Risky world of angel investing takes off in the UAE and wider region
For aspiring angel investors in the UAE, the message from above is clear – start-ups can produce sky-high returns, but your money is more likely to vanish into thin air.
Angel investment – seed capital to help get businesses off the ground – has traditionally been sourced informally from entrepreneurs’ friends and family.
But amid the buzzing start-up scene of cities like Dubai, more ways are emerging for individuals to take stakes in exciting – but risky – new businesses.
Yet there is no getting away from the harsh reality of the regional technology sector: most start-ups fail.
One angel group to have emerged in the Arab world is the Dubai-based Womena, launched in November, which shortlists start-ups and holds pitch meetings exclusively for women investors. Others include Cairo Angels, formed in 2012, which says its members have invested more than five million Egyptian pounds (Dh2.4m) in eight start-ups.
The Womena member Tala Salloum made her first angel investment in April – and plans at least a couple more in the coming years. She’s aware that the more start-ups you invest in, the greater the odds of finding a decent return – if not the next Facebook.
“Nine out of 10 of them fail – so I think I’m going to head towards 10 investments within the next year or two,” she says.
Ms Salloum, 30, lives in Dubai and is the founder of the Yellow Submarine Nurseries in Abu Dhabi. The Lebanese-Palestinian recently made what she described as a “small investment” in a company called AlemHealth, a platform to connect medical facilities in developing countries with doctors around the world.
She says the advantage of joining an angel group like Womena is that they shortlist start-ups for investment and do the due diligence, saving members the hassle of this essential – but time-consuming – process.
Womena has about 30 members, who pay an annual fee of $2,500, with the group taking a 3 per cent fee from investment transactions. The minimum stake is $5,000, with members asked to complete at least one investment a year.
Elissa Freiha – co-founder and director of Womena, and an Emirati of Lebanese-American descent – says the group helps to address the gender gap she has seen at other Middle Eastern investment events.
“It was preposterous to go to these events and be the only women in the room,” she says. “So we started focusing on educating these women and demystifying investment to bring them into the story.”
Despite such groups collaborating on due diligence of young businesses, there is no escaping the inherent risks in angel investment, Ms Freiha says. That means diversity is key when taking stakes in small businesses.
“You need to be investing in multiple companies to cover your bases,” she says. “Instead of investing let’s say $100,000 in one company, invest $10,000 in 10 companies.”
Larger investors can do this through venture capital (VC) funds, several of which have targeted Middle Eastern enterprises. One is the US venture capital fund Fenox, which said last year it planned to spend $25m in the region over the next 10 years. Others, such as the $75m Wamda Mena Ventures I, attracted corporate and institutional investors including the International Finance Corporation and Abraaj Group.
Yet VC funds are not geared towards smaller, individual investors, says Chris Thomas, co-founder and chief executive of the Middle East crowdinvesting site Eureeca.
Eureeca allows angel investors to buy equity stakes in Middle Eastern start-ups, by shortlisting firms, carrying out background checks and listing entrepreneur pitches on its website.
Live Eureeca campaigns include Kidz Venture, a childcare company hoping to raise $160,000, and Saluqi, a website-builder platform looking for $140,000.
“There’s a lot of money looking for a better home than the stock market or the property market,” says Mr Thomas. “In the US, $50 billion a year is invested by friends and family in businesses … There’s a lot of excess money that needs a mechanism by which they can find great things to invest in.”
Despite being early days for crowdinvesting, investing this way will one day be as easy and normal as booking taxis through Uber, says Mr Thomas.
“You’ll go into your local cafe or yoga studio, and you’ll say ‘I like this place, when are they crowdfunding?’ It will be so normalised. Like you’d pick up a phone to get an Uber – that’s where it’s going,” he adds. “It won’t be some nice niche, left field way of raising money … it will be the air that we breathe.”
Eureeca has so far helped 13 businesses gain funding worth about $2.8 million, of which it takes a 7.25 per cent cut. The average individual investment is $4,800, with some investors putting in $100,000 or more.
One tip for wannabe angel investors is to look for scalable businesses, and to look carefully at the entrepreneur you’re investing in, says Mr Thomas.
“You back the jockey, not the horse,” he says. “A venture capitalist will always say that they would much prefer to invest in a brilliant entrepreneur who has an average idea, than an average entrepreneur with a brilliant idea.”
Eureeca members saw their first exit opportunity earlier this year. Those who bought into a company called Search in Mena – a business-to-business online marketplace – were offered a 150 per cent profit return via a share buyback, meaning an investment of $10,000 in 2014 would have returned $25,000.
Such returns are, of course, not guaranteed: Eureeca carries prominent disclaimers about the risks of losing money, and investors must pass a suitability questionnaire. To mitigate risk, angel investors should diversify and not allow angel investments to make up more than 5 per cent of their overall portfolio, Mr Thomas says.
Yet crowdinvesting sites in some other markets have come under fire for potentially misleading investors. Dino Wilkinson, a UAE-based partner in the communications, media and technology group at the global legal practice Norton Rose Fulbright, says such sites are attracting increasing attention from regulators in markets like the UK.
“Crowdinvesting is considered to carry a number of risks for investors,” he warns. “Regulators are concerned to ensure that the increasing number of investors and recipients of finance are afforded proper protection.”
Not everyone is convinced by the crowdinvesting model – or indeed the overall feasibility of low-level angel investing.
P K Gulati, a Dubai-based technology investor, says crowdinvesting services are yet to prove themselves or reach “prime time” in the Middle East.
Mr Gulati – who has made about 15 investments worldwide, mainly in Silicon Valley and India – says there is no quick way to becoming a good angel investor.
“It’s probably not as simple as ‘hey, these are the 10 things that will make you a great angel investor’,” he says. “One thing that you can’t teach people is to take risks … either you do or you don’t.”
An individual with, say, $20,000 to spend should not even bother with seed investments because the risks are so high, Mr Gulati adds.
“If [an investor has] got $200,000 then they can possibly put $20,000 in 10 companies,” he says. “But if you’ve just got $20,000, forget it – don’t do it. Angel investment should be done by people who have liquid cash, or things that they can afford to lose.”
Those that do chose to take a stake in young companies should pay an active role in the business – as this shouldn’t be a passive investment, Mr Gulati says: “The ‘angel’ comes from the fact that the person is actually giving more value besides the money. It’s not that you write a cheque and you forget about it.”
That is something that resonates with the Dubai resident Christine Nasserghodsi, who has made two $5,000 angel investments through Womena.
Ms Nasserghodsi, who is from the US, says she has helped the businesses in which she has invested by, for example, making introductions on their behalf. Aside from the potential financial returns, there are also social reasons for investing in start-ups, such as job creation, she adds.
“I love the idea of helping start-ups. One of the things I really like about Womena is that you’re engaged in a process – you feel like you tend to support the company as well as investing.”
Ms Nasserghodsi, 42, is the director of innovation and entrepreneurship at Gems Education, based at Wellington International School in Dubai.
She plans to make between two and five additional angel investments in the next couple of years – but is under no illusion about the risks involved in investing in start-ups.
“Half of them will go completely bust and some of them will barely break even. And one or two may be successful, which is why diversity is critical,” she explains, adding that angel investments are part of her and her husband’s wider portfolio, which also includes property and shares. She echoed the sentiments of many, in that angel investing is a risky business – and not the basis of your nest egg.
“Nobody would make their retirement on angel investments,” she says.
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