Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh how times have changed. While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Alvaro Abella is Managing Partner at BECO Capital.
Before and after his MBA from MIT Sloan School of Management in 2003, Alvaro worked as a management consultant for various firms such as Booz & Co and Diamond Cluster (now Oliver Wyman).
He joined Gulf Capital at its inception in 2006, one of the largest alternative investment companies in the GCC with over $1 billion of assets under management, responsible for its TMT investments conducting all investment activities with a prime focus on post-acquisition.
VatorNews: What is your investment philosophy or methodology?
Alvaro Abella: The name BECO is borrowed from the space program. It means "booster engine cut off," and it's the process where initial rockets detach, and the engine takes stratosphere after it ignites. That really is an analogy for what we try to do. We drive companies that have an idea, a functional product, and we provide capital mentorship and networks to get them to the later stages.
Our mission is to be a catalytic converter for ecosystem in the MENA region. That's the Middle East and North Africa. We make sure we turbo charge the companies we work with, and, by doing that, we create a fantastic ecosystem.
Compared to other developing regions, in terms of venture capital and the Internet space, the MENA region is still in the initial stages. We are probably where India was in 2008 or 2009, or where China was in 2005. We see ourselves as being fundamentally seven to 10 years behind India and China, which have seen a lot of traction over the last four years, and the number of qualified deals has has grown six or seven fold in the last two years. We are now starting to see good role models, good examples of entrepreneurs who are able to build great businesses. For example Talabat, an online food ordering company, which was bought at the beginning of 2015 by Rocket Internet. That's a very clear example of one local entrepreneur – Kuwait-born Mohammad Jaffar - making it big across the region.
Dubizzle, an expat-started general classifieds portal, was sold to Naspers in 2014, and Maktoob, which started in the early 2000s, was sold to Yahoo in 2009 for $170 million. Those are marquee exits.
Some of the latest large rounds and acquisitions include Careem, which raised $350 million from Rakuten & Saudi Telecom Company, as well as Souq.com, which has been acquired for a reported $650 million by Amazon.
VN: What do you like to invest in? What are your categories of interest?
AA: Because of the nascence of the ecosystem, we don't have the luxury of being focused on a specific industry or theme. We like initiatives or companies that have very distinct characteristics, such as great founders, companies that solve a big local problem, that have a lot of scalability, and are tackling it in a different way that might transform the way the sector operates and have a defensible proposition. We like companies that are really transformative for this region.
If you look at our portfolio, we predominantly do marketplaces, and classifieds as well. We also do infrastructure or money circles.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
AA: There's a startup we invested in, based in Kuwait, that does recurring payments. They're in stealth mode, so I prefer not to give the name of the company.
A lot of rental payments are check based and, in the Gulf, post-dated checks is a civil liability. Landlords can take you to court, or the police might show up, even if you're good for it. It's very convenient, in an offline world that is making the transition to the online world, to do rental payments through an app. The company is tackling pain points for consumers and landlords.
We come across many different sui generis ways to solve local problems, which can be expanded across the region. For example, another company that we invested in does digitization of money circles in developing markets. In the offline world, 10 or 12 friends will all pitch in on a monthly basis, a set amount and the pool will be handed to one member every month on a recurring basis. They use it for large outlays, like a TV or school payment fees. It offers easy access and credit for people who don't have access to banking in places like North Africa, Southeast Asia and South America. This company is digitizing this through social networks and data from their social profiles and online activity as 60% of the population in the MENA region is online.
VN: What do you look for in companies that you put money in? What are the most important qualities?
AA: We have to have chemistry with the entrepreneur. We also want to see someone where this is the second or third time they've started a company and that they've had success. Moreover, we have to see that passion, that drive to solve that particular problem, and intimate knowledge to be able to solve it.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
AA: We're very early stage investors, so we have done deals when it's just at the product development phase, so there isn't much traction there. It's just based on the product road map and the founders and entrepreneur hitting their milestones. Also, when they start testing, etcetera, so I guess that's the traction. Not traction in the traditional sense of how many users or what revenue.
When it's at Series A, obviously we need to see market acceptance, proof of concept, user uptake rates and probably some initial unit economic analysis. We also want to see at least a trend toward positive unit economics, so that, at the end of the day, the customer lifetime value turns out to be positive. We want the cost of acquisition to be lower than the average revenue per user, as defined in the customer lifetime value. So, you have a lower cost of acquisition than what that user generates in terms of revenue so that you have a positive margin as the company scales.
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
AA: It depends on several factors. One is stage; at the very early stage there is typically little due diligence. It's really about the chemistry with the founder, whether we feel that it’s a quality entrepreneur who has the right skill sets to solve whatever problem he's going after, and then matching those skill sets with the market opportunity and the scale of that opportunity. There we usually take less time in terms of diligence. It could be a few weeks to a month and a half, but here's no specific timeline.
Where we get into a little more diligence, and that drives the time to close the transaction, is when you have something that has more traction and we need to do diligence unit economics. We need to understand the operations, especially if they're across several countries. We need to spend time with the entrepreneur and the team. There will probably be legal and financial diligence. Again, there's not a specific timeline, but it typically takes several months. We've done it in six to eight weeks, up to four or five months.
Everybody talks about proprietary dealflow, but we really believe in it, in the sense that the best deals we get are referrals from other entrepreneurs that we either are currently working with or have worked with or that we know. We also have an inbound program through our Web application and we get a lot of different opportunities through that, and there's also a lot of stuff off remit.
So, the main three channels are us being out constantly in different conferences and meeting entrepreneurs in mentor programs. Second, electronically from people applying through the website or through email. And third is referrals from people we have worked with, and who know exactly what type of businesses we like.
VN: These days a seed round is yesterday's Series A, meaning today a company raises a $3M seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes of a seed round vs a Series A round?
AA: There are a few different aspects that we need to address here.
First of all, MENA is not a single market. I'm assuming that seed rounds vary in size in the U.S. depending on whether they are raising in Miami or raising in the Valley or raising in Boulder, Colorado. Similarly, here in our region, seed rounds can be very different because it reflects the cost structure of the city and the market. So, Dubai will have more expensive seed rounds than Cairo. The Egyptian Pound devalued 100 percent back in November 2016. So, if a round used to be, just using an arbitrary number, $500,000 before November 2016, suddently it's $250,000 on the same on basis. You're going to have inflation, but definitely, on a dollar term, the seed rounds have become much smaller.
You have to look at the intricacies of each of the individual markets, which each have their own currencies. Most of the Gulf country are pegged to the dollar, but then you have the other large markets in our region: Egypt, Morocco, Jordan, Lebanon. All of those are free floating, so things happen, and obviously they have their own political risk. The cost structure in those markets is different, so we can't paint it with one brush. I would say a seed round here in Dubai is anywhere between $200,000 to $800,000, and a Series A is still anywhere between $1.5 million to $3 million.
The second aspect, regarding Series A, is that this market is in the developing stages. As I said earlier, we are probably seven to 10 years behind China and India. There's definitely been an inflation from where we were three years ago, but you still can't compare it to other ecosystems.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
AA: The common thread across venture capital has to be passion about what you’re doing. You have to be passionate in this business because it's, like being an entrepreneur, very stressful at time and you have to have that juice in the tank to get you through it. In my case, I'm a diplomat brat, where I moved around a lot as a kid. My dad was stationed in Brazil, Kenya, in Washington D.C., and we were back in Spain a lot as well. I studied in Germany, and I've lived in Italy, so I definitely consider myself somewhat a citizen of the word. What's the saying? "At home everywhere, a citizen of nowhere"? Something like that.
The way I started my professional career was in TMT consulting, and, because background of my moving around and seeing many different things, consulting back in the mid-90s was fantastic. Especially in telecoms consulting because it was the liberalization of the telecoms market basically across the whole globe, at the same time. You had liberalization of the markets in Europe, South America, the U.S., here. What that meant was that you had consultants flying across the globe, trying to understand licensing requirements and what was going to happen to the markets and operations after competition came in. They were writing regulation and helping the telco companies gear up for competition, and understanding pricing structures, interconnection rates, etc. It was a fantastic platform, for me at least, to see many different challenges, to understand many different idiosyncrasies from the different markets. For a year and a half, I basically had a suitcase and I traveled to Brazil, the U.S., did projects all over Europe. There were times where I was taking six or seven flights per week. It was an intense period of my life.
In 1998, at the height of the Internet boom, I was going to do my MBA, and a friend of mine from the consulting shop says, "I have this friend who's putting together an Internet business and he's looking for guys with your profile, why don't you give him a ring?" I went to see him and I thought, "Wow, this sounds really interesting, let me see if I can put my MBA on hold, and try my hand at this." And it was pure chaos. It was like a drug, it was addictive, because it was definitely unstructured, and very much different to the consulting business, where you have a partner, you have an engagement manager, you have the analyst and everyone knows what they have to do. You have deliverables, you have timelines, and you're doing many, many hours a week but there's a start and a finish. In these Internet businesses in the late 90s and early 2000s it was just chaos, but it was positive and creative chaos. I had a fantastic time. I learned a lot about, specifically, dealing with people from very different backgrounds and mindsets. Developers, back in those days, were a different breed. Today, they interact with people, and they talk about product requirements, but back in those days it was definitely a communication barrier, and figuring out how to work, to get to that common goal, I thought that was truly invigorating. It was a true challenge and I really enjoyed it.
The company, unfortunately, didn't do well. It closed down, and I went off and did my MBA, but I still had the bug. In 2003, when I finished my MBA, it wasn't a great job market, so B2B and B2C, then became: "back to banking" and "back to consulting." I ended up going back to consulting for just about two years, and then I went over to the investment side.
When I first went to the investment side, back in 2006, I was with a PE fund out of Abu Dhabi, which had just launched, and I was responsible for their TMT investments. There was very little in terms of PE investment on TMT side at that time, because most of it was operator based or large infrastructure projects, and very little in terms of services that could be addressed by PE style investments. There was a lot of smaller stuff, more for venture capital, and I always wanted to do that, but it just didn't hit the ticket size and the remit for a PE fund. I was always a little bit frustrated with that.
A good friend of mine, Danny Farha, who's today my partner, he was one of the co-founders of Bayt.com, which is the largest job site in our region today. They focused on localization early on and they basically kicked Monster out of here. He exited Bayt in 2011, and he started investing on his own. So, we started talking investing on the tech side. I started first, from my PE experience, advising through investment committee and structuring, and about a year into that I joined full time, in 2013. We then raised our first fund in 2014.
VN: What do you like best about being a VC? What makes you excited?
AA: I have a lot of respect for entrepreneurs because you need to be 100 percent focused and you need to be obsessed. I enjoy investing because of the variety and the multi-faceted part of it, and looking at many different things at the same time. Most VCs have a little bit of ADD.
I also love the novelty of everything. Everything is new and looking at new problems, new challenges, new business models. It's the network. Everybody talks about helping entrepreneurs. Everybody likes to help other people, whether it's an entrepreneur or you help a colleague, you like to be useful, but thinking through new problems and helping out with those new problems really invigorating. It's exciting.
VN: What is the size of your current fund?
AA: We raised north of $32 million at the onset and we're basically almost fully deployed.
VN: What is the investment range?
AA: We’ll do seed at anywhere between $300,000 to $500,000 and we'll do follow on of that that to $1 million to $1.5 million. We do new investments at Series A of $1 million to $1.5 million, and Series B up to $3 million.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
AA: It depends on the stage, but we try to take and maintain around the 20 percent mark.
VN: Where is the firm currently in the investing cycle of its current fund?
AA: We started raising our second fund which is over $100 million.
VN: What percentage of your fund is set aside for follow-on capital?
AA: We reserve about 50 percent of the new fund raised for follow on.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
AA: We provide capital for the initial stages of the startup, starting with late seed, up to Series A and B. We do not do later stage rounds, we let the later stage investors (today, particularly international investors) lead those rounds who have the balance sheet/capital base and international networks to support the company in the future stages.
VN: In a typical year how many startups do you invest in?
AA: We did six investments last year. We’re three, going to four partners, so that's two to three investments per partner.
VN: Is there anything else you think I should know about you or the firm?
AA: We believe that we are really at the start of what will be 15 years of tailwind in the MENA region in terms of opportunities in these growth companies. We believe that Careem, which has made it to a billion dollar valuation in four years, is a prime example of the potential of the region. You have common language, across a 160 million population, with very high spending power in some of those countries. You have 60 million consuming users online today, and growing rapidly.
From a demand perspective, you have the user base and the spending potential. From a supply perspective, from the VC side, there's really about four or five firms here. You're starting to see more international firms coming here, and they take the late stage rounds, like Tiger, Rakuten, General Altantic, Warburg Pincus, Naspers; those big guys have been looking at this region. I think there's an opportunity, and this is what we really are active in doing, in building our network of partner firms that would like to have exposure to an emerging market, such as Middle East North Africa, and there's an opportunity for them to capitalize on those growth opportunities in a very exciting region, like India and China have been in the past.
We're building and expanding our international network. That's why we have a great working relationship with the guys over at Alpha Ventures. Steve Brotman has been a fantastic partner and those are the types of relationships we want to continue to build and foster.