Open the gates

Here’s the thing – entrepreneurship is the hot topic in the region and thankfully, governments and institutions have caught on. Whereas small business lending was the primary method of involvement from governments in the past, today we are seeing much more in terms of training programs, the introduction of new licenses and structures, as well as funding efforts.

Having said that, in order to encourage growth in the sector, there needs to be a favorable environment for venture capitalists to operate. There are positive initiatives being announced in an effort to create such an environment. For example, Bahrain Development Bank has recently announced a $100m venture fund of funds. In the UAE, a new venture capital regulatory framework has been put in place to guarantee a standard of governance for the asset class, thereby increasing its competitiveness and attractiveness. Saudi Arabia, on the other hand, is exploring different platforms to invest in VCs and attract them to the market.

But where do we stand and why is this really important?

Government funding programs vs. VC funding – what difference does it make?

While most government funding programs are created because of social and political reasons, VC’s are founded with the aim to generate high returns to their Limited Partners. Due to this critical difference, we conduct our business in very different ways.

VC’s are crucial for the success and development of every entrepreneurial ecosystem. Like any other industry, if competition is there, the venture capitalist will be pushed to develop and innovate in order to differentiate themselves from other players. Startups will ultimately receive a better “service,” and will see that the financial support is secondary to the added value provided by VC’s. Moreover, founders will be able to shop between VC’s and choose the right partner. Over time, VC’s will start to narrow down their segment focus to achieve expertise and will recruit high caliber team members and experts to ensure competitiveness.

With that in hand, strong VCs will be able to intelligently filter and invest in top startups with solid teams and products. At this stage, great entrepreneurs have been funded while VC’s are continuously upping their game. This environment will attract more high-potential entrepreneurs to pursue their dreams and the ecosystem will flourish.

Going back to our topic, If governments want to take on the VC role, who will they compete with? With the absence of LP’s, how will their performance be evaluated? Their teams probably would not have a carry incentive scheme, so how can we gauge commitment? Would fixed salaries of team members push them to select the best startups or focus merely on the value deployed and the number of companies funded? How will procedures, layers, and bureaucracy affect responsiveness?

Alright, so what can be done?

All of us ecosystem participants (VC’s, founders, governments, etc) have the same ultimate objective of building a thriving ecosystem, but each one of us has a different driving force. We need to work towards meeting our individual goals to collectively benefit the overarching goal for the government: job creation, economic development, and progress. In order to achieve that, I believe we need to see the following:

1. Define roles: there are many players in the ecosystem and everyone’s role is very important, however, we fall into the trespassing problem. This problem will only be solved if we can define each player’s role and be disciplined about it. If everyone is dedicated to their roles, an ecosystem can flourish efficiently with fewer obstacles ahead.  Government roles can include ensuring proper legal structures and protection are in place as well as reforming taxation and labor policies.

2. Say no to direct funding: I am a strong believer that governments should not fund startups directly. They should act as enablers and regulators. Why? Simply, they do not have the required DNA which can match that of a specialized investor. In addition, government officials are influenced by politics and many other social aspects all which influence their decisions and vision.

3. Collaborate: GCC governments are working in silos when it comes to solving VC’s and entrepreneurs’ challenges. Collaborations between governments will speed up the process,  allow better knowledge sharing and bring all countries up to the same level.  I take part in many of these discussions and there is a significant difference between where each country stands. Will we see the day where entrepreneurs are allowed to expand cross-border and operate in the region more easily, allowing them to grow their businesses and attract foreign investment? We sure hope so.

 

TL;DR (too long; didn’t read)

Supporting the booming entrepreneurial ecosystem means also creating a favorable environment for VCs. Regional governments can get on board with this by focusing on empowering entrepreneurs, leaving funding to investors, and collaborating with each other to create a thriving ecosystem.

 

Read the whole ArzanVC July newsletter here

April: Are you in amman?

April: Are you in amman?

We’re back again with some great news this month, most recently our investment in Swvl! We’ve also been working on a couple of transactions we will be announcing soon.

Our beautiful startup studio and co-working space, Blender, is coming to life and we’ve opened up applications! You can have licensed offices, dedicated desks, and more.  Here’s a peek…

blender-space

Lastly, we took a look at the state of startups in Jordan.

Enjoy!


Jordan Tech Startups

Ten years ago, reports described Jordan as the Middle East’s Silicon Valley in the making.   Jordan, backed by the king’s efforts and armed with a large developer community and ample human resources, led the pack with its number of tech startups and notable exits.  However, over the years this growth has been stunted by laws and regulations that were not fully conducive to entrepreneurs’ needs.

Forward to today, the general take is that Jordan has lost its edge.  Tech sectors are growing in the region, with entrepreneurship moving up on every country’s agenda and the startup bug hitting young individuals everywhere.  Nevertheless, Jordan continues to be one of the regional leaders in the ICT field, with many tech founders across the region originating from Jordan.  For this month’s market map, we took a look at 84 active Jordan tech startups and the sectors they are focusing on. We then identified areas of development or gaps in the market where we would like to see more action.

market-map-Jordan

With a vast proportion of the Arabic content on the web originating from Jordan, a large number of startups we found are operating in the media and content category.  This includes information resources about the weather (Arabia Weather), food recipes (Atbaki), and everything in general (Mawdoo3).  Several content producers are focusing on video content (e.g. Istikana), audible content (e.g. Masmoo3, Sowt) and content for children (e.g. Shablol, Kharabeesh).

E-commerce was the second largest category and includes a range of businesses from multiproduct stores (e.g. OpenSooq) to platforms for buying hardware (e.g. Jafar Shop), books (e.g. Jamalon), apparel (e.g. Jobedu), real estate (e.g. AqarCircle ) and many more.

The technology category is a broad group that includes companies doing innovative things such as mapping technology (e.g. Navcode), assistive technologies for the deaf (e.g Mindrockets), and chatbots (e.g. Arabot, Eila).   Several companies provide tools for the web such as website builders (e.g. websity.me) and website translations (e.g. dakwak).

The fintech sector in Jordan is more developed with companies offering payment services (e.g. CashU, Hyperpay), crowdfunding (e.g. Afkarmena, Liwwa ), and lending (e.g. Solfeh).

In the health tech category, companies provide remote doctor consultations (e.g. Altibbi), medical information (e.g. Webteb), and medical marketplaces for suppliers and end users (e.g. Aumet).

The edtech sector in Jordan has been quite active with startups offering online courses (e.g. Edraak), peer to peer tutoring (e.g. Gattaa), learning management systems (e.g. edaura), and specialized training courses (e.g. Salalem).

Several companies in gaming publish games serving the Arab market (e.g. Tamatem, play3arabi).

The social category covers networks that connect a variety of groups including travelers (e.g. Friendture) and readers (e.g. Abjjad).  It also includes social media management tools that help with automation and customer service (Sortechs, Sadeed).

In enterprise tools, companies are building sales CRM tools (e.g. Repzo) as well as libraries of professional documents (e.g. Hashdoc). Related to enterprises, in the jobs and recruiting field are sites for general recruitment (e.g. Akhtaboot) as well as temporary home maintenance jobs (e.g. 3oun).

Other sectors
The bookings category includes reservations for events (e.g. Sajilni) and restaurants (e.g. Reserveout). In design, companies are building platforms for homeowners and designers (eg. Darpedia), creatives (e.g tasmeemME) and crowdsourced interior designs (e.g. eldesigners).  Lastly, in food and grocery, local companies deliver groceries (e.g. iMoneh) and home cooked foods (e.g. Bilforon).

📌Untapped

These are the segments that have many startups in global markets but are not yet fully exploited in the Jordanian market. For example, for a small regional market, many players look to immediately scale outside of Jordan to grow.  The SaaS model of startups lends itself to this type of growth and is one of the main reasons why we’d love to see more come out from Jordan and the region in general. Another interesting untapped sector is travel technology, which potentially includes rewards management software, trip financing, corporate travel apps, flight claim and compensation services, and destination-specific content, to name a few.

Although there are companies that offer some of the functionalities listed in the Untapped box, we are still not seeing single players dominating these categories and it would be interesting to see how they evolve.

Know of other leaders in the Jordanian market?
Think you could use one of those untapped services?

Join the discussion at #arzanVCchats !!


Welcome to the fam

Fresh off the press – we’d like to introduce you to Swvl, our latest investment. We participated in the series A round in Swvl and are proud to welcome its founders Mostafa Kandil, Ahmed Sabbah and Mahmoud Nouh to the ArzanVC family.  Swvl is reinventing transportation in Egypt by connecting commuters with private buses and allowing them to reserve and pay for these buses through its mobile app.

Swivl-founders

What do we like about Swvl?
We’ve been in Egypt many times and we’ve seen how commuters (men and women) squeeze in vans and buses with discomfort, hoping to reach their destination safely. Commuters face this daily struggle and they deserve to upgrade their experience! We believe that Swvl’s amazing team and technology are fit to solve this problem through optimization of this chaotic experience.


Family Postcard

C to the Izz-o
Trukker.ae is now ISO certified for Quality, Health/safety, and Environmental standards.

Because you love airports
Tamatem launched a new game, Airport City, so you can build and manage one yourself.


Till next month, keep working…

Hasan

To the Kingdom 👑

To the Kingdom 👑

Hey folks,

February has been an action-packed month for us and for our portfolio companies, what a great start for the year!

We mentioned in our January newsletter that we are looking at Saudi startups for 2018 and this month’s piece is our take on the market.  Definitely eyeing those SaaS models 👀!

Enjoy!

To the kingdom

2017 was a transformative year for Saudi Arabia. The kingdom saw reforms across the board, including an encouraging strategy to focus on technology and innovation as drivers of economic growth.  Along with government institutions, such as the SME Authority, an increasing number of entrepreneurship support organizations, from incubators to training programs are working toward nurturing and pushing the ecosystem forward.  In addition, new trading licenses allowing foreign entrepreneurs to set up businesses will attract more founders and investors to the market going forward.

These developments, combined with an inflow of capital, open up great potential for innovation.  For this month’s market map, we took a look at 113 active Saudi tech startups and the sectors they are focusing on. We then identified areas of development or gaps in the market where we would like to see more action.

E-commerce is the most prevalent category and the first stop for most startup ecosystems. They include a range of businesses from multiproduct stores (e.g.Ashal) to platforms for buying cars (e.g. car7araj), books (e.g. Rofoof), and many more.

As covered in previous maps, the food & grocery space is massive in MENA. In Saudi, this category includes multi-vendor food delivery sites (e.g. Hunger Station), grocery delivery (e.g. Nana Direct), restaurant POS systems (e.g. Foodics) and restaurant review apps (e.g. Qaym).

Several companies in on-demand services provide platforms for hiring workers for short terms tasks, such as handymen (e.g. Sakrobe), home cleaners (e.g. Matic), and movers (e.g. Vanoman). Similarly, delivery and logistics includes services to purchase and deliver almost everything (e.g. Mrsool).

In the healthcare category, companies provide remote doctor consultations (e.g.Cura), appointment bookings (e.g. Sihatech), and diabetes management (e.g. Sokry).

The edtech sector in Saudi has been quite active with startups offering online courses (e.g. Rwaq), online tutoring (e.g. Noon), and learning management systems (e.g. Acadox).

Enterprise startups include technologies and services built for businesses. They include recruiting platforms (e.g. Shoghul), employee offers (e.g Walaplus), and accounting software (e.g Qoyod).

Other sectors
Picking up slowly, the fintech sector includes payment service providers (e.g.Faturah) and crowdfunding (e.g. Mojtm3 Ta2). In travel, companies provide bookings (e.g. Almosafer) and local guides (e.g. Daleeli). The transportation category includes startups providing ride-hailing services (e.g. MyTaxi), as well as GPS tracking for fleet (e.g. SafeRoad), school buses (e.g Hafilaty) and family drivers (e.g.Sawwagy). In the social category, companies are providing social media analytics (e.g. Lucidya) and social networks (e.g. Sarahah).   Media startups are creating online content (e.g. Uturn), audiobooks (e.g. Dhad) and publishing platforms (e.g.Qalam).  Companies in bookings help users discover and book salons (e.g.Spoilee), events (e.g. HalaYalla) and photographers (e.g. Sawerly).  Lastly,technology is a broad category that includes companies doing innovative things such as 3d mapping (e.g. Falcon Viz) and crowd management (e.g. Hoshood).

📌Untapped
These are the segments that have many startups in global markets but are not yet exploited in the Saudi market. For example, in oil and gas tech, large players such as Saudi Aramco Ventures have invested in US startups providing drilling-related analytics and IoT.  It would be interesting to see technologically advanced localplayers help the oil and gas industry manage its complexities. Another interesting untapped sector is construction technology, which potentially includes project collaboration software, inventory management, and specialized drones.

Although there are companies that offer some of the functionalities listed in the Untapped box, we are still not seeing single players dominating these categories and it would be interesting to see how they evolve.

Know of other leaders in the Saudi market?
Think you could use one of those untapped services?

Join the discussion at #arzanVCchats

Family Postcard

Flippin’ fantastic
Tamatem raised $2.5 million to grow their MENA presence, work with international game developers and hire top talent.

Armada raised its Pre-Series A investment to grow their team and expand into Saudi and Jordan.

Virtual Insanity
CoContest launched PillarVR, a new tool to help architects and interior designers transform 360 renders into VR tours for clients.

Show ’em what you got
Looking to take your FIFA game to the next level? Bidvine, the platform to hire local service professionals, is offering Professional Gaming Coaches to help you learn from the best.

Lastly, we wish our readers in Kuwait a happy national and liberation day.

Keep it real,
Hasan

can’t access your file

can’t access your file

Happy new year to all of you!

We came back in January refreshed and ready to roll ⛷️ .

Before I jump into the newsletter, I would like to start by wishing Anurag Agarwal – who is family before he becomes a colleague – all the best in his future endeavors. Anurag has decided to join Oman Tech Fund (OTF).  Anurag was a star at ArzanVC and his departure is a loss to the team and to me personally. He will continue to be one of ArzanVC’s family members and a reason why ArzanVC is what it is today. OTF, you’re lucky!

Back to our scheduled programming…
This month we kicked off construction on Blender, our coworking space. We’re renting out licensed office spaces as well as individual desk passes. Our founders get extra perks as well, which we’ll be sharing soon 💃 💃.   If you are looking for a space in Kuwait or know someone interested, hit us up here for more details.

We’ve also been looking at a couple of interesting companies and follow-on investments, and expect deals to pick up this quarter. In 2018, we are specifically interested in Saudi based startups! This is in line with our strategy to launch our KSA office in the next few months. In light of that, this month, we’re sharing our piece for founders on organizing documents.

Get your “house” in order

We’re beginning a new year and I’ve asked AVC Venture Partner Anurag to share his tips for founders on organizing documents ahead of a due diligence round…

📢 PSA for Founders: Time kills deals.  If there’s one surefire way to slow a deal down, it’s not having your data ready for investors when you approach them. Get yours in order asap, at least before Ramadan when slowness kicks in.

I have seen startups with well-structured data rooms close their deals faster and more efficiently.  In general, a data room can mean a physical room with your data, virtual data rooms or data centers. What I’m referring to here is a due diligence data room. A shareable folder where your company aggregates its legal, commercial and financial documents for review by a potential investor.

Let’s take a look…
First, this may sound straightforward, but make sure to put your company’s name on your folder. Otherwise, things get messy with your investors receiving 20 folders titled “Due Diligence.”

What goes in there?
Good question. Here’s what we consider our DD checklist at ArzanVC. You can keep it as a reference to help you structure your data room. We organize our checklist into 5 parts:

1. Corporate, Shareholders’ Information, & Legal Matters
This is all your incorporation related documents, copies of licenses, CAP table, previously signed term sheets and shareholding agreements.  If you’ve had several financing rounds, create a folder for each one, and make sure to include the term sheet and signed agreements.

2. Management & Personnel
Your organization chart, summary bios of founders or LinkedIn accounts. Got an ESOP already? This where you keep it.

3. Material Contracts for the Company
Which contracts are important will depend on your business. This doesn’t need to be all your confidential contracts and agreements. Use your judgment on what can be shared and what you consider ultra-confidential.  You can share contracts for leases, housekeeping services etc.

4. Product / Services / Competition & Intellectual Property
I can’t stress enough the importance of this folder – this is where the juice is.  Things we look for are:
–    Product roadmap;
–    market research information & market sizing;
–    list and analysis of competitors;
–    metrics and KPIs that you use to track performance.

5. Financial Information
Yes, for an early stage company, there might be minimal financial history and information. Still, this information should at least be included in an orderly manner. Build a proper business plan and forecast for at least 2 years ahead.

TL;DR (too long; didn’t read)

A data room is a reflection of your existing file structure. If you’re organized and on top of your record keeping, setting up a data room is a quick and simple exercise. Don’t leave it until the end, or you’ll be scrambling to put something together and it won’t look good in front of your potential investors.

🌟 BONUS: Tools of the trade
Continuing with the organization theme, here are tools we use every day:

Pipedrive: For our deal flow management. Very convenient to take the deal from receiving it to the final decision stage. We can integrate all email communication with the startup, have all our notes in one place, and upload all information and documents.

Slack: Streamlines communication between the team, with separate discussion rooms and topics.

Asana: Our tool of choice for task management, but there are many others you might prefer.

Our startups ❤️:
Tableau:    Measuring KPIs
Chartio:     Interface to your database and get data analytics
MixPanel:  Business analytics for mobile and web
Intercom:   Customer messaging apps & live chat
New Relic: Server monitoring and DevOps tools
Segment:   API integrations, especially analytics
Crazy Egg: Heatmaps, usability testing, and optimization
Sketch:       Design and prototyping
Invision:      Design and prototyping

Family Postcard
On the list
Artificial Intelligence startup Cognitev, was selected on the SAAS 1000 list, an index of the world’s fastest-growing SaaS companies.
Bring on the drivers
Careem is expanding to Iraq, reopening in two Palestinian cities, and hiring female drivers in Saudi Arabia.
It’s true: hardcover to your door
Online bookstore, Jamalon,  launched Jamalon Express, a service to deliver books to your doorstep within 48 hours.
Till next month, keep it real…
Hasan Zainal
June: Reap the seeds you sow

June: Reap the seeds you sow

Hey folks,

Eid Mubarak!

Every year we hear about Ramadan being a slow month with barely any activity.
This Ramadan was surprisingly busy in the region and for AVC as well, and it was refreshing to see the ecosystem bustling un-caffeinated 🙂

On the AVC end, we’re so excited to tell you about a new offering we have in the works, and our latest investment, POS Rocket. Hope you all have a great Eid break and start to the summer holidays!


MENA EDTech Startups

This month, we looked at the EDTech sector in MENA. EDtech companies focus on designing effective academic instruction using technology, media and learning theory.  Our map illustrates a variety of categories in the market where we are seeing an increase in number of and growth in regional startups.  We found a large number of startups focused on creating educational content and software for young learners in Arabic, as can be seen below. In addition, companies offering platforms for tutoring and providing supplemental courses linked to public curriculums are increasing, indicating the dire need for quality educational content and delivery.

Overall, with the increase in internet penetration and new forms of media in the region, there appears to be huge potential for further innovation and growth in this sector.

Where are the gaps in MENA edtech?
Can it scale across the region?

Join the discussion at #arzanVCchats


Reap the Seeds you Sow 🌱

Close your eyes and imagine this….

A passionate individual has a hunch for a product that could potentially solve a big problem that people face in the MENA region. It’s been occupying his mind for some time. He can visualize the world with his product and what it could become.  It’s brilliant and he’s fired up. He puts in his time and money to work on bringing this rocking idea to reality. He diligently researches the market and convinces others to join him in achieving his vision. Together as a team, they work day and night for 8 months to produce an MVP.  After much trial and error, their MVP works and they high-five each other ✋, but sadly, they realize they’ve run out of money.They decide to raisea small amount of funds to enable them to test and build some traction. With great enthusiasm, he knocks the doors of family and friends but realizes that some turn out to be too expensive. He’s stunned. Some have asked for 40%+ of the company! Why? Because the company has a tiny capital base, no assets, and is not a “profit generating company!” The disappointed founder, clinging on to his dream, decides to explore his investor options. He has meetings with corporates & large institutions, but ironically, they send him job offers instead of checks! Thanks, but no thanks.

Unwilling to give up on his vision, he pursues regional VCs, but they (including

Arzan VC) worry about the risks and ask the founder to come back once sufficient traction is reached.That said, the founder is left with three difficult alternatives: accept an unfair deal and regret it for the rest of his life, become a career person, or bury the idea once and for all.  Buzzkill.  The sad thing is this idea could have been Souq,

Careem, Carriage, Talabat …etc, but the difference is that it did not get it’s real chance to get off the ground.Sound familiar…? We’re sure it is.

Moral of the story

If we do not plant seeds, we won’t see trees! Hence, if no Pre-Seed (MVP is available but no traction) investments are made, no sufficient Seed and Post Seed deals will be available. This also means the $100mn+ VC funds that are currently being raised won’t see adequate deal flow.

This has been on our mind at AVC & here’s what we are going to do about it…

We are taking the initiative to invest in the seeds of the ecosystem. This fall, we are launching a dedicated Pre-Seed platform to turn this story around.

How it works
Startup founder(s) will log onto our Pre-Seed platform, tick simple criteria boxes, upload a pitch deck, hit submit and track our investment process. Within two weeks the founder will receive a decision. If approved, s/he will receive $25,000 and all legal/admin documents required.  The founder will then need to raise at least another $25,000 (from angels) based on our standard terms. 

Wait – that’s not it! 
Once you’re in, you’re in! We will continue funding up to Series A and the ticket size will vary per stage. Sweet.

There’s more, but we’ll keep the other perks as a surprise for you once we launch!

Our investment criteria
We are looking for the basics:

🌱 Minimum round of $50,000
🌱 A technical co-founder (available or joining)
🌱 Focusing on a Large market
🌱 Operating in a legal entity

We will invite other angels/VC’s to co-invest, provide feedback and interact via our platform.

too long; didn’t read

We are launching our in-house Pre-Seed Platform to invest in companies at MVP stage in September 2017.  Companies that meet the investment criteria will receive a decision (within two weeks!), followed with $25k in funding + required documentation.We would love to hear your thoughts.  What would you like to see on the platform? What capabilities/functionality would make the process for you smoother as a founder? Investor?  Hit reply and let us know.

5 things you’ll want to check out


Family Postcard

Ramadan Careem

Careem raised $150m to close out its $500M Series E round. Also, Careem launched operations in Palestine and is working towards improving mobility and economic growth in the country.

He’s got game

Tamatem Games CEO, Hussam Hammo has been selected as an Endeavor Entrepreneur. Tamatem also got covered in Inc Arabia 👏👏👏

When nobody wants to be notetaker

Use AI to summarize your meetings with the Wrappup Slackbot and get the meeting notes in Slack! It even got featured on Product Hunt with 200+ votes!

Here comes the jam

Jamalon, the largest online bookstore in the Middle East, has been featured in Forbes.

They’re also expanding their tech team and are looking for an android mobile developer (senior), front-end developer (senior), UI/UX designer (senior), and 4 PHP back-end developers.  Applicants can send their CVs to jobs@jamalon.com


Welcome to the fam

We’d like to introduce you to POSRocket,  our latest investment, and member of the AVC family.  Led by CEO, Zeid Husban,  POSRocket is a cloud-based point-of-sale platform in the MENA region that improves customer discovery and intelligently increases sales. Their target audience is small to medium sized businesses that struggle with growth as well as retailers not currently using a POS or inventory management system. POSRocket supplies merchants with a cloud-based POS platform that consists of a software and a hardware component (iPad, cash drawer, and receipt printer).


Say 👋 to Zeid

Zeid is a second time founder; his first startup, ifood.jo was sold to Yemeksepeti (later acquired by Rocket Internet). For POSRocket, Zeid brings relevant industry experience in the food industry.

But not just the food industry…
POSRocket is also working with other types of businesses such as retail outlets, services and entertainment industry.  The opportunities for growth are endless.  We are happy to announce also that Arzan VC is leading this investment round.


On this festive occasion, I’d like to wish you happy eid to you and your loved ones!

Keep it real,

Hasan Zainal

May: Understand your CAP table (our two fils)

May: Understand your CAP table (our two fils)

Hey folks,

We’re back with this month’s newsletter and have some fresh scoop. We’ve been talking to a variety of interesting startups this month while continuing with our fundraising discussions for Arzan VC II.

Earlier this month we were invited to participate in Mix N’ Mentor in Kuwait and it was awesome to meet so many talented entrepreneurs. Although there were primarily non-tech startups, we are starting to see an emergence of some in Kuwait.

 

Anurag with the energetic group he joined

 

With multiple tabs open and endless distractions, if you don’t make it to the end of the letter, we’d like to wish you a happy Ramadan from the Arzan VC family 🌙

MENA Delivery Startups

 

The food delivery space is massive in MENA. There’s a lot of overlap ranging from food portals to one-store delivery services. We’ve focused on multi-vendor delivery companies.

Who do you think should be on here?
How can they differentiate?

Join the discussion at #arzanVCchats

 

Understanding your cap tables: our two fils

 

We see tons of startups at ArzanVC, and we tend to see common pitfalls amongst them.  One of those is in the CAP tables of startups.  Since AVC Venture Partner Anurag works closely with these startups on legal documents before we do invest, I asked him to share his experience and this is what he had to say…
Based on the deals we looked at so far in 2017, we can tell you that one in every three startups in the MENA region had shortcomings with its shareholding structure. Founders in the region seem to underestimate the importance of having a prudent shareholding structure to an alarming extent. Here are 3 common mistakes we have found in many startups’ CAP tables:
  1. Founders give up too much equity to early stage investors
  2. Founders’ shares do not vest
  3. No or limited employee stock option plan for key members

Let’s take a closer look…

 

1. Founders give up too much equity to early stage investors

In all the shareholding structures that we saw, the founder already owned too little equity at an early seed stage. Having this structure as it currently exists is a complete non-starter. While you don’t necessarily need to have 100% of the equity, you as a founder need to have at least 75-90% as you head into the first round of institutional funding.  For example, here’s an illustration of what the CAP table looked like for one company we evaluated in Jan’17:

In the above instance (Actual CAP Table), the founder owns almost nothing at the time of exit due to the dilution in multiple rounds. Think about it: what would motivate the founder(s) to continue working for this startup? How would future investors look at such a situation? What impact would it have on future funding rounds?

On the other hand, in the revised cap table, the founders along with the key employees (through ESOP) own 70% of the company after the angel round of funding. Starting with this ownership structure guarantees that the founders along with those key employees own a substantial minority at the time of exit, motivating them towards that goal.

Why do we see a lot of the first kind of cap table? First, a lot of founders are desperate to raise money from any investors. Second, investors -mostly angels- are partly to blame for this as they demand high equity percentages (“I need 40% for $100k”) in a company rather than giving money to founders at fair valuations (“I would invest $100k for a post money valuation of $500k”).

To remedy this issue, founders need to always raise money based on fair valuations, keeping in mind the dilution effect.  If an investor asks for a high equity stake, DON’T TAKE THE MONEY.

 

2. No vesting of founder’s shares

Any startup that wants to build a successful enterprise should vest its equity over time, particularly for founders and key employees. A carefully thought out and deliberate vesting schedule can prevent difficult conversations with investors or, worse, lost equity in the hands of departing team members.

Very few companies we evaluated had founders’ shares vesting. It is a very important aspect for a startup as it addresses 3 main issues – 1) keeping the founders enthusiastic and motivated, 2) whenever a founder decides to leave, you can fill his position with a new founder and give him the unvested stake of the leaving founder and 3) investors and other stakeholders see it as a sign of commitment; the founders want to get their due share only after achieving something.

Note: The legal aspect of vesting varies significantly from country to country. Consulting a lawyer is generally a good idea.​

 

3. No employee stock option plan (ESOP) for key members
Stock option plans are as important as vesting because in every startup, a founder will have to hire key, high caliber team members.  At an early stage company, founders seldom can match or pay more than industry standard salary to these members. Realistically, the only way a startup can keep these key employees motivated is through stock options (also vested over time).

Ideally, a startup should have a minimum of a 10% stock option plan (going up to 30% in some cases) in their CAP table before the first round of funding and the ESOPs can be distributed over any period of time.

Lastly, we believe the progression in case of most startups would be something like this. The infographic is a general example and in no way represents 100% of the actual scenario a startup would go through. It gives you a good idea on how a founder should distribute equity in his company over the period of time.

(too long; didn’t read)

Managing your cap table and equity options is not easy, but it is not something impossible with the right research and planning. Seek advice from investors, lawyers, and other founders. A clean Cap Table and solid stock option plan can be worth more than a million-dollar investment alone.

What challenges have you encountered while constructing your Cap Table?Tweet us at @arzanvc

4 things you’ll want to check out

Smart founders learn what didn’t work for others (also here & here)
Build the strangely familiar
Stop obsessing over the elevator pitch
An excellent piece on the rare hockey-stick growth model

Family Postcard


Storage just got even better

In addition to its tech-enhanced blue boxes, Boxit now also stores customers’ own boxes, suitcases and large items like fridges, TVs, beds & sofas.  Time to declutter!

They be killin’ it

Tamatem released its new car drifting game and hit number 1 on the Saudi app store in less than 24 hours. Yaaaaas.

Only on your phones guys, please

 

The big reveal
MenaCommerce has rebranded to Cognitev and you have to see their fantastic website 💯 Cognitev uses artificial intelligence to understand the meaning of content across the web and enhance user experiences. Think high-quality traffic, targeted ads, and more.
Everything in moderation, friends. You know what I’m talking about.

Happy Ramadan!

Keep it real,

Hasan Zainal