A Brave New World
In the Fourth Industrial Revolution, we have seen the rise of new technologies, including blockchain, fintech, artificial intelligence, biotech, and green tech. In the coming years, we are likely to see more disruptive tech ideas emerge in the global startup ecosystem as investors become more interested in investing in new ideas.
According to PitchBook, an international financial data and software company, VCs invested a total of $53 billion in 2,657 companies globally in the first quarter of 2019. This year also saw the birth of 23 new unicorn companies in different verticals worldwide. However, for many entrepreneurs, raising the capital needed to stay afloat, let alone become a unicorn, can feel like an impossible task.
Recently, I spoke with a successful MENA-based entrepreneur who was deeply frustrated by the fundraising process, especially in the MENA region. He claimed that no matter how successful a startup has been, or could be, that the fundraising process in the region is often laborious, tedious and bears little fruit. Yet, this frustration is not unique to the MENA region.
For over a decade, I have consulted for startups and investors in the U.S., Switzerland and the MENAT region and I have discovered that the biggest challenge for both investors and entrepreneurs alike is the fundraising process. Investors will frequently complain that global startup ecosystems are nascent or that entrepreneurs are inexperienced. On the other hand, entrepreneurs will complain that investors are too impatient and risk-averse. While the complaints vary depending on the maturity of the startup ecosystem in question, fundraising still remains to be a major pain point.
There is one category of entrepreneurs who tend to find the fundraising process more off-putting than most and that is the tech entrepreneur. This group of innovators is frequently faced with the formidable task of pitching avantgarde ideas to investors who might not fully understand the complexities of their value proposition. While it is true that many global investors VCs, angels, and family offices still prefer to invest in traditional business sectors and business models, there is a growing number of investors who are looking to invest in the burgeoning global tech scene.
According to Magnitt, a MENA-based data platform for entrepreneurs, investors, and corporates, a total of $893 million was invested in 366 deals across the MENA’s top eight industries in 2018. Magnitt’s 2018 MENA Venture Investment Summary ranked the industries by the number of deals closed and the top five industries included: fintech (12%), e-Commerce (11%), delivery and transport (8%), IT solutions (8%), and F&B (7%). In order to ensure the continued growth of these innovative sectors in the MENA region, tech entrepreneurs need to overcome their negative self-talk and hone their pitching skills so they can pitch their ideas to any investor.
1. Adopt the “less is more” mentality
Any good investor will do due their diligence before approaching a startup. So, if an investor is listening to a startup pitch, they probably already know that the startup team in question is capable and they trust them to do whatever is necessary to make the technology work. However, when most tech entrepreneurs pitch investors, they mistakenly think that investors need to understand everything about their technology in order to invest. In reality, most investors are not interested in understanding the nuts and bolts of a tech entrepreneur’s technology. In fact, most of the world’s most successful investors do not back new technology, they invest in new business models.
If an investor sees potential in a tech entrepreneur’s business model, typically all they want to know next is how much capital they need to invest and how much their return on investment will be. Nevertheless, not all investors are the same, therefore tech entrepreneurs need to be prepared to customize their pitches and pitch decks to satisfy the curiosity of each investor they engage with. At the end of the day, raising funds is all about relationship-building, and if an entrepreneur is not willing to put in the effort to build a relationship with an investor they should not feel entitled to their money.
2. Understand who you are pitching
Before pitching to an investor, entrepreneurs need to research their prospective investors and gather as much information as they can about their professional career and investment history. This is important because it gives tech entrepreneurs the opportunity to build pitching personas for each kind of investor they encounter. Ultimately, pitching tech ideas to a baby boomer investor (born between 1946 and 1964) is not like pitching tech ideas to a Generation X investor (born between 1965 and 1980) or a Millennial investor (born between 1981 and 1996). That being said, while there will inevitably be generational and cultural differences between investors, all investors have one thing in common: they want to make a return on their investment.
Again, no matter how old an investor is or where they come from, they do not need to understand every aspect of an entrepreneur’s technology. They do, however, need to know enough about the technology to remain financially and emotionally invested. In addition to researching an investor’s professional and investment history, tech entrepreneurs should also seek to learn as much as they can about a prospective investor’s life story, as these details will undoubtedly help entrepreneurs craft a more personalised pitch for their investor. The more relatable the analogies and stories that entrepreneurs use in their startup pitches, the more likely it is that an investor will invest, or at least consider investing, in an entrepreneur’s startup idea.
3. Be a willing teacher and student
Sometimes, tech entrepreneurs can develop a defensive attitude about their technology, especially when they have to explain it to “non-techie” people. This attitude often drives tech entrepreneurs to avoid situations where they might feel criticised, inevitably costing them valuable investment opportunities. That being said, the fear of criticism is not the only thing that prevents tech entrepreneurs from pitching their ideas. Sometimes, the fear of their technology being “too complicated” to explain to “non-techie” people keeps tech entrepreneurs from pitching their ideas to investors. Either way, the fear of feedback, especially negative feedback, often keeps tech entrepreneurs from developing themselves and their technology.
However, if tech entrepreneurs really want to make their technology available to their target markets and secure long-term investments, they have to be willing to teach investors about their tech. They also have to be willing to take criticism about their business and “be coachable.” Just as an investor does not know or understand everything there is to know and understand about an entrepreneur’s technology, entrepreneurs do not know or understand everything there is to know or understand about product development and running a successful business. Therefore, tech entrepreneurs need to be willing to learn from their investors and leverage the knowledge, resources, and networks they have to offer to support the long-term growth of their startup.
The Institutional Family Office
At the top end of the wealth and complexity spectrum are the family offices that look after some of the world’s most successful families. These are the family offices that make the headlines and are probably what most people associate with when they hear the term. In reality, however, these make up a small minority of the family offices that exist in practice.
These organisations will typically hire a team of professionals over a period of time and see themselves as the peers of private equity funds and principal investors. While they may still outsource certain services, there will usually be an in-house expert to oversee each asset class from financial investments, private equity and commercial real estate through to yachts, planes and art work. These will be accompanied by a CFO, lawyers, tax specialists, a team of administrators and, in some of the largest, their own HR or IT functions.
The Real “Dream Killer”
Last year, I met a man from one of the wealthiest families in the MENA region who told me a story that fundamentally changed the way that I think about investment. In 2018, this man, who I will call Mustapha henceforth, attended one of the United Arab Emirates’ most popular annual entrepreneurship events to explore new investment opportunities. At this event, it is customary for participants to wear a badge that indicates whether they are an entrepreneur, investor, government official or visitor in order to facilitate the networking process. However, when Mustapha came to register for the event, he was given a visitor’s badge instead of an investor’s badge.
Loath to waste time correcting the minor error, he decided to enter the event hall where hundreds of entrepreneurs stood in their booths pitching their startup ideas to the passing multitudes. Mustapha seamlessly blended into the bustling crowd, thanks to the visitor badge that he had received at the registration desk. He anonymously began to explore all the event’s different startup booths, until one particular booth caught his eye. Interested in learning more about the startup, Mustapha made his way to the booth to ask the founder some questions.
When he arrived at the booth, the startup founder took one look at Mustapha’s visitor’s badge, sighed inwardly, and proceeded to give him a rushed pitch so he could make himself available for “more important” guests at the event. After listening to the entrepreneur’s clumsy pitch, Mustapha walked away from the booth feeling offended and annoyed by the entrepreneur’s belittling demeanor towards him.
If Mustapha had been wearing an investor’s badge, that conversation might have gone very differently. However, the mistake was not Mustapha’s, but rather the entrepreneur’s. While Mustapha just so happens to be a wealthy many with a passion for investment, not everyone who invests in a business has to be rich or have a long investment history. All you need to be an investor is some savings and the willingness to invest. So, essentially, everyone can be an investor.
The moral of Mustapha’s story is that an entrepreneur’s ego and over-inflated sense of self can do more damage to their entrepreneurial dream than any tech jargon or math algorithm will. Although many tech entrepreneurs might feel that their complex tech ideas are deterring them from raising capital, that is not always true because even simple, non-tech startup ideas can be pitched poorly. The success of a tech pitch is not defined by how complex or simple an entrepreneur’s idea is, it is defined by their ability to gain an investor’s trust and simply convey their added value.
Over the past two hundred years, we have seen a rapid advancement of technology. Having said that, what is considered to be “cutting edge” is constantly evolving. That is why tech entrepreneurs who want to be successful need to focus on establishing startups that provide innovative solutions and unique business models. If a tech entrepreneur can do that, there is no reason why a prospective investor should not want to invest in their seedfunding round, or successive rounds of funding.
Youness Yaghcha is a serial entrepreneur with more than a decade of experience in financial services, investments and management consulting. I’ve worked with large financial institutions in private banking and technology and I’m a specialist in business strategy and M&A. After years of working in Europe and the MENA, I’ve developed a complex understanding of various investment and entrepreneurial ecosystems.