Category Archives: Startups

Middle East Venture Partners’ new fund

Middle East Venture Partners (MEVP) yesterday announced their $250M VC fund focused on investing in startups in MENA and Turkey. This makes it the region’s largest non-corporate VC fund and second largest VC fund following Saudi Telecom’s $500M venture fund ST Ventures.

The large fund size is enabled by MEVP’s partnership at the general partner level with Mohammed Alabbar, chairman of Emaar Properties, in May of this year.

Given the large fund size, MEVP is likely to focus on larger transactions beyond the seed and series A stages, and increasingly in the Series B and C stages. In Turkey specifically, the availability of capital in the latter stages is lower than that in the former stages, so this move makes strategic sense for investments in Turkey. I imagine that the same holds true for the MENA region.

I had the opportunity to work with the MEVP team following their co-investments in Turkish female fashion marketplace Modacruz and Istanbul’s inner city ridesharing app Volt, and congratulate the team on their new fund.

Selling and reality

In an earlier post entitled “The nuance of reality”, I wrote that “Our tendency is to draw conclusions and then look for evidence to support those conclusions. Reality, however, is much more nuanced. Most good things have bad characteristics and most bad things have good characteristics.”

The underlying assumption of that post was that you’re operating in a context where your goal is to understand reality to the greatest extent possible. This calls for evaluating evidence to draw conclusions rather than drawing a conclusion and then looking for evidence to support it.

However, in a different context, the opposite approach is necessary. Specifically, when you’re selling something, your goal is to highlight those pieces of evidence that support the product you’re trying to sell while overlooking or downplaying those pieces of evidence that could be barriers to the sale.

In other words, selling is the practice of constructing reality by carefully selecting and presenting pieces of evidence which, while short of being comprehensive, hopefully remain individually accurate.

Defensibility

Entrepreneurs are doers by nature. They have ideas for what customers want, build teams to execute on these ideas, and execute.

Assuming that the entrepreneur has correctly identified a real customer want, this approach will likely produce a business that makes money in the short term. However, this isn’t enough for the business to survive in the long term.

The reason is that, if the customer want is really there, competition will either already be there or it will soon emerge. The bigger the customer want the entrepreneur identified, the greater the competition.

And for a business to survive in the face of competition, it needs to be defensible. In other words, it needs to have a characteristic, or a combination of characteristics, that stops its customers from moving to the competition.

Defensibility comes in many forms. It could be a very strong brand that has perhaps even given its name to a product category, like Coca Cola. It could be the lowest price provider due to a combination of economies of scale and the leveraging of an intrinsically low cost customer service channel, like Amazon. Or it could be a business with strong network effects that prevents users from having the same experience on an alternative network, like Facebook. Or it could be a combination of these characteristics.

Without a source of defensibility, a business’ initial growth will soon taper off and may even reverse into decline, thereby threatening the company’s survival.

As a result, you need to think about the defensibility of your business before jumping into execution. Your company’s survival, and thereby your return on the years of work that you’re going to put in, depends on it.

Hummingbird Ventures III

My friends Firat Ileri, Barend Van den Brande, and Pamir Gelenbe are partners at Hummingbird Ventures, a VC fund that invested early in companies including restaurant delivery marketplace Deliveroo, cryptocurrency exchange Kraken, and mobile gaming company Peak Games.

Hummingbird recently announced the closing of its $95M third fund, Hummingbird Ventures III, which Barend wrote about here. Having co-invested with the Hummingbird team in female fashion marketplace Modacruz and listened to several of the entrepreneurs they’ve backed share their thoughts on the team, their success is very well deserved.

Congratulations guys.

Execution

I recently went back over the pitch decks of two e-commerce companies from 2013. Fast forward 4 years and one of the companies is doing well while the other has closed shop.

What’s interesting is that the 2013 pitch decks of the two companies are very similar. Among other similar strategies, both companies planned a combination of content building to inform their customers with the goal of driving purchases, the introduction of private label products to increase product margins, offline community building to strengthen their brand, and the development of mobile apps to serve their customers through the medium of their choice.

In other words, both companies knew what to do. One company simply did it well while the other didn’t. In other words, execution was the difference.

So to pick the right company in 2013, looking over their pitch decks wasn’t enough. You had to develop an informed view on the execution capabilities of both teams.

Private information

I spend a lot of time consuming and processing information to inform my thinking. This thinking is what eventually informs my investment decisions. I believe that success in VC is determined at least as much by the quality of your investment decisions as by how much value you add to the business post-investment. So the time I spend consuming and processing information is very important.

There are two types of information that one can access. These are public and private information.

Public information, by definition, is information that everyone has. And since everyone has access to this information, it’s difficult to gain a competitive edge when investing based on public information.

A great example of public information is news articles. By the time something is covered by the media, the action has already taken place. As a result, any returns to be gained based on acting on the information in the article have already been taken by others.

The fact that public companies need to make most of their information public is why it’s much more challenging to generate outsized returns in public markets than in private markets. In the public markets, you’re making investment decisions based on information which is accessible to everyone willing to put in the time to research, read, and understand it. Trading based on insider (in other words private) information is illegal. To produce a return, you need to have an insight that others who have access to the same public information don’t have. That’s challenging and rare.

In private markets, however, having an insight that others who have access to the same information don’t have is just one way to make money. And it’s the difficult way to do it. The second and relatively easier way is to have access to information that others don’t have.

This private information comes largely from personal connections. Whether it’s an entrepreneur you’ve backed who shares the new business idea that their friend is working on, another investor who tells you about a company that they’ve decided to invest in for which they can’t fill the entire round, or another opportunity that you discover because of your local network in a particular geography, it’s these personal connections that give you an edge when investing in private markets.

This is also why being able to make follow-on investments in your winners is so important. As an existing investor in a company, you have private information about what’s going well at the company and what isn’t which others don’t have, and you’re able to use that private information to inform your investment decision.

You want to act on opportunities before they hit the news. You want to be front-running and helping create the news. And having a unique insight is just one way to do that. Having access to private information is the second and easier way.

Interests and emotions in negotiations

When two parties first begin to negotiate, there’s a blank slate. Each party focuses on the issues in an attempt to, in light of their negotiating power, trade away those issues that are less important to them in exchange for getting what they want with regards to those issues that are more important to them. The exchange is primarily interest-based.

However, as a negotiation progresses, emotions emerge.

If each party is respectful of the other, they may feel good and continue the negotiation even if their ranges of acceptable outcomes seem unlikely to overlap.

On the other hand, if one party is repeatedly conceding ground, they begin to feel bad. Similarly, if a party feels like their good intentions are being abused, they also begin to feel bad.

The negotiation develops an emotional history which becomes an important determinant of the negotiation’s outcome, beyond that suggested by a purely interest-based approach.

Depending on the emotional history of the negotiation, one or more parties may take actions contrary to their own interest in order to prevent their counterpart from getting what they want. In other words, they might trade away their interests in order to not trade away their perceived fairness of the eventual outcome.

They may also refuse to budge on what is actually a relatively less important issue to them in order to get back at their counterpart for their actions on a more important issue.

At the extreme, since a party’s negotiating style is a signal for how they will act post-negotiation, a party might leave the table due to the emotional layer of the negotiation, even after securing an outcome that is otherwise in line with their interests.

In order to not let the emotional layer of a negotiation get in the way of an otherwise mutually beneficial partnership, it’s useful to keep two principles in mind:

  1. Treat your counterpart as you would like to be treated
  2. Communicate kindly

Acting in line with these maxims isn’t easy in the heat of a negotiation. And they don’t guarantee that you’ll reach a mutually satisfying outcome.

However, if you’re able to act in line with them, they go a long way in ensuring that the outcome that you do reach reflects the interests rather than the emotions of both parties.

Making your reputation on the ones that don’t work

Venture capital is a private asset class that has a greater global supply of dollars than great startups where those dollars can be put to good use. The private and globally oversupplied nature of venture capital (there are pockets of undersupply in some emerging markets like Turkey) makes seeing and getting into deals as important determinants of success as the exercise of sound judgment when evaluating companies.

And seeing and getting into deals is not only a function of the success of the companies you invested in in the past, but also your reputation in how you dealt with these companies.

Your reputation, in turn, is at greater risk when things go wrong than when things go well. The reason is that, in the former, there’s more to correct, including that which often requires stepping on some people’s toes, as well as more blame to go around.

That’s why I really like this quote from Andreessen Horowitz’s Marc Andreessen:

“We make our money on the [startups] that work and we make our reputation on the ones that don’t.”

The reasons for bridge rounds

Startups receive bridge rounds of funding from existing investors in two different contexts.

The first is to give them additional runway to achieve an important milestone which will position them to raise a larger round at a higher valuation.

The second is because existing investors don’t sufficiently believe in the company’s future to fund a large round, the company has been unable to find a new investor, and existing investors would rather have the company continue to survive in the hope that it will find funding or reach profitability than to see it close.

Since most startups fail, the latter is a more common scenario than the former.

Correctly distinguishing between the two reasons why bridge rounds take place is an important skill for investors evaluating new investments in companies with a history of past funding.

Capital efficiency

When a VC-backed company achieves an exit, the media focuses on covering the exit value.

However, as important as the exit value is the amount of capital that was invested in the company until it achieved its exit. There’s a big difference between a company that exited for $100M after raising $5M and one that achieved the same exit value after raising $30M.

This difference in capital efficiency, together with other terms like liquidation preference multiples, anti-dilution clauses, and earnout provisions, can produce very different return distributions for the founders, team, and investors of two companies with the same headline exit valuation.

This effect is particularly pronounced in times when there’s plenty of venture capital which makes it relatively easy to raise large amounts and be less capital efficient. The current environment is a great example.