Middle East angel investors daring to turn their sights homeward
An angel investor, sometimes known as a business angel, is usually an affluent individual or professional investor who provides start-up capital for a new venture in exchange for equity.§
The rewards for backing the next Bill Gates can be spectacular and angel investors outside western markets are now starting to look for winners among start-ups in their own regions.
"We need to educate investors that they can make huge returns by investing in an early stage company," says Usama Fayyad, the executive chairman of Oasis500, a Jordan-based early stage investment programme.
"For an investor, this is a unique opportunity to participate in companies that could easily grow in value two to 10 times over in a matter of three months, which is a more attractive rate of return than anything they could get at a later stage."
Oasis500 is modelled on the sort of start-up incubator model used in the US, where angel investing, already booming, is soon expected to fund a whole new wave of Silicon Valley start-ups. It is anticipated that the initial public offering of shares in social networking sites such as Facebook, expected to take place this year, will spawn a new generation of millionaire angel investors.
This growing enthusiasm for angel investment is gradually spreading to the Middle East. The global adoption of high-speed internet connections by consumers and businesses is rapidly enabling Middle Eastern companies to reach an international marketplace. This, in turn, means that companies are able grow very fast without any of the crippling overheads previously associated with foreign expansion.
"A business idea that appeals to millions and has a low investment capital is an attractive business," says Ihab Ramlawi, one of a new breed of angel investors now funding the growth of small businesses in the region.
Mr Ramlawi is a serial entrepreneur who has already grown and developed two successful construction businesses. In 2004, he sold a minority stake in his first venture, a Qatar-based construction company, that allowed him to co-found a new construction company in the UAE. Within four years, that company, Core Construction, had an annual turnover of US$30 million (Dh110.1m). A Saudi investment group then bought a majority stake in Core Construction in 2008 before fully acquiring the company three years later.
Mr Ramlawi grew his business angel wings last year and invested in an early stage Jordanian company, Masmoo3, which specialises in Arabic audiobooks. The company was established in 2011 and quickly produced 11 Arabic audiobooks, together with two translated best-sellers and nine Arabian classics, offering them for sale on iPhones and iPads last June.
"We started from an idea with a home-made prototype and a short draft business plan, to a company with five full-timers and 15 part-timers, and a catalogue of over 30 Arabic audiobooks and 30 audio stories for kids, available for online sales worldwide," says Ala Suleiman, the chief executive of Masmoo3.
In August, Mr Suleiman closed an investment deal with Mr Ramwali, which valued Masmoo3 at $500,000. By early September, Masmoo3 had opened its own office, built a studio and closed a distribution deal enabling the Jordanian start-up to sell its products via Amazon.com. The company is now not only partnering with digital publishers in the Middle East, but also with others in the US to publish its products across all available platforms. Masmoo3 is also publishing some titles on smartphones that run Google's Android software.
"Our plan for this year is to produce and publish around 100 audiobooks and 150 audio stories. We also expect to launch our website for audiobook sales in April," Mr Suleiman says.
Mr Ramlawi invested $200,000 in Masmoo3 in exchange for 34 per cent of the start-up's equity. His investment will help to fund the company's growth. His other investments include a real estate development company in Amman, Jordan, which specialises in developing high-end residential properties for niche markets.
He says he is now looking to invest in other start-ups in the information technology and communications sectors. Meanwhile, Masmoo3 is preparing for its second round of investment.
Business angels who are serial entrepreneurs have something far more than money to offer struggling start-ups. Their experience of having started their own businesses is invaluable when it comes to developing a workable business strategy alongside the start-up's own management team.
This form of "mentoring" is commonplace in sophisticated markets such as the US, where the most successful business angels tend to be entrepreneurs. It is a process that is now being introduced into markets such as the Middle East.
"We need to create a mentor network to allow these companies to benefit from the energy, wisdom and know-how of people who have done that before; business leaders who are willing to help," Mr Fayyad says.
As well as acting as a showcase for start-ups from the region, Oasis500 trains and develops new entrepreneurs. The first stage of this process is referred to as "boot camp". The company then enters a process of incubation, where it can benefit from mentoring from established business figures while simultaneously negotiating seed funding with business angels.
Emile Cubeisy is the managing director of IV Holdings, a venture capital investment firm, and intends to invest in an Oasis500 start-up.
"The transformative effect that the mentors have had on this venture I cannot begin to measure," Mr Cubeisy says.
"To have a company less than four months old sitting in Jordan being mentored by the likes of [entrepreneurs] Mike Cassidy and Tom Keller alongside Jordanian mentors means that the type of feedback and input they are getting is immeasurable."
But, while angel investors should be happy to act as mentors to their investments where appropriate, they should also be wary of over involvement. Once an angel becomes part of the management team, it can often become hard to take a detached view of the company from an investor perspective.
The temptation can be to continue to inject capital into the start-up to keep it going until it can fully execute its business strategy. In the case of a company that may have made over-optimistic forecasts on earnings, this can mean throwing good money after bad.
Before opening their chequebooks to new ventures, prospective business angels need to take a long, hard look at any potential investment. Becoming a successful investor requires significant market knowledge, an ability to analyse a new business plan at a glance and a sound knowledge of human character.
It is also vital for new angel investors to have a firm idea of how much they are willing to wager on the potential success of a new start-up. This calculation should be made in light of the fact that any business idea, no matter how well planned or executed, can fail through no fault of its own. The pace of technological change, international financial crises and competition from the big players can all combine to strangle a struggling start-up.
It is generally considered unwise for an angel's start-up investments to represent more than 5 per cent, or, at the very most, 10 per cent of their overall assets. Business angels should also be accredited investors with a net worth of at least $1m.
The successful business angel should also have the required professional experience to conduct due diligence and make a thorough financial inspection of any start-up in which he or she is considering investing. Failing this, the angel should have access to those skills via an adviser. In any case, employing a first-class legal adviser is paramount because an angel investment involves many legal documents and disclosures that must be professionally reviewed.
One way for novice angel investors to avoid the pitfalls of managing their investment on a day-to-day basis is to become part of an angel syndicate. Syndicates generally have one lead investor who monitors the start-up's progress. A syndicate can be formed by approaching a more experienced angel investor.
But even angel investors sheltering in a syndicate should inspect any potential investment closely. As well as examining the company's own business plan, it is essential to take a look at the competition. It is of little use funding a start-up with what appears to be a unique market approach only to discover that other companies may have already started to execute strategies around the same brilliant idea.
Investments Google, Twitter and Square
Company SV Angel
The quote “I like investing in entrepreneurs that are super young because you get to watch their entire progression ... It’s fascinating to watch the logarithmic maturity that goes into building a huge successful company.” (The Trentonian)
Investments LinkedIn, Facebook and Zynga
Company LinkedIn co-founder and executive chairman
The quote “The gift card industry has grown to a $100 billion industry and yet very little innovation has been done around social networks and smartphones. You put those two things together and suddenly you get a much more easier way to give.” (All Things Digital)
Investments Photobucket, Twitter, Instagram and Turntable.fm
Company Lowercase Capital
The quote “We’re doing everything we can to make this a playground for devices.” (thinkexist.com)
Updated: March 3, 2012 04:00 AM