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Often, a startup starts with a brilliant idea followed with the seed capital coming from close friends, family or the founder's savings. But as the concept gains traction, the inevitable need for funding arises in order to transform it into a thriving company. Here's where venture capital comes into play.
In the US, venture capitalists have played a significant role in startup growth. According to PitchBook-NVCA Venture Monitor, venture capitalists (VCs) deployed a whopping $131 billion in US startups last year. In fact, venture capitalists invest more than $22 billion into 2,700 US companies every year.
As per MAGNiTT, there were 366 startup funding deals last year, amounting to $893 million, in the MENA region.
In Saudi Arabia, technology start-ups incubated by the Badir Program, one of the King Abdul Aziz City for Science and Technology initiatives, successfully raised around SR110 million ($29.333 million) in 2018 across 64 deals.
Individual investors were the most active in terms of funding size, having pumped SR40.690 million ($10.851 million) into Saudi startups followed by venture capital firms investing SR30.680 million ($8.182 million), private sector companies SR35.200 million ($9.387 million) and the government SR3.542 ($944.533).
While the numbers for the Kingdom of Saudi Arabia are comparatively quite minuscule to the US; Saudi does offer a fertile ground for startups. Venture capital funding is an essential piece of that startup jigsaw and is unique in its characteristics.
A startup is a company that is looking to receive funding from a venture capitalist which implies it meets several basic criteria for growth: a strong founding team, a solution to a clear and identifiable problem, a clear path to monetization and a scalable product that has a regional if not a global market.
Venture funding is imperative to growing startups at each stage of funding whether they are yet to break even or need additional funding to achieve scale and growth. Unlike other conventional funding sources, venture capitalists take up an equity stake in exchange for funding. It is therefore essential for entrepreneurs to understand the implications when pitching to venture capitalists.
While I have articulated the four preliminary criteria that a venture capitalist looks for before they undertake basic due diligence on a startup, founders need to bootstrap in their early days. If they require funds, they should speak to friends, family or angel investors before pitching to a venture capitalist.
Bear in mind, the venture capitalists role is not to help a startup prove a product market fit or to help them hire their founding team; their investment is used to scale. And hence it is essential to bootstrap in the early years of a startup journey.
In the last few years, we saw on average that the top 200 funded startups across MENA took two years to get to SEED stage and three and a half years to get to Series A.
Given the extremely time-consuming processes, bootstrapping allows a founder to answer three of the key criteria posed: Create your Minimum Viable Product (MVP), get the right team and showcase a monetization plan.
Finally, the startup founder has to show a large addressable market. For a startup to be appealing for a venture capitalist, he/she needs to show that there is a large market that they are looking to tackle.
The mantra for success for the startup founder is to do your homework, look at global competitors, understand how you want to scale and then capture the market.
