It may not be one of the first things that springs to mind, but raising capital for your start-up or new venture is often most easily achieved by simple, old-fashioned networking. Being in the right place at the right time is often about who you know and getting in front of the right people.
Mahmoud Adi and Shane Shin are founders of one of the Middle East’s most active seed-stage VC firms, Shorooq Partners. They’ve shared why they think being part of a thriving tech ecosystem is so important for start-ups post-Covid-19, offering their tips on how to get investment-ready.
What is your advice for start-ups that want to get themselves investment-ready?
Mahmoud Adi: The most important prerequisite to being investment-ready is being business-ready. Quite often, we have seen start-up founders tangled in “fundraising races” where they believe the amount of capital they raise indicates the future success of the company, but the best companies start with focusing internally.
Ask yourself, “What are the key market opportunities or problems? What is the best product to solve this? What is the best technology to create this product? What is the best distribution method to sell this solution? What is the revenue model to make a business out of this? What is the best team to build and grow this business? How much funding do I realistically need to do all of this? Do I even need external capital today? If not, when will I need it?
Identifying answers to these questions and executing on them should always be the top priority and will always be the fundamental propellers for success. Founders who have a clear understanding of these will always attract the smartest and the fastest capital.
Shane Shin: Agreed. Also, know your company. Before you start raising capital, step into the shoes of a sceptical investor – think of all the data they would want to review, all the questions they could ask and all the things they could challenge, and be ready. We cannot stress enough the importance of data upkeep. If a company, especially a tech company, doesn’t know its own performance by the month, week or even day, it can be very detrimental and sends the wrong message to investors.
For every tech start-up, raising capital isn’t a one-time event but an entire journey. And so we always emphasise the importance of thinking about today’s fundraising and future fundraising in a multidimensional way, every time founders make a decision. For instance, raising your seed round at too high a valuation may mean it will be harder to raise Series A and could lead to a “down round”, which is always terrible for a start-up’s narrative. But raising at too low a valuation could mean the founders lose too much equity today for the company to be investible by the time it reaches Series B or C.
You’ve partnered with Hub71, the global tech ecosystem based in Abu Dhabi – can you share some of the benefits of being part of that community?
Adi: Venture investing, more than anything, is about investing in people. Ecosystems like Hub71 allow investors and start-up founders to coexist in a common space to explore synergies and build trust in the most organic way. It is the mindset and energy level you are geared into when you are physically working alongside hundreds of hand-picked, top-tier founders who wake up every day to strive towards their purpose and make a positive change in the world. It is impossible to articulate in words – but you feel it every day. It is a consistent and humbling reminder of why we as investors do what we do.
For example, we met the founder of one of our most recent companies organically over coffee at Hub71. Being in the same space allowed us to learn about the company better. As a result, we led their pre-Series A round, and today we are in the process of leading their Series A. Additionally, ecosystems such as Hub71 support start-ups in numerous ways. Along with creating an incredible network of people around them, Hub71 provides multiple tools such as subsidised housing and offices, ease of employee onboarding and so on, enabling start-ups to cut costs and focus on their core businesses. This creates more chances of success, and as the ecosystem succeeds, so do we.
What start-up qualities will impress potential investors?
Shin: This is quite a broad question, so let’s narrow it down by key characteristics.
Founders: committed founders with deep experience in the industry and record of building strong teams.
Market: clear market opportunity that allows leveraging technology to solve a problem in an efficient and economical manner. Are you the first to do this? If not, is there an opportunity to create a differentiated business that is the market leader in this space? Are there other untapped opportunities you can realise at a later point (for example, Amazon went from selling books to selling groceries)?
Traction: generally, in highly competitive spaces (say, for instance, e-commerce, or CRM software or ride-hailing) investors like to see growing traction to demonstrate that the business can penetrate the saturated market and compete. Generally, for white spaces (no competition), investors will forgo this part if they believe in the market thesis and the leadership.
Customer dynamics: as a firm, we focus heavily on customer retention and repeat customer dynamics. We like to see businesses that have a high customer LTV and retention rate – this ensures businesses aren’t just burning money to generate unsustainable top lines without truly creating value for their customers.
Technological focus: I think Covid-19 has reiterated to the whole world the importance of digital technology. There are two angles of a company’s technology that investors generally want to focus on. 1) Core infrastructure: this is the backbone of the company. It should be powerful enough to handle rapid scale, flexible enough to support experimentation and sophisticated/defensible/complicated enough for it to be at a unique advantage against competitors. 2) Front end: this should be easy to use and easy to sell.
Vision: of course, as investors in technology, we want to see businesses of the future that challenge the current status quo and have grand plans that reshape our expectation of the future.
How has Covid-19 changed the way you invest?
Adi: As disciplined investors, we must always critically evaluate the market situation. In doing so, we have noticed that while unfortunately Covid-19 has negatively impacted several businesses and business models such as start-up businesses, it has also created an opportunity for a lot of tech businesses and tech investors like us by emphasising to the world the unequivocal importance of technology. Given the unpredictability in the world and the rapid change in the way things are done, we as investors will have to be more cautious, more rigorous and more thoughtful in our due diligence and emphasis on the core technologies of every business. However, the best opportunities and companies rise from the hardest circumstances. Therefore, we are pleased to say that we are definitely open for business and here to support.
Learn more about the Hub71 Incentive Programme in our free white paper Roadmap to Abu Dhabi: How to unlock new opportunities for your Tech Startup, which includes information on page 19 for how to be one of the few start-ups chosen to join the programme and best tips for success. Download white paper.