8 ways to invest in a MENAPT startup
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Mohamed Aboulnaga is a Tech-Entrepreneur and computer Engineer who was part of the leadership teams in Fawry, Careem, and Kitab Sawti for a combined duration of a decade before Co-founding Halan. He currently sits on the board of leading startups and funds in the region, such as Disruptech, Cashcows, and Robusta, and is an investor in several top-tier startups including breadfast and koinz and currently serves as the Cofounder and CEO of KLIVVR which is a new fintech startup.
In this article, we explore the different ways of investing in startups in the MENAP region and how to “ Segway” yourself into the ‘Cap-table” of the Startups that you see their potential is high and can be from the glowing 1% of the recently launched companies growing a high rate and can keep scaling at scale also known as “ startups”.
1. Angel Funds:
The First way of getting into a startup is simply investing in an Angel fund, Like Cairo angels, Alex angels, or any of the angel funds in the city you are living in where you get to place tickets or money slots ranging from 10,000 US dollars up to 300,000 Us dollars in a set of startups that are offered to you by the “Angel Fund manager”.
Pros: gain access to otherwise hardly attainable investments.
Cons: Forfeit any decision-making powers or contact with the invested startups.
2. VC funds:
The second way which requires more cash is to invest in VC funds such as Endure Capital, Algebra Ventures, SAWARI Ventures, or Disruptech by placing tickets or money slots ranging from 500,000 US dollars up to 10 Million us dollars.
Pros: Benefit from the brand equity of the VC and expertise of the fund managers to get good deals, big discounts, and better participation rights.
Cons: Requires a solid cash flow where investors need to commit large amounts of money over a couple of years and any default on payment can strip them of most investor benefits.
3. Consultancy Shares:
If you’re a Subject matter expert and the startup you want to invest in needs your knowledge in the business, this is a much easier way for investing as you will be able to get a very good deal and even get some free shares by providing your expertise.
Pros: Low risk as free shares will be a great “cushion” for any slowdown in growth as the “aggregated outcome” is usually rewarding.
Cons: Requires immense time and effort to spend with the startup, with a risk of conflict having no regulatory body managing equity/investment agreement.
4. Secondary shares:
Buying “secondary sold” shares from founders or early employees in the startup or from investors, for a slight discount if the board of the startup allows it.
Pros: The companies that reach that stage are usually mature enough so the risk of losing money is low while the cash discount can reach up to 40% in some cases which creates great returns if the company performs well post-buy.
Cons: “Rolled Over” shares can come with hidden information or loopholes that can be problematic for the buyer, extra research and a presence of a good lawyer could be critical.
5. Full-time work investment:
Similar to the consultancy share investment, you’d be exchanging expertise for extra equity or a place on the board. Here you’d be investing in the startup and working as a full-time employee. The lack of access to talent makes the talent more valuable than money therefore you can make super good deals in case the startup wants your services as a full-timer.
Pros: The reward of this type is usually the highest of all types of investments if the startup performs well and the return on the investment is multiples of the regular money.
Cons: This is more of a job not an investment and time is the most valuable asset in a person’s life so the loss of time and money in the same venture is placing “all your eggs in one basket”.
6. IPO/SPAC investments:
Public and Pre-Ipo investments are less risky models for investments than all of the above, you can ask the investment banking departments of the likes of EFG Hermes to include you in their “roadshow” before the IPO or allocate some money for them to deploy them through their brokerage arm in startups that made it to the IPO. The first model needs a lot of cash or a big family office to convince the Entity to include you in the roadshow and the second format is very easy and can be done at very small amounts. Also, recently some Companies are going public through a SPAC (special purpose acquisition company) where a “famous person with a good track record in investments” raises money and files for a publicly-traded “empty” company, and then after getting the funds they merge with an existing company for a certain % and this % of the company that merged with the SPAC is then considered public. You can buy stocks in this SPAC before knowing which company will be merged with it or in some cases after the merge.
Pros: The shares are very easy to sell, you sell them with the click of a button and you just pay some small fees and cash the money in your bank account in a few days, also the governance is very high in those startups and the audit levels are super good so you know that your money is in safe hands in most cases.
Cons: The rewards are usually not very high, especially when you buy stocks after the IPO, as the startup at this stage reached a bigger size and growing at a bigger size is usually much harder.
7. Venture Building:
This is, finding a good idea and getting a good leader and a leadership team, and building the whole startup from scratch with your resources. Big entities usually do this, for example, VALU was built inside EFG Hermes in Egypt, they have the resources and the infrastructure, and the brand name to start a new idea from scratch and fund it till the IPO or the exit. If you have enough cash, know-how, and a brand name in the market, then this is your game. It allows you to get much more equity in the startups and to dictate the strategy from Day 1.
Pros/Cons: The “All In” format is a PRO & a CON in of itself. If you manage to make it work you’d have full autonomy to replicate the model in different industries or take the startup to different places. While the risk of losing is very high as you put your name & entities on the line.
8. Cold calls/emails to founders:
If you are eyeing a specific startup and you want to place a ticket in it, the best way is to just send an email to the founder or the CFO of the startup and ask them if they can reserve a slot for you in the next, SAFE (Simple Agreement for Future Equity), or a convertible note that allows you to have a slot in the next priced round at a certain valuation written in the safe or a discount from the priced round. The SAFE and convertible notes allow investment of small tickets to individuals in startups without a long “KYC” process of identifying who you are or registering a company and once you transfer the money you receive the allocation “ pro-rata” so if you pay 10,000 dollars and the whole safe or convertible note is 100,000 dollars and this safe accounts for 10% of a 1 Million dollar company at a 20% discount from around then you will get around 10% of the 10% of the company which means you can own 1% of the company once the SAFE or convertible turns into proper stocks after a priced round.
Pros: This investment usually brings good deals as the discounts are usually high and the priced rounds increase the value of the money so if you want quick wins this is a very good way of investment given that the founders or the board allowed you to place this direct ticket through a SAFE or convertible note.
Cons: The risk here lies in two parts, first of all, if the company fails to land a priced round and goes out of cash then you might lose your money if you do not have a “liquidation” preference with a certain multiple on your money, the cases I dealt with were 1:2 so you at least guarantee double your money value in case of liquidation. The second risk lies in the priced round metrics so if the new investors force the old ones to buy out the safes and liquidate them then sometimes this happens and you lose your position in the company and receive a small return on your money and honestly, this is a very rare case but it happens sometimes in priced rounds or exits of companies post the SPAC or convertible note spree.
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