Venture capital funding: Yes or no?
Venture capital (VC) funding activities have long been concentrated in New York, Los Angeles, San Franciso and other key cities in the US. Though the country remains the epicenter of VC investments, other countries are fast catching up.
Startups have mushroomed in China, India, UK, Germany, and UAE, among others. Naturally, these early-stage ventures are on the lookout for much-needed financial resources – either early-stage funding or expansion funding.
In UAE, 2017 saw startups getting $400 million worth of VC funding. It also accounted for 84% of overall deal value in the MENA region with a total of 57 deals.
Dubai leads the way in UAE, claiming the fifth spot in the list of cities that are increasing their venture investments the most in percentage terms, according to the Harvard Business Review’s recent report titled “Rise of the Global Startup City.” From the period 2010-2012, the total capital invested in UAE’s newly formed ventures jumped by 1,074.6% for the years 2015-2017.
This trend was sustained in 2018, with UAE still having the most vibrant startup economy in MENA. According to Magnitt’s 2018 MENA Venture Investment Report, UAE-based startups accounted for 70% of total funding in the region in 2018. Mena startups in general recorded 366 investments in 2018, amounting to $893 million worth of total funds – an increase of 31% from total investments in 2017.
However, while UAE’s startup environment continues to peak, New York startups are beginning to have a peek of VC funding’s darker side. Some entrepreneurs in the city now doubt if VC funding is the way to go. In fact, some of them have opted out of the VC route, either by buying out their investors or kicking them out of the pipeline altogether.
Their reasons vary – the investments come with huge risks, expectations for startups are not worth it, exclusion from traditional capital networks, and being forcibly led into the acquisition or IPO route. Some of them claim that certain startups buckled under the pressure of having to grow at a tremendous rate and eventually fell apart.
With this issue swirling around the startup industry, boardrooms may now be buzzing with the question of whether to continue receiving VC funding. To help answer this question, startup founders should consider these benefits:
In contrast to bank loans which are usually limited and are subject to stringent approvals; VC investments are enormous, allowing a business to gain sufficient capital to launch into a rapid upward trajectory. Said capital will be readily available for product and service improvement, stronger brand positioning, increasing market competitiveness, and customers. When these targets are achieved, additional rounds of funding will pour in.
Venture capital is not a loan. Therefore, startups don’t have to repay the money, even if the business fails.
Collateral not a problem
Banks pose a challenge to software companies as they have no acceptable collateral. With VC funding, however, this is not the case. Venture capitalists lean toward small businesses with high-growth potential and tech companies like those engaged in software development have the ability to scale up fast.
Most venture capitalists are well connected. Therefore, going for VC funding opens more doors for the startup. With the VC firm’s vast network of consultants and professionals across fields of specialization and with a deep understanding of specific markets, any startup can have the assistance and expertise it needs for professional services like accounting, recruitment, legal work, and engineering. Some VC companies also help in setting goals and objectives, determining marketing methods and execution, performance evaluation, and customer management.
Careem, a Dubai-based ride-hailing app founded in 2012 relies on venture capitalists. As of October 2018, it already secured $200 million in funds as the first tranche in its Series F round where it expects to raise $500 million. Careem will use these funds to penetrate the mass transportation, delivery, and payments space. The app now has 30 million users in more than 120 cities in Mena, Turkey, and Pakistan.
Souq.com, dubbed as the Amazon of the Middle East, also sought funding. By 2016, the company had raised $275 million, the largest by any e-commerce business in the Middle East. As of March 2017, the platform had sold more than 8.4 million products in 31 categories and recorded about 45 million visits a month. By January 2018, its subsidiaries included QExpress, Payfort, Helpbit and Wing.
These success stories show the bright side of VC funding. It may not have worked for some companies. Some quarters may bemoan its so-called darker side, but it has more than its fair share of startup beneficiaries that have grown in spectacular fashion, providing more jobs and making life easier for more people.
In the MENA region, Careem and Souq.com are just two of these startups. The list is actually long. There’s also StarzPlay, Fetchr, Pay Tabs, Wego, Unifonic, Instabug, Nar, Nafham, Vezeeta.com, and more. Meanwhile, PropertyFinder, Wadi, and Namshi are unicorns in waiting.
These companies did not suffer the same fate as those startups which fell victim to the pressure. Instead, they went on to become very successful, some even becoming household names by virtue of strong brand recall like the three unicorns to be.
This only goes to show that VC funding does work. With analysts forecasting that prospects for startups remain bright in 2019, VC funding is poised to continue being an attractive option for them.
Besides, not acquiring venture capital does have its dark side as well. Startup founders who refused VC funding ended up bootstrapping, that is shelling out money from their own pockets, either through their savings or credit cards.