By Megha Merani / Entrepreneur ME
There’s a Dilbert comic strip about venture capitalists in which its eponymous hero makes a wisecrack about starting his own venture capital firm. “I'm attracted to the concept of watching people with moronic ideas beg for money,” the satirical character quips.
Namek Zu'bi laughs when he looks at this. “In terms of bad ideas, we get them all the time." But he always lets them down constructively. The 32-year-old co-founder and Managing Director of Silicon Badia says he tries to “balance the fine line of telling the entrepreneur that his or her idea is terrible, without being too rude or disrespectful of someone who is actually trying to do something for themselves.” Of course, Zu'bi is empathetic because he's been through his share of the hustle and risk-taking. After all, venture capital is an odd business. It's a negative-return asset class on average, and it's widely believed that 90% of venture industry performance is generated by just the top 10 firms.
Headquartered in Amman and New York, Silicon Badia is an emerging global alternative asset manager consisting of a network of venture capital funds that invest in early-and growth stage technology companies around the world, with a specific focus on the US and the Middle East and North Africa (MENA) region. Zu'bi founded the firm in 2012 with his uncle Fawaz Zu’bi, Jordan’s former Information and Communications Technology Minister and founder of VC firm Accelerator Technology Holdings, along with Emile Cubeisy, who managed the company's early-stage tech investments.
Other MENA VCs invest in American-based startups too, but Silicon Badia says it is the first Arab VC with a fund dedicated to early stage tech startups in the US. About to hit its 50th investment milestone, the Badia Outreach Fund is a seed and early-stage fund that invests in US tech ventures that are utilizing technology to solve inefficiencies in traditional niche markets such as healthcare, finance, real estate and education. Silicon Badia also manages the Badia Impact Fund, which invests in Arab startups, with investors including the likes of Cisco, King Abdullah II Fund for Development and the European Investment Bank. Its portfolio includes weather forecaster ArabiaWeather, ecommerce site ShopGo, and restaurant reservation portal Reserveout.
It's annoyingly disillusioning when a venture capitalist casually attributes success to luck. But that's exactly what it is, Zu’bi insists. “Building a venture capital business is not easy,” he stresses. “First you need to convince people to give you money for you to invest into an extremely risky asset class, where the far majority of underlying companies end up failing. And then you need to go out and find the best ones out of the millions of ideas out there to put money into and help grow- sometimes competing aggressively for these deals. Finally, you have to wait and figure out how to make money from all of this for your investors first, and then for yourself and your team.”
Of course, the challenge becomes worth it once you go through a success story, and take a company from founders in a garage to a billiondollar story. A top quartile performing fund that's invested from a few hundred thousand dollars up to US$1 million, the Badia Outreach Fund I has a billion dollar or so aggregate valuation of all its portfolio companies combined. Silicon Badia says its fund beats the Mean TVPI for 2012 US Venture Capital Vintage by more than 200%. Its average realized exit is over 6x cash-on-cash return, and 75% of its portfolio companies have raised follow- on funding, versus the industry standard of 40%. For every $1 the fund has invested into a company, it has attracted $20 in follow-on investment. Reflecting on his company’s success, Zu’bi says, “It takes a lot of hard work, patience, and of course, a little bit, or, arguably, a lot of luck. It's not as cool as people think it is.”
Of course, the firm's unique, strategic approach has paid off too. Specifically, in the US, Zu'bi says, the VC firm sought to go after “niche, inefficient, offline and at many times 'non-interesting' verticals.” These included real estate technology, agricultural technology, waste management technology, and certain verticals within health tech, fintech, and blockchain. To get in rhythm with the pace and style of the two markets, Silicon Badia sought to become embedded in both Amman and New York. An office in the latter geography was crucial, so they wouldn't be seen as “outsiders,” but rather as a part of the ecosystem. “It was really hard to break into the US startup ecosystem in the early days,” Zu'bi recalls, describing the environment as a “closed off and highly competitive community.” But once you're in the ecosystem, the good thing is “people reward you for what you do more than what or who you are,” he adds.
“Our fundamental belief was that we had to physically be in and a part of any market we invest in, which is why we established operations and teams in both markets from day one,” adds the 62-year-old Fawaz Zu'bi. Both markets are at very different stages of their maturity curves, the older Zu'bi says. “The US, which started in the 60’s and 70’s or even earlier some say, is a very mature ecosystem from all aspects -investors, entrepreneurs, infrastructure, and exits- while the MENA region is still “very early in its trajectory” and maturing “slowly but surely.” However, the asset class is just as risky in both markets. “(The) main difference is that the US is a much more liquid market that allows entrepreneurs and investors to generate returns at a consistent pace,” he explains. “So, the 'reward' part of the 'risk-reward' is more highly skewed in the US, but this is a factor of time and maturity.” The MENA region also has more loopholes and bureaucracy to deal with, which many times hinders an entrepreneur’s ability to move fast, he adds. “Each regional market has its own peculiarities and in many instances it’s like having to start from ground zero all over, and multiple times. Dealing with the complication and intricacies of the bureaucracy (in the MENA) can be a challenge. That said, the US also has its own issues and many have criticized Silicon Valley for having a 'fake it until you make it' culture, where entrepreneurs want to succeed at all costs.” But the maturity of the US ecosystem also makes it far easier to get things done quickly, notes Namek Zu’bi. “But at the same time, it is highly competitive and also fairly crowded so you need to find what works for you and run fast,” he says.
“In the MENA ecosystem, things happen much slower and companies usually take much longer to develop so it can be frustrating at times but it is also less competitive from a deals perspective, especially if you are looking for high quality investors, and can also be rewarding over time especially if you invest in first generation digital category leaders.” Over a third of the US startups Silicon Badia has invested in are based in the Bay Area and Silicon Valley, a third are in the New York area and the rest are spread out over the rest of the country, including Chicago, Kansas City, and Austin. “We definitely think that a 'rise of the rest' trend is happening in the US outside of the traditional venture hubs, and we have our eye on this,” Namek Zu’bi says. He notes also that the US has also witnessed a very “entrepreneur-friendly” shift away from old-school investment vehicles, which has done away with some lesser friendlier terms within equity financing like participating preferred liquidation preferences and full ratchet anti-dilution. The market has instead evolved to other friendlier non-equity instruments like the SAFE note, which allows startups to structure seed investments without interest rates or maturity dates.
As for the MENA region, Zu’bi says, “The MENA is slowly catching up, but we still see a lot of strange asks from some of the newer ecosystem investors– for example, someone investing a couple hundred thousand into a company, and asking for a majority stake and board seat.” Fawaz Zu’bi adds that while the region has come a long way, the startup trend has, to a large extent, focused on emulating successful models in more advanced markets such as the US and customizing them to the region. But that's not the way forward. “We encourage entrepreneurs to focus less on building the next shiny object, but instead to build companies that are solving real problems currently facing this side of the world,” the older Zu’bi advises. “In this respect, there are successes in such areas as access to finance, healthcare, agriculture, transportation, and education. Those I would suggest are mostly concentrated in the UAE, Egypt, and Jordan, with other countries like Saudi Arabia rising.” As for the road ahead, Silicon Badia is in the process of exploring and raising its next set of venture capital funds. “We are doubling down on our successful efforts in the US and are also still interested in the 'underdog' growth story happening in the MENA region,” Fawaz Zu’bi says. The firm is also looking at Europe as an “appealing” new potential market. “We still like the ‘off the beaten path’ type investments in the US,” Namek adds. “We think those sectors still have a long way to go from a disruption perspective, but also like relatively newer spaces like cybersecurity, blockchain, and everyone’s new favorite buzzword 'artificial intelligence.’”
In the MENA, Silicon Badia likes entrepreneurs who are “trying to make people’s lives easier.” They also need to learn to move faster, the firm adds. “We see great talent in both, but entrepreneurs in the US benefit from a more mature and resourceful ecosystem and are able to move much faster,” Fawaz Zu’bi explains. “The MENA region needs to learn from this- speed is critical in this industry.” The “fragmented nature” of the MENA market remains a big challenge facing entrepreneurs, he adds. “We may get there in time, but we have to collectively be aware of the challenges, and seek to tackle them to make it easier for someone to start, build, scale, and either close or sell their venture.” In the meanwhile, Namek Zu’bi says, Silicon Badia is asking the hard questions, and trying to guide entrepreneurs in the right direction. “In some cases, the business idea is really absurd, but luckily there are a few layers before those ideas get to me,” he jokes.
THE INVESTOR'S VIEWPOINT
Namek Zu'bi's Tips For Wannabe VCs
1. Get involved
”We find it very difficult to be fly by investors in this asset class, especially if you are investing in the early stages. You need to be there physically, and more importantly, be involved.”
2. It's tougher than it sounds
"There is also a big myth that being a venture capitalist is cool. It really isn’t... it is actually a hard job -not as hard as the entrepreneur’s, obviously, but still hard- with all odds stacked against you.”
3. Hustle harder
"Be prepared to roll up your sleeves, and get to work. Returns don’t come easy.”
4. There are ups and downs
"The reward comes when you go through the ups and downs of a typical startup, go through one too many near death experiences, and then help someone build a successful company that eventually brings financial gain not only to the founders or its investors, but to all of its hardworking employees - it can be life-changing.”