. Citadel Capital (Cairo)
3. Eastgate Capital (Jeddah)
4. Amwal Al Khaleej (Riyadh)
5. Gulf Capital (Abu Dhabi)
6. Growthgate Partners (Dubai)
7. NBK Capital Partners (Kuwait)
8. Gulf Investment Corporation (Kuwait)
9. Foursan capital (Amman)

Before collapsing in January 2018 , Abraaj capital was the largest PE firm in the region with
assets under management in excess of $14 billion.
15
 Overview of PE in the MENA Region
1. PE firms in the region scarcely use excessive leverage as a funding method (the PE industry
abroad has debt to equity ratio in excess of 75%). The relatively low taxation especially in the
GCC, does not provide sufficient incentive for excessive debt financing. This is why regional PE
firms were not much affected by the financial crisis of 2008 and Covid-19 crisis of 2020. They did
not have to get rid of assets at fire sale prices as had happened elsewhere when loans borrowed
became mature and could not be refinanced.
2. With the exception of Investcorp, which is listed on the Bahrain Stock Exchange, most PE firms
in the region are privately held. Internationally, PE firms like Carlyle, KKR, Blackstone, Apollo
etc., are publically listed companies.
3. In the US and Europe , LPs typically limit their role to providing capital to the GPs. In the MENA
region LPs are more involved, they provide their networks for both sourcing and exiting the
deals. The importance of relationships, strong networks and connections are key requirements
of doing business.
4. Most of the PE firms in the region have focused on either providing bridge capital, opportunities
in which the investment is made for a relatively short period of time requiring little or no
operational change "quick flips", with a hold period of 1-2 years, or on providing growth capital,
becoming strong minority stakeholders (up to 25%), who would help transform the family
business into a professional corporation. 16
PE Investments by sector and Country(%):
2015-2021
Morocco Lebanon Outside MENA PE Investment values by sector
1% 2% 4%
Oil and Gas Transport
5% Other
Turkey 11% 4%
15% Financial
Services
Services and 7%
KSA education
21% 13%
Jordan
13% F&B
8%

IT
UAE 8%
7% Consumer goods
Egypt Tunisia 33%
19% 8%

Healthcare
11%
Other MENA
9%

17
 Funds Raised and Investments Completed
1. Investment activities are now well spread across the region. Whereas in 2010-2014, over
75% of investments by value were concentrated in the UAE and Saudi Arabia, in 2015-
2021, Egypt, Jordan, Tunisia and Morocco each accounted for 10 or more deals as
managers were able to more effectively deploy across a range of geographies.
2. Private equity focused on consumer driven sectors such as retail, healthcare, Food &
Beverage and education (accounting for over 60% of investments by value), with an
understandable and expected shift away from investing in the oil and gas sectors given
the volatility in oil prices (oil field services companies had previously been among the
more favored targets).
3. Funds raised in the last two years declined from the high seen in 2014-2017. The
downfall of Abraaj Capital in 2018 from being the world’s largest emerging market PE
firm to becoming the world’s largest insolvent PE firm has had a detrimental impact not
only on the MENA ‘s PE industry but also on Dubai’s regulatory environment , especially
the DFSA .

18
4. Average investment size has been at around $15 million, reflecting continued focus on
SMEs or on minority ownership in acquired companies. There were only a few buyout
and other large deals of $100 million. Standard Chartered Private Equity Fund invested
$ 175 million to acquire 25% of FINE, a Jordanian headquartered major integrated
tissue manufacturer.
5. Consumer goods (including retail), followed by services and education, saw the highest
levels of activity in the past few years reflecting the commonly held investor focus on
businesses that directly benefit from the region’s relatively young and growing
demographic profile.
6. PE investment activity in 2015-2021 was more widely spread across the region than in
2010-2014 when the UAE and KSA attracted over 75% of PE investment by value. This
reflects a positive trend with most funds being GCC or MENA centric and diversification
of invested capital across the region should be regarded positively.

19
 Exit Strategies for MENA’s PE
1. Since the PE industry in the MENA region is still in its early stages of development, only a
handful of PE companies have been observed to exit in recent years. Most of the PE sponsored
IPO’s were listed in Dubai, whether on the DFM or on Nasdaq Dubai (e.g. Aramex, Arabtec,
Damas, Depa). So far there has been no PE sponsored IPO’s in the more liquid Saudi market.
Founding members (including PE firms) are not allowed to sell their holdings in newly listed
firms before the end of a 5 year holdup period required after listing.
2. Petrofac, Damac, Al Hikma, Gulf Marine opted to list on the London Stock Exchange (LSE) and
Anghami listed on NASDAQ. While there are few drawbacks such as taxation and stringent
requirements of disclosure and regulations, nevertheless companies perceive several
advantages when listing abroad:
1. Higher valuation in efficient markets and more liquid secondary markets
2. Strong equity research coverage boosting the companies international profile.
3. Institutional investors rather than retail investors
4. Prospects of index inclusion in the future allowing them to benefit from passive investment
5. Large number of listed comparable companies
6. Stronger corporate governance,
7. The holdup period for founding members after the IPO is relatively short 20
 Ample Opportunities for PE Industry in the Region
1. Although many sectors in the region are directly or indirectly linked to oil, there are ample
opportunities in such industries as Food & Beverages, retail, healthcare, education, financial
services, renewable energy, travel, telecom, chemicals, cement, paper products, and others.
Companies benefiting from strong long-term fundamentals such as access to a growing
demographic segment, captive customer loyalty, pricing power, a technological breakthrough
and those that have the potential to grow regionally and abroad will attract more PE
investments.
2. Private markets, in general, tend to lag public markets. Consequently, lower valuations are
generally expected, allowing private equity firms to acquire assets at reasonable valuations.
3. Private equity firms are fast emerging as viable alternatives to bank lending, moving from
providing equity to providing debt and equity. Moreover, IPO market in the Gulf countries has
picked up recently, further enhancing the clout of PE firms in supporting growth of private
companies before taking them public.
4. Private equity as an asset class will continue on its path to maturity through increased
secondary transactions and a sharper focus on operational improvements in portfolio
companies.
21
 Private Equity in Lebanon
1. Before the financial crisis that started in 2019, Lebanon ranked in the 8th place in the
MENA region in terms of PE investment value, but in the 4rd place in terms of number of
investments. The UAE is in the first place in both criteria, followed by Saudi Arabia and
Egypt. Around five PE funds are still active in the Lebanese market including Emerging
Investment Partners (EIP), SFO Capital Partners of Saradar Group, EuroMena, Lucid
Investment Corporation, and FFA private Bank.
2. PE firms in Lebanon has s concentrated on the middle market, that has a yearly turnover
ranging between $3 million and $20 million. To diversify risk, PE firms usually invest less
than 15% of the size of the fund per company. Through its $100 million fund EIP is targeted
deals between $5 and $10 million per company with a 5 to 6 year exit plan. The emphasis
has been on Food & Beverage, education, IT, fast moving consumer goods and industrial
sector like chemicals, paper, cement, etc.
3. Because Beirut Stock Exchange is still underdeveloped, PE funds find it difficult to exit the
targeted company through an IPO, instead most exit deals are executed through a trade
sale, selling the targeted company to an institutional investor.

22
 A Secondary Market for Private Equity Investments
1. Investors wanting to exit a PE fund before the end of the lock-up period (up to10 years)
need to find a buyer for their stake in the secondary market. This may not be readily
available at the desired price. Also, a fund nearing its expiry date may find itself still
holding a large number of its investments.
2. A new GP-led deals has sprung up to fill a gap in the secondary market. GP-lead deals
place the responsibility on fund managers, known as general partners to find buyers.
Such deals have grown world wide from just 10% of the secondary market in 2012 to
over one third in 2021.
3. GP-led deals offer liquidity to investors during a fund’s normal lifetime. In the US and
Europe, secondary stakes are selling on average at just 5% discount to their net asset
value. In South America, the going discount is about 30%.
4. GP-led transactions have not yet surfaced in the MENA region. It is estimated that
private equity secondary transactions in the region may reach $50 billion in 2030.

23
 Challenges for PE industry in the region
1. PE in the region is falling behind other rival asset classes in the competition to attract Islamic
funds, even though PE is basically asset based. Sharia compliant PE funds have failed to take off due
largely to Sharia regulations prohibiting excessive debt financing. In the few deals that were Sharia
compliant, the PE fund stepped in to deleverage the business (replacing excessive debt by equity).
2. The family offices in the region are well funded competitors for PE firms. They prefer co-
investing with PE firms on a deal by deal basis rather than become themselves LPs in the PE fund.
However, as family businesses continue the transition to the third generation, they are likely to:
◦ Divest non-core assets that PE firms may be interested to buy.
◦ They need growth capital to expand as many of them are not yet ready for an IPO.
3. Both political and economic instability, as well as, the regulatory environment, the financial crisis
in Lebanon, and the collapse of Abraaj Capital posed significant challenges to PE investors:
◦ PE investments are of long term nature that require political and economic stability.
◦ Bankruptcy regimes are not well developed in the region
◦ A key value proposition for PE Funds is acquisition financing, still limited in the region.
◦ Post the collapse of Abraaj Capital and the financial crisis in Lebanon, PE investors are
questioning whether the regulatory environment in the region is sufficiently safe for PE .
24
 Behind the Spectacular Collapse of Abraaj Capital
1. Abraaj, that used to be the Middle East’s biggest private equity firm, was founded in 2002. It
rose over the years attracting global investors by offering easy access in hard-to-invest, but fast-
growing economies in the Middle East, Asia & Africa. Before its collapse in early 2018, the fund
managed almost $14 billion, accounting for more than 75% of all PE managed funds in the
MENA region. Abraaj attracted various regional and global institutional investors such as the Bill
& Melinda Gates Foundation, the World Bank’s International Finance Corporation, Britain’s CDC
Group and Proparco Group of France.
2. The problems of Abraaj began in late 2017 when investors in its $1 billion health-care fund,
grew worried. Nearly $280 million out of the $545 million committed funds were not spent on
acquisitions in the health care sector, as is standard in the industry. Abraaj blamed delays in the
construction of hospitals in Pakistan and Nigeria for not investing.
3. Abraaj’s liquidity position was eroded when the proposed sale of a 66.4% stake in Pakistan
based K-Electric failed to be completed. The company had agreed to sell the asset to Shanghai
Electric Power Co. for $1.77 billion in October 2016, but the deal did not go through due to
negotiations over electricity tariffs with the Pakistani government. This has affected cash flow of
Abraaj Group which has eventually pushed it to seek liquidation.
25
4. It became evident that there was a lack of adequate governance and an overall weakness in
the company’s control framework. Funds had been commingled, diverting money from the
Health fund to cover operating costs of the group. Abraaj borrowed heavily to fill the gaps and
ended up with more than $1 billion in debt. Fees earned barely covered half the company’s
operating costs. While it is true that PE firms thrive by borrowing money to fund acquisition, they
don’t use debt to pay for basic expenses, especially if such expenses were excessive.
5. Faced with a crisis of confidence among investors, other PE players in the region who
intended to raise capital felt the heat as their fund raising plans have either been impacted or
abandoned completely.
6. The PE firms in the region may now be subject to greater investor’s scrutiny and stricter
regulations. The Abraaj incident could bring in positive changes to MENA’s private equity ,
including proper governance, internal control measures, enhanced transparency of
operations and better disclosures and reporting standards. Going forward, we envisage
greater emphasis on independent board members and corporate oversight to become the
norm for PE firms in the region.

26
 Venture Capital Financing Startup Firms in the MENA Region
1. Startup firms find it difficult to get financing from traditional sources. Commercial banks are
not willing to lend to new companies with no assets, no revenues, and no track record.
Startups turn to venture capital funds to get equity financing and advice.
2. Founders draw first on family, friends and fouls to get started, then they approach
incubators/angel investors for seed money, followed by venture capital for second stage
funding before approaching private equity firms for growth capital.
● Family, Friends, Fools  Incubators/Accelerators  Angel Investors  VC  PE
3. Venture Capital is a professionally managed pool of money used to finance new and often
high risk startups. VC firms screen hundreds of targets before deciding on few startups to
invest in. Only 1 out of 20 startups chosen in stage one makes it to the next stage.
4. Venture capitalists have to listen to lots of fairy tails from would be entrepreneurs arguing
that “the world will look different because of their idea” .
5. Investing a small amount in a startup is like buying an option to invest in the future, with a
seat on the table that allows you to have all the information needed to make future
investment decisions. Of course, the option could expire without any value.
27
6. The VCs receives many proposals for funding from startup ventures, however the majority
of the requests are rejected. Only promising ventures with:

• Potentially high returns generating 10 to 30 times the initial investments.

• Those who have a credible founding team and there is a potential market for the product,
preferable at the regional level (e.g. Souk.com)
• A visible exit strategy where the company can be sold eventually to a strategic buyer.
• Diversification of risk, investing small amounts in several startups hoping one will make it big.
• Investments by VC funds in startups worldwide reached $300 billion in 2021, up from $86.6
billion in 2014. Of the 10,000 VC announced deals, 46.8% were in North America, 17.4% in
China, 15% in Europe, 10 % in India, 2% in Israel, and 8.8% in the rest of the world including
less than 0.1% in MENA.
• Around 35% of total number of VC deals worldwide went to the E-Commerce, followed by
Fintech (16%), Telecom (15) , Healthcare (14%), Education (12%) and Gaming (10%).
• In 2021, Mena startups raised $2.87 billion collectively, almost four times as much as the
amount raised in 2020.

28
VC funds are different from PE funds in that they invest in risky startup firms and draw on
engineers and IT professionals to help identify new and emerging technologies. PE funds
draw on finance professionals to assess the valuation and profitability of existing businesses
with a track record.
Types of Venture Capital Firms

1. Professional VC firms:
These dominate the industry where General partners own the VC fund.
2. Financial VC firms:
These tend to be subsidiaries of investment banks.
3. Corporate VC firms:
Subsidiaries of companies in high tech sectors e.g. Google, Facebook, Amazon,
Microsoft, etc.

29
Despite investing relatively modest amounts over the decades, America’s VC funds have
seeded firms that are today worth at least $18 trillion of the total stock market. This record
reflects the dizzying ascent of the big tech platforms such as Google, Tesla, Twitter, etc.
More recently VC backed unicorns (private startups worth over $1bn) have come of age in a
bonanza of public listings, ranging from Rivian to Slack.

Over the past golden decade, an index of American VC funds has made compound annual
returns of 17%. A few have done much better than that. Meanwhile, with interest rates still
low, pension schemes, sovereign-wealth vehicles and companies are scrambling to allocate
more cash to VC funds.

Approximately 90% of start-ups fail, out of which 10% fail in their first year. Start-up failure
is most common in years two through five, with 70% of them falling into this category. One
of the important sets of choices often overlooked by founders that causes this failure is
organization design. Assembling a proper start-up team for a new and emerging start-up is
consequently critical.
30
CEO: The Chief Executive Officer — The Dreamer
The CEO is the most important player in your startup. The CEO is usually the company’s
founder, who is in charge of the firm’s overall direction, vision, and culture.

CTO: Chief Technology Officer — The Engineer

A member of your team who specializes in technology and development is critical to the
success of your start-up. Although you can recruit freelance front-end and back-end engineers,
having someone on your team in charge of this area can be beneficial.
CSO: Chief Sales Officer — The Hustler
Your company’s sales department is led by the Chief Sales Officer, who ensures that revenue
and sales growth targets are met. This person oversees sales and other responsibilities include
directing all sales-related activities, such as evaluating, implementing, and reporting on sales
tactics that will increase revenue and help your firm expand.
CMO: Chief Marketing Officer — The Growth Hacker
This member of your team will concentrate on your clients and how they perceive your product
or service. Hiring a professional with outstanding marketing and promotional skills is critical to
ensuring that your concept reaches a large audience.
Chief Financial Officer (CFO)
Having someone on the team who is accountable for the money and has a keen eye for
detail to manage all elements of the company’s finances is critical given that in the
beginning, there will be some difficulties like acquiring bank funding and leasing premises,
as well as day-to-day tasks like paying suppliers and managing the company’s cashflow.
Business Development Manager
A smart business development manager seeks new business prospects both within and
outside of your organization. They’ll think of new markets, areas where you could
expand/grow, new collaborations, ways to reach new markets, and strategies to appeal to
ideal customers while doing so. Stage 2: The Scale-Up Era
At the “Scale-Up Phase”
When you have the proper people on board, your start-up can only grow. To keep your cost
low, hire those who are absolutely necessary for the operation, and outsource the rest.
People who can do things that a program can’t, who are full of fantastic ideas, and who are
multi-skilled are the types of hires you need.
The rush of capital has
pushed up prices. Seed-
stage valuations today are
close to where
“Series A” valuations (of
older companies that may
already be generating
revenue) were a decade
ago. The average seed
valuation for an American
startup in 2021 is $3.3
million, more than five
times what it was in 2010

35
In 2002, 84% of venture activity, in terms of value, took place in America. That share is now
about 49%. China’s share grew from below 5% in the 2000s to 37% in 2018, before its tech
crackdown brought it down to nearer 20%. Capital has instead sought greener pastures in
Europe, Southeast Asia and MENA.
Riskier biotechnology, crypto and space ideas are being backed by VC funds. Moderna, a
pharmaceutical company that produces covid-19 vaccines, was spun out of Flagship
Pioneering, a VC firm. Green tech, which saw a boom and bust in the 2000s, is resurgent. 
Although the average American VC’s assets under management rose from $220 million in
2007 to $280 million in 2021, that is skewed by a few big hitters. The median, which is less
influenced by such outliers, fell from $70m to $48m. But this is not to say that the industry
has become dominated by a few star funds. Market shares are still small. Tiger Global, for
instance, led or co-led investments worldwide worth $5bn in 2020, just 1.3% of total
venture funding. Startups have diverse enough needs so there is plenty of scope for a
variety of vc firms to exist, reckons

36
37
38
39
40
Startup Sector / Industry Location Amount & Round Investors
Rain Finance Bahrain $6M, Series A led by Middle East Venture Partners (MEVP)
Tamara Finance KSA $6M, Seed led by Impact 46 and regional investors
Zbooni Ecommerce UAE $5M, Series A led by an undisclosed London-based fund
SpiderSilk Technology UAE $2.25M, Series A Co-led by Global Ventures and STV, along international angel
Solution investors.

Hakbah Finance KSA $1.2M, Seed Funded by a group of undisclosed investors

Casabana Technology & AI Egypt $1M, Seed Led by Disruptech, Other Fintech and angel investors
Eljaro Finance KSA $850k, Seed Saudi Arabia-based angel investors
Nearpay Finance KSA $600k, Pre-Seed Musaab Hakami and a group of angel investors
Odango Transportation Egypt $600k, Seed Essa Al-Saleh, former CEO of the billion-dollar logistics
company, Agility Logistics.

Ynmo Education KSA $500k, Seed Wa’ed, the entrepreneurship arm of Aramco
Gocash Finance Jordan $300k, Pre-Seed Undisclosed
Opio Fashion Egypt $300k, Seed Angel investors
Cwallet Finance Qatar $220k, Pre-Seed Founders and MBK Holding
Hi-express Technology Iraq Undisclosed amount, Seed Iraqi Angel Investors Network (IAIN)

Ziina Finance UAE Undisclosed amount, Seed OTF Jasoor Ventures

 Venture Capital in the MENA Region
1. The UAE continues to dominate the startup industry in the MENA region accounting for 20%
of total deals in 2021. UAE startups secured $577 million or 56% out of the $1,031 million
raised by regional startups last year. Egypt came in second with 17% of the total , followed
by Saudi Arabia with 15%.
2. Lebanon that ranked third in place out of 14 countries in the MENA region in terms of value
of startup investments in 2018, with $60 million investment, dropped to the fifth place in
2020 with $20.6 million accounting for 2% of the region’s total, and to less than $15 million in
2021. The number of startups in Lebanon witnessed a more than threefold increase from 11
to 37 companies  between 2013 and 2018. Similarly, investments reached $60 million in
2018, compared to just $7 million in 2013. 
3. Lebanon’s regulatory framework and inability of LPs to repatriate capital are the main
concerns for entrepreneurs. Entrepreneurs relate this to three main aspects:
1. The defacto capital control in place.
2. Inability of VC to provide funding in fresh dollars and commercial bank’s
inability/willingness to lend
3. The high rate of failure of homegrown startups after the financial crisis.
◦ 

42
 Are You an Entrepreneur?
• All humans are born with an innate desire to create, it is part of our DNA, as demonstrated by
toddlers drawing creatively on iPads or constructing objects with Lego sets.
• Entrepreneurs have a high appetite for risk, they are always looking for something new, they
accept failure as part of the risk-taking process, willing to try again.
• They have leadership characteristics moving ahead of the crowd rather than following them.
Their passion to their innovation is infectious affecting their team members.
•They challenge the status quo, looking for:
i. Transformational innovations (Metaverse)
ii. Incremental innovation, a new way of doing things or reaching the customer.
iii. Disruptive innovation (new product or service, new business model e.g. Neobanks, Uber,
Ripple, Airbnb, etc.)

43
 The Need for a Supportive Ecosystem
An environment in which they can start a business, availability of funding sources;
incubators/accelerators, VC funds, exit outlets (PE, IPO, etc…)
1. A culture where it is acceptable to take risk and fail. In most of the region, bankruptcy and
failure are considered to be socially degrading and should be avoided at all costs. In several
countries honest, insolvent entrepreneurs are treated like fraudsters. The majority still
prefer to invest in hard assets like property, industry, stocks and bank deposits.
3. A good education system that encourages critical thinking and problem solving (e.g. AUB).
4. Supportive bankruptcy laws and other legal and regulatory framework including protection
of property rights. Failure can mean a prison term if debts are not paid on time.
5. The availability of a secondary IPO market where SMEs can list, thus providing a successful
exit opportunities for investors in startup companies. (e.g. Nomu market for SMEs in Saudi)
6. Flexible labor laws that allow companies to hire and fire workers and pay employees
bonuses with stock options.
7. Less bureaucracy, Seeking approval from slow moving government agencies can add years to
a business plan.
8. Fast and efficient internet systems (G5, WiFi, Fiber optics Internet, etc.).
44
Funding of Startups in the MENA Region: Three rounds of Funding
Online Applications to Incubator
Selection of startups

Incubation, hosted for 100 days on premises, providing

training, mentorship, IT, business plan, etc. providing the
first round of funding

$10,000-$50,000
Second round of
funding
Angel investors
($50,000-$200,000)

Exi
t
the
VC (3rd round of funding): $200,000 - $1,000,000

PE/IPO
inc
ub 45
Crowdfunding

Crowd investors:
Startup companies Small
Crowdfunding platform
Raising equity investments in
several startups
1. Screening of Startups
2. Provide advice on business
plans and target valuation
3. 3% fee on the amount
raised
4. Does not take investment
risk only reputational risk
46
1. Crowdfunding platforms allow startups to raise equity directly from the general public.
Anyone with a convincing idea can go to a crowdfunding site and ask the crowd for small
sums of money which when added would bring the targeted amount.
2. The crowdfunding platforms screen the startups and only those approved are posted on
the platform. They provide startups with the advice needed on business plans and charge
3% fee on the amount raised from the crowd. Investors allocate small amounts to several
startup ventures (risk diversification). There are over 500 crowdfunding platforms globally
with Kickstarter and Indiegogo of the US being the largest.
3. The first MENA crowdfunding platform Eureeca was established in Dubai in 2012. So far
Eureeca has been successful in raising $10 million to 20 businesses across a variety of
sectors. Zoomaal was the second crowdfunding site in the region, established in Beirut in
2013. The average pledge made by each crowd investor in the MENA region was just
$200.

47
 Valuation of Startups
1. Valuing a startup with no track record, no revenues (losses), no tangible assets, no
competitors or peer group to compare to and with a high probability of failure is quite
problematic. Besides, it is difficult to come up with weighted average cost of capital
(WACC) since startups have no borrowing.
2. A classic investment approach is to invest small amounts in several startup companies
where many are expected to fail, but if one makes it big, it will compensate for losses
elsewhere. Investors look for the following pre-requisites:
• The startup serves an attractive market (local/regional) with growth potential
• A strong entrepreneurial team in place
• Need a lower amount of capital to achieve financial independence
• Has potentially a meaningful exit, i.e. there could be a group of buyers interested in the
venture.
• Startups of the kind that has done well recently

48
 Venture Capital Valuation Method
• This method values the target startup company at a time in the future when it starts
generating positive earnings. The future value is then discounted back to the present using a
target rate of return (TRR) instead of WACC. The TRR is the rate of return that the VC firm
requires when making such a risk investment.
TRR would incorporate:
1) Risk of failure
2) Lack of a diversified sector (most VCs tend to concentrate their investments in one or few
sectors (IT, media, Ecommerce, Fintech ,Biotech, etc.) with venture capitalist drawing on
their knowledge of that sector. PE firms are more diversified than VC firms.
3) Few comparable companies to draw upon for estimating average P/E , price to book, etc.
TRR usually ranges between 30% - 80%.

49
 A Single Round of Funding
• Assume a VC is considering investing $3.5 million in a startup company that would not
require additional capital till year 5 when its earnings are forecasted to reach $4 million. The
comparable companies already operational in that sector are few with an average P/E of 15.
The investor’s TRR rate is 50%.

• To find the future value of the company in year 5 :

• Given average P/E ratio of comparable companies of 15, earnings forecasted by the startup
to reach $4 million in year 5
P = E x 15 = $4 x 15 = $60 million (future value of startup company in year 5)

• PV of the company = today

• With an investment of $3.5 million the VC will own of the startup.

50
 Multiple Rounds of Funding
• A company established by 2 entrepreneurs has 1,000,000 shares issued and capital of
$500,000. One year later, an angel paid $100,000 and ended up owning 10% of the company.
This implies that the investor has valued the company after the injection of capital at $1
million.
• Post money valuation = $1,000,000 = Pre-money valuation + $100,000
• Pre-money valuation = $900,000
• Pre-money valuation per share = a share (pre-money number of shares = 1,000,000)
• New shares issued to the angel investor at the Pre-money price per share of $0.9 = =
111,111
• Total number of shares = 1,000,000 + 111,111 = 1,111,111

• The founders now owns The Angel investor owns =

51
• Second Round of Funding

A venture Capital fund decides to invest $4 million at a pre-money valuation

of $5 million , i.e. the VC valued the firm at $5 million
Accordingly, price per share = = $4.5
◦ Post money valuation: $4 million + $5 million = $9 million

◦ New shares issued: = 888,888

◦ Total number of shares outstanding following the second round of funding:

1,111,111 + 888,888 = 1,999,999

52
 Carried Interest
The issuance of additional shares:
◦ Reduced the equity of the founders to = 50% from 90%.

◦ The Angel investor is now diluted to = 5.5% from 10 %

◦ The VC investor owns = 44.5%

◦ Carried interest = Post money valuation x (% ownership of founders)

= $9 million x 50% = $4.5 million
= $4.5 - $0.5
= $4.0 million which is sweat equity or the value assigned to the founders
hard work, patent, etc…

53