Venture capital team hunts for elusive digital ‘traction’
The Middle East is in the throes of an entrepreneurial revolution that will remake the region’s business scene, and Walid Hanna is at the cutting financial edge of that transformation.
The Lebanese businessman is one of three managing partners of Middle East Venture Partners (MEVP), a venture capital firm that recently became the biggest independent funder of new businesses in the region when it closed its second Middle East Venture Fund at US$32 million, his fourth fund over the past decade. MEVP now has assets of $120m under management, specialising in technology and digital start-ups.
Why is the tech revolution happening now? “In 2010 the industry was tiny, but now the number of internet users has jumped. There are about 150 million people [in the Mena region] who use the internet, increasingly for financial transactions, and 80 million smartphone users. When you combine that with the growth in the use of credit cards, it adds up to a boom period for tech-based start-ups with consumer applications,” says Mr Hanna.
The latest fund is run by Mr Hanna and his two joint managing partners, Walid Mansour and Ihsan Jawad.
The latter needs little introduction in the UAE business scene, having made his name, and a considerable fortune, on the launch and development of the business information website Zawya, sold to Thomson Reuters in a multimillion dollar transaction in 2012.
Mr Jawad runs the Dubai office of MEVP’s newest fund, using his expertise as a grandee of the UAE entrepreneurial scene to identify and evaluate investment propositions.
Mr Mansour has been a business partner for the past five years, liaising with the firm’s 16-strong team with offices in Beirut and Dubai, as well as its smaller outposts in Cairo and in the California’s Silicon Valley.
Mr Hanna, who had a previous career in entrepreneurial finance as head of the now-defunct Arab Business Angels Network, says MEVP is single-minded in its investment approach. “Our focus is on digital start-ups, mostly for mobile applications. We invest in ‘early stage’ propositions, but not just at the ‘idea’ stage. We don’t insist on revenue or profits, I’m proud to say, but we do look for ‘traction’, which usually means visitors to a website or application.
“As long as you’ve built something useful that’s growing fast, it doesn’t have to be making money. Our investments are like babies – they grow very fast every year. We would not regard even 25 per cent growth each year as traction, it has to be faster than that,” he says.
But if traditional criteria such as revenue and profit are not obligatory, the hunt for traction is highly selective.
“We screen around 400 potential investments per year and invest in maybe eight, with an average ticket size of $2m to $3m and a minimum of $500,000,” Mr Hanna says. A committee of heavy-hitting big business names – the MEVP equivalent of the “dragon’s den” – vets potential investments.
When successful, these can be big profit earners.
“It’s a high-risk, high-return strategy. We offer 30 per cent return per year, but the return is that high because it is a very risky asset class. The fund has a seven-year life, but investments are usually exited after five, so if on average, it would return 30 per cent to investors per year, that equals a threefold return,” he says.
That potential return lured in some big name investors for the recent fund, which closed oversubscribed.
The Kuwaiti telecoms group Zain was part of the funding group, as were several large Saudi family offices. Big regional media organisations were also involved, as was the chief executive – in a personal and anonymous capacity – of a local communications group.
The investments are in three categories within the digital technology sector: the consumer internet economy, like social media, networks, apps or sites; the e-marketplace aimed at connecting consumers to businesses; and in business-to-business (B2B) markets in sectors such as banking, telecoms and retail.
The new fund has already invested in nine ventures, bringing Mr Hanna’s total to 29 investments through his four funds, two of which focused in Beirut and two on the wider region. There have been four successful exits to date.
The fourth MEVP fund is invested in projects such as Anghami, a web and mobile based entertainment platform for the Mena region.
It has 17 million users of its music app and video streaming business, and has attracted investment from big telecoms players in the region.
Likewise Al Tibbi, a medical advice app that connects thousand of doctors and patients in the region each day. “The patients get free advice on treatment, but if they want urgent answers they pay a $10 fee. The doctors get known and rated by their peers and the community. We put $1.8m in Al Tibbi and it’s still not generating revenue, but it has traction and people are getting health care,” says Mr Hanna.
Another novel idea is The Luxury Closet, exploiting the lucrative market in second-hand luxury goods. “In the GCC there is a very high spend on luxury goods but sometimes the closet gets too full, especially when financial times are tighter, and they are sold at heavy discounts,” he says.
The next “big things” will come in software services, Arabic contact provision, and other applications related to “smart city” strategies, he believes.
“Messaging has been the hottest thing in the global tech world, but there is nothing from this part of the world to match WhatsApp or Snapchat so far. Some people ask why nobody in the region has produced anything like Facebook or Google, but the simple answer is that nobody else, apart from America, has invented those things either,” he says.
“And, maybe most important, there has not been a VC industry to support them. Well, now we think there is,” says Mr Hanna.
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Published: December 1, 2015 04:00 AM