Venture Debt in MENA: Financing alternatives with SHUAA Capital

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Venture debt is a type of debt financing obtained by early-stage companies, startups, and businesses that have already completed several rounds of venture capital equity fundraisings. They are companies that have some history of operations but still do not have sufficient positive cash flows to be eligible to obtain conventional loans.

The use of venture debt allows entrepreneurs to meet funding requirements without overly diluting shareholders’ equity at these early stages, while at the same time improving liquidity, extending the runway between equity funding rounds, and overall providing a more balanced capital structure. This financing mechanism can be provided by both banks specializing in venture lending and non-bank lenders and is typically used as a complementary method to equity venture financing, potentially combined with warrants for company stock. 

As we release our 2021 MENA Venture Debt Sentiment Report in collaboration with SHUAA Capital, an analysis of 100+ survey responses from Investors, Venture Builders, Entrepreneurs, and Startups across the region, we start the conversation around Venture Debt in MENA: the alternative potential, investor and entrepreneurial readiness, as well as market needs and top priorities. Here’s a quick glimpse of our market deep dive with SHUAA Capital Head of Debt, Natasha Hannoun: 


 



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In the first half of 2021, the start-up ecosystem in MENA has raised over USD 1.2 billion in funding across 254 deals compared with USD 1 billion across 537 deals in 2020, demonstrating the rapid growth of the ecosystem and its funding requirements. Access to the right forms of capital is fundamental to enable the growth of the businesses and the development of the economy they operate in.

Whilst Global VC investment is at record highs (2.3x year on year growth in 2021), one of the biggest challenges startups continue to face is access to capital. Traditional businesses have multiple sources of capital available including traditional bank financing, alternative finance providers, private equity, and of course capital markets. The majority of these funding sources are not available for start-ups, particularly less dilutive debt solutions.

 

MENA Startups and Investors alike have ranked working capital as a top consideration and priority from raising capital. In light of that, considerations around non-dilutive injections, at-hand liquidity, and amortization arise when considering funding options. While only 31% of surveyed startups have previously raised Venture Debt and other types of Debt Financing, it seems that MENA investors had a firmer grip over the concept, where 74% of surveyed investors claimed they have a strong understanding of Venture Debt while the percentage was only 35% of all startups. 

In the GCC, venture debt has started to emerge as a funding alternative and complementary
source of capital for these high-growth technology-enabled companies that used to rely on equity only as a source to fund their businesses. The support coming from the use of venture debt is key to entrepreneurs as it sustains businesses in need of funding in a key phase of their evolution without overly-diluting shareholders’ equity at these early stages. Furthermore, due to its versatile nature and a wide variety of potential structures, venture debt can also be of support when businesses run into a deficiency of short-term capital due to unexpected market circumstances as was the case during Covid-19 lockdowns.

 

This report is aimed at providing an overview of the current use of venture debt as an instrument by startups in the region and VCs. With the rising number of entrepreneurs looking to support the growth of their businesses it is very likely that an increasing number of startups will progressively add venture debt as a strategic tool to achieve sustainable success, and with that, the whole GCC economy will flourish by being sustained by these prosperous and thriving new realities.

In MENA, readiness for Venture Debt remains highly promising where 80% of surveyed investors recorded that at least one of their portfolio companies is considering venture debt as a viable fundraising option in the near future. While the perception of Venture Debt remains complementary to Equity fundraising, of the 30% surveyed startups that raised Venture Debt rounds, an interesting 15% raised more than $10M. 

This article is an excerpt of Natasha Hannoun's Forward message opening our 2021 MENA Venture Debt Sentiment Report. Get the full extensive insight on startup & investor readiness for Venture Debt in MENA by downloading the free report. 


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