Long queues form for start-ups’ $400m funding pot in Middle East

Many people think they can just come up with a great idea, but there are many models that have significant challenges and not worth venture capitalist dollars, Dany Farha of Beco Capital says.

Omar Christidis, the chief executive of ArabNet, says that digital businesses now have access to funding that enables them quickly scale up. Jeff Topping / The National

Millions of dollars in funding is available for start-ups in the Middle East as the regional network of investors continues to grow. But the number of companies competing for this pool of capital has nearly doubled by some estimates.

More than US$400 million in venture capital is earmarked for start-ups in the Mena region this year, according to digital networking group ArabNet.

“Digital businesses now have access to much-needed funding that will enable them to rapidly scale up, meet consumer demand and capitalise on the high potential of growing regional economies,” said Omar Christidis, chief executive of ArabNet.

Deny Farha, chief executive of Dubai-based Beco Capital, said that while the UAE was “awash with cash for the right person”, it was still difficult for start-ups to secure investment.

“Many people think they can just come up with a great idea, but there are many models that have significant challenges and not worth venture capitalist (VC) dollars,” Mr Farha said.

Out of 250 start-ups that submitted business proposals to the VC last year, Beco Capital only invested in one.

Mr Farha said that Beco expects to receive twice as many applications for funding this year and is likely to invest in just three to four companies.

“We are very selective and know exactly what we’re looking to invest in,” Mr Farha said.

Beco targets a 5 per cent week on week growth rate in users in the prototype or seed stage.

“A start-up is all about growth and we have companies growing 100 per cent to 350 per cent year on year,” Mr Farha said.

One experienced start-up operator, Dinesh Lalvani, is currently on his third venture.

“When you’re fund-raising, it’s the track record of the management team [that matters most],” he said.

He set up Growl Media, which has developed an app based on the Adventures of Zee cartoons that teaches Arabic using the cartoon characters, games and books, in 2013. The initial seed round of funding raised $1m, and then another $2m was raised in the first round of offerings.

Most of the investment has come from the UAE with a small amount from Saudi Arabia, and the company is continuing its expansion plans.

He said that acquiring the funding for start-ups in the region was getting easier, but it was still a long process. “Unlike in the West, there’s still not that ecosystem of investment,” Mr Lalvani said.

Potential investors were always comparing opportunities to the real estate market, he said.

“When you ask them to invest in a [novel] idea, it’s a struggle,” said Mr Lalvani.

“You have to create a buzz around yourself and the product.”

Mohamed Shawky, the co-founder and chief executive of the e-commerce site KanaryGifts.com, said that he looked for funding from so many different sources, including crowdfunding platforms, that he lost track.

Ultimately none of those areas proved helpful – VCs wanted an exponential growth rate that was not feasible for him – and he is now in discussions with a potential investor that came from a personal contact.

VCs mostly look for a good patent or unique service.

“If you are selling products that are already on the market, you can’t increase [the size of the business] that high,” Mr Shawky said.

He has plans to grow his business by seven to tenfold in five years, but that could be held up if he doesn’t get the necessary investment. “If this deal doesn’t go through, I will still continue but my expansion plans will grow very slowly,” Mr Shawky said.

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