The VC veterans guide on becoming Series A ready: An interview with Plus Venture Capital's Sharif El-Badawi and Hasan Haider
Sharif El-Badawi and Hasan Haider, former managing partners of 500 Startups' Falcons Fund, last week announced the launch of newly founded Plus Venture Capital (+VC) and its $60M debut fund. The fund will focus on investing in early-stage tech startups in the MENA region & its diaspora, and will target 120 investments over the next 3 years.
Following the announcement, MAGNiTT spoke with the veterans of the startup ecosystem to discover more about why the new fund was launched, what this shift will mean for current 500 startup portfolio companies, what they are looking for in a fundraising startup, the differences in their investment strategy, and more.
Read the interview below to delve deeper into Plus Venture Capital (+VC).
What were the main drivers for creating a new fund?
Based on our observations over the past few years, the region is in need of more capital, in overall volume (100x by some measures) and in choice (optionality). We saw many startups raising pre-seed to post-seed via piecemeal checks over a period of time, and finding it hard to drive meaningful milestones to garner interest from Series A investors. Through our new fund, we plan on leading proper seed rounds to help founders focus on their businesses for 12-18 months and become Series A ready. We plan to drive intense support for our founders at scale through a number of unique initiatives, which you’ll hear about in due course, and reserve ample dry powder for our best performers into their Series A rounds.
In our previous fund, about a quarter of the deals we did were pre-Seed stage, usually meaning pre-revenue, and about a third were investments through a program. The majority overall, raised from us as part of a series of small checks without regard for how much capital they’d need to raise for 12-18 months to generate the growth and size needed for their next institutional round. We intend to focus on leading proper sized Seed stage rounds for our portfolio companies to support their runway for 12-18 months and helping them reach Series A within that time.
What will the changes mean for the current 500 portfolio companies? Will the portfolio be transferring to your new fund as well?
The Falcons I portfolio will continue to be supported by us for the next 18 months along with additional resources from 500. The fund and portfolio will remain under the 500 umbrella and continue to be supported by 500 staff beyond the transition period.
How will you continue to support these portfolio companies and what will your involvement with them be going forward?
Hasan and I will stay on to support the portfolio for the next 18 months to help the companies progress and provide our input on any portfolio matters within this period. As the fund has been fully deployed since earlier this year, the team’s main focus is on portfolio management, fundraising support, and any investment management decisions that need to be made. We’re still here for our founders for whatever they need at any time.
How will entrepreneurs looking to fundraise in the future be impacted by the changes? Will you be approaching the current portfolio for follow on funding?
We hope these changes will help provide more optionality of funding sources for entrepreneurs, and more capital availability generally across the ecosystem.
We don’t intend to actively approach previous portfolio companies for funding. While it is possible, it is highly unlikely we’ll cross-over investments between funds.
How is your investment strategy different from other funds?
One thing that certainly stands out as different about our investment strategy, is that we invest in very large portfolios of companies. We expect our funds to have over 100 companies each to generate optimal diversification across the fund. This allows us to kick up investment activity at the early stages and gives us a breadth of exposure in deal flow. The strategy is complemented by a second prong, which is to follow-on heavily in the highest performers, effectively providing the appropriate amount of depth in ownership to balance the portfolio.
Beyond portfolio structure, our rubric and process for deal operations are built for our unique approach to high-frequency deployment whereby allowing us to invest early and often within a relatively fast time frame. An important part of this process is using standardized deal documents in well-known jurisdictions.
Why has your focus shifted to later-stage seed rounds?
As a pure VC, we feel we would better serve startups in the region with a focus on proper seed-stage rounds where we can help them raise full rounds instead of stringing along smaller checks over a period of time. Our aim is to plan out the fundraising strategy with the companies to help them reach meaningful milestones to raise their Series A. Since we won’t be running pre-seed programs, it makes more sense for us to focus on the seed stage, after the company has achieved some market traction and reserve dry powder to support them through Series A where the region lacks lead investors.
What sort of startups will the new fund be investing in?
We’re looking to invest in tech or tech-enabled startups across all sectors in the region and diaspora. Ideally, the startup will have a solid team and product, showing that they’ve been able to execute, build a team, find a solution to a big problem and develop their offering for the market. We get excited to invest when there’s evidence that the solution they’ve is showing positive reception from the market, which we measure by the monthly growth rate of users or revenue. In other words, we invest post-traction, when a company has several months of user or customer adoption with a decent and consistently strong month-over-month growth rate.
How will you be working with LPs to support the ecosystem in the region?
Just as we encourage founders to be selective about their investors, we like to work with LPs that align with our mission and values, many of whom have an interest in working closely with us and our portfolio companies. We won't be operating a black box type of fund - in fact, we will be working closely with our LPs to give them access to our deal flow and co-investment opportunities on an active basis. We believe this helps our startups raise more meaningful rounds, and our LPs access highly curated deal flow.
Are you able to share what LPs you are looking to speak to and where you will be looking to raise the new funds from?
Per regulatory guidelines, we aren’t able to share specific LP names. We are in discussions with several private and public sector LPs and are running a standard fundraising process per the regulatory compliance guidelines.
What are your top 3 learnings from your time investing over the past few years in the region that you will be bringing to this new fund?
1. The most important factor to look for in a seed-stage startup is the founding team. We know it's cliche, but it is true, and we’ve seen that great founders make or break a startup, no matter what headwinds occur. We’re looking for founders with a bias towards execution who are fundamentally resourceful and resilient.
2. We believe in the power of community and fostering interaction between our startup founders. Being a founder in the MENA region can be a very lonely path, and having closed events and sessions to talk to other founders in the same position can be very helpful, even for keeping a positive mindset. Building a strong community of founders at +VC will be a key part of who we are as a firm.
3. When it comes to funding, seed-stage startups aren’t getting the runway they need by piecemealing small checks, hence aren’t reaching the milestones for healthy next rounds. Startups ready to raise larger rounds, typically at Series A, have sparse options to find a lead investor. Many have commitments, but no lead.
Turkey's average deal size was up 250% in H1 2020 to $2.8M, indicating the shift of investors' focus towards later-stage startups. Discover more trends and insights in MAGNiTT's H1 2020 Turkey Venture Investment Report.