The rise of the angel investor in the UAE

Tarek Ahmad is an optimist, which is just as well.

As an angel investor who lost US$80,000 on his first two investments, he is undeterred.

“You live with it,” says the 30-year-old Egyptian entrepreneur and investor, who was born and raised in the UAE.

Angels such as Mr Ahmad invest in very early stage start-ups, playing a critical role in the region’s entrepreneurial ecosystem.

“One way to look at them is that they offer significant assistance in helping the start-ups cross the valley of debt,” says Ramesh Jagannathan, the managing director of the innovation and entrepreneurship platform StartAD. “That’s a gap that they fill.”

Mr Jagannathan was speaking at a recent event at New York University Abu Dhabi called Angel Rising organised by StartAD, which he is the managing director, and the early stage funding platform VentureSouq. The annual event aims to educate prospective angel investors.

According to a report released earlier this month by Arabnet which surveyed 150 investors, approximately half of the investor community across the Middle East and North Africa are early stage investors.

But unfortunately for the UAE and wider region, there are still not enough angels. “If you look at the US there are 400 of these angel groups and there are 300,000 angel investors. Over here there is of course VentureSouq, Wain, Womena – there are a few groups doing a really good job, but we need more of them,” says Najla Al Midfa, the general manager of Sheraa, the Sharjah Entrepreneurship Centre.

So why are more investors here not getting involved at the angel stage?

“In general, perhaps we don’t have enough investor education, so not many high net worth individuals are very familiar with this asset class,” says Ms Al Midfa.

Others think people are put off by the risk involved.

“You could lose 100 per cent of your capital. So if you are not prepared to take that, don’t do it,” says Saud Al Nowais, an angel investor who is the commercial counsellor for the UAE to the United States.

In fact, according to Jeff Lynn, the cofounder and chief executive of Seedrs, an equity crowdfunding platform based in the United Kingdom, this is a space where most businesses you invest in will probably fail, no matter how good you are.

Typically, the first funding a start-up receives is from their friends and family, say experts. Angels come in after that, providing anything from $25,000 up to $250,000, in return for a stake in a business. The next investment stage is seed funding, which takes into account certain criteria, such as traction in revenue or user growth. It is typically this stage where a company aims to scale.

Therefore, without angels filling the gap between friends and family and seed investment, there would be no ecosystem, the experts agree.

But despite the risks, many investors still want to get involved because the returns they receive if the business they back does succeed can be tremendous. Many angels hope to hit the next unicorn, which is a start-up with a valuation of more than $1 billion.

“The winners can win so big,” says Mr Lynn. The prospect of making money is partly what keeps Mr Ahmad, an engineer-turned-entrepreneur, interested in the space.

“I usually invest around $30,000 to $100,000. I love to give very small tickets,” says Mr Ahmad, who plans to launch his company Wakil, which offers people the chance to complete government services without visiting typing centres, in July.

“I have realised through time that the more money a company has at the beginning, the more foolish they will become. It doesn’t really drive you to become leaner. You start thinking about all the luxury you might not necessarily need. I have made that mistake before.”

The first two angel investments he made, which were for $50,000 and $30,000 respectively, did not fare well. He lost it all when the businesses folded.

“You enter it with [the prospect] of losing the money in mind. You know you have a good team and a great idea and you look at the macroeconomics of things; will they have leeway and can they operate in the country?” he says.

“But then sometimes either the competition is too fierce or they couldn’t get funding at the right moment. It’s a combination of a lot of issues. If you lose the money, at least you are ready for that.”

However, Mr Ahmad could be in line to score his first big win. He has invested another $30,000 in a company that is preparing for a seed round and expects a good return when he receives the possibility to exit in about three years’ time.

Although money is a key motivation, it is not the only one for Mr Ahmad. Being lucky enough to receive investment from his parents at the earliest stage, he knows many are not so fortunate.

“From a UAE perspective, there aren’t yet a lot of angels in the market,” he says. “That’s why a lot of early stage start-ups don’t find it easy to access funds. And not everyone has family or friends we can rely on.

“For me there are a lot of ideas and founders you can trust. And they just need an opportunity. They just need their own opportunity to shine.”

Others are in it for the thrill. Some angels, many of whom are, or have been entrepreneurs themselves, act as mentors to the start-ups and get a kick out of seeing them succeed. This is the case for Vikas Shah.

“I find it intellectually stimulating and it really makes me want to get out of bed in the morning. That’s why I do it,” says the visiting professor of Entrepreneurship at MIT’s Sloan School of Management.

Sonia Weymuller, 33, from France, became interested in angel investing at the same time as her friends, Tammer Qaddumi, Sonia Gokhale and Suneel Gokhale, back in 2013. Like them, she had some money to invest and was looking to do something interesting with it, but it quickly developed into something far more significant.

“Basically, our friends started feeling a bit envious, saying ‘that’s cool, you should have told me’,” she says.

“We started holding these informal pitch events, which would feature a company we found interesting and had them pitch to a group of us, 10 or 15 of us. And then our friends started inviting their friends, and their friends started inviting their friends. And literally it just grew very organically.”

Today it is a business, called VentureSouq, which has five partners, the original four plus another based in Saudi Arabia. It promises to make an angel out of anyone – provided that they can afford the investment. Ms Weymuller describes it as an early stage equity funding platform with an investment and edu- cation pillar.

It has done 20 funding rounds into 14 companies, including Knot Standard, an online custom-made suits company, and financial comparison website Souqalmal, since 2013.

It has a reach of 750 investors across the GCC, but most of them are from UAE. All do not necessarily invest though. Majority On average about 100 investors attend the investor round-ups, which are held on a quarterly basis.

Teasers are sent out on the three companies that will feature to ensure people are not wasting their time. And the number of people who do part with their cash is rising.

“It is a conversion process. So we have increasingly seen our investors feeling comfortable. Now that we have been around for four years, that conversion rate is increasing because people have been following us. They are starting to trust us. It is now that we are starting to realise the benefits,” says Ms Weymuller.

She credits the company’s education programme, which tells people what angel investing is and how they can get involved, for that success.

“I joke around with people and say with our education pillar we are kind of becoming an investor accelerator because that is what we are trying to do, to encourage that,” she says.

The minimum investment depends on the deal but is typically about $15,000.

“Everyone thinks of this region and thinks of family offices with deep pockets of money, but there is a whole untapped pool of capital lying with ‘normal people’, like you and I. Young professionals in their 30s and 40s. We don’t have $500,000 to put in a company. We might have $15,000 or $20,000,” she says.

Investors get involved for many reasons, says Ms Weymuller. Some of them invest for the reasons already mentioned. Others want to be part of something which could become big without risking it all themselves, she says. “Even if you yourself haven’t quit your day job to do this, you are still part of the story nonetheless.”

pf@thenational.ae

Follow The National's Business section on Twitter