In cafes and conference rooms across the world’s leading and emerging technology capitals, it is not uncommon to hear the same conversation-starter.
Members of the investment community invariably introduce themselves by giving their name before proudly pronouncing: “I am an early stage investors in such and such.”
This sense of pride and recognition generated by their involvement in an early stage tech start up investment does not currently exist in the Gulf Cooperation Council but is something that is on the horizon.
I have spent a significant amount of time working with sovereign investment vehicles, state-owned-enterprises, family offices and high-net-worth individuals from the GCC regarding their investments and the diversification of their portfolios.
When analysing the assets in the portfolios of a HNWI or family offices you will typically see some similar investment patterns. In most cases, these pattern investments include real estate, local capital markets, fixed income and long-term equities, a trading company, a local sponsorship agency and a hospitality or food and beverage entity. In some cases you have savvy investors that are engaged in hedge funds and private equity funds but rarely do you see allocation to the venture capital asset class.
I started to explore and learn more about why this was the case and what opportunities exist for investors to access the VC community in the United States.
Venture capital investments have not been a ‘foreign’ or ‘unchartered’ asset class to the likes of sovereign investment vehicles. The recent $3.5bn investment into Uber by Saudi Arabia’s Public Investment Fund is testament to the confidence of VC-backed tech growth companies.
The PIF is not the only GCC based vehicle that has been engaged in technology investing. The Kuwait Investment Authority placed roughly $165m into Jawbone, a leading audio and wearable technology company based in San Francisco, in early 2016. The Qatari Investment Authority, Abu Dhabi Investment Authority and Abu Dhabi Investment Council are also known to have diversified limited partner positions into United States VC funds and various direct investments in the technology space with VC-backed start-ups.
These sovereign investments lead to a few questions. With significant government funds taking such stances, why have tech and VC related investments not been on the radar of HNWI and family offices? Why is private family and individual capital not getting involved in a sector that generated $73bn in returns in 2015 alone?
Firstly, the typical GCC-based investor is very risk averse and is fond of tangible assets. A lot of investment security has existed in the region by making real estate investment plays and garnering a set return profile within a fixed amount of time. This has worked well as the majority of the region has had tremendous development, growth and government spending over the past decade and longer.
However, with oil prices down and local capital markets reaching all-time lows, there is no hiding the fact that there has been some belt tightening when it comes to spending in the region. The need for diversification and getting into new asset classes has never been more important, not only with local governments but also with individuals and family offices.
Second is the issue of exposure to early stage deal flow. Many entrepreneurs or funds come to the GCC to raise capital as a secondary or even later resource when notable investors in the space have already slowed down or denied further investment.
Most VC-backed tech investment deals coming from the GCC into US companies are later stage and as a result are often at heightened valuations. It has become something of a pre-initial public offering game in the Gulf; much more so than an early stage game, even though this would have better returns. The larger valuations lead to larger investment amounts that most individuals or family offices are not willing or able to partake in.
Despite this, tech start-ups and investing in VC funds remain solid options for family offices and HNWIs to diversify their portfolios.
There is no denying the widespread adoption and hyper-growth of innovative technologies and the start-up companies that are transforming the way we live our lives and how companies operate. VC-backed start up companies are disrupting the existing business ecosystem, generating massive revenues and attracting global investment.
Today there are 166 ‘unicorns’ (start-ups valuated at $1bn or more) that are VC-backed, 95 of which are US based. There is going to be undeniable growth in cyber security, fintech, edtech, healthtech, cleantech, software as a service, big data, the internet of things, artificial intelligence and machine learning, virtual reality and augmented reality, among many other areas yet to be fully realised.
Many GCC investors are unaware of the humble beginnings of major tech start-ups. Uber started with just $200,000 seed capital in 2009, while Facebook had $500,000 seed in 2004 and Snapchat a $485,000 seed in 2012. Even into their first or second qualified financing rounds (series A) the major tech companies of today were raising under $15m – amounts that do not generate the same type of ‘sticker shock’ that typically turns away local investors at the later stage.
It is a key time for HNWIs and family offices to be proactive in the venture capital space. They must seek out funds that are participating in early stage or even growth stage investments if they do not want to miss out on the next wave of high growth tech companies. Taking limited partner positions into funds can cost as low as $50,000 to upwards of a minimum investment of $2m for more notable funds with extensive track records.
It is important to note that global HNWIs and family offices that are already active are typically allocating anywhere between 0.5–5 per cent of their entire portfolio to this asset class. It is not common to see this type of allocation in the GCC but things are growing slowly. And investor interest is leaning towards technology and start-ups.
Taking limited partner investor positions is often a smart play for first time venture investors. Fund managers typically have the understanding and know-how of the ways deals are sourced and structured, and how money is made on the back end. And they tend to invest in a larger number of companies to diversify their own portfolios, mitigating the risk that individual angel investors take directly investing in a small number of companies on a deal by deal basis.
These fund managers are also willing to spend the time on the ground in key tech markets like Silicon Valley, New York, Boston, Washington DC and other areas. Much like any business, the personal relationships and people behind the investments are important to accessing top tier deal flow.
With Arab Angel Fund, for example, many of our investors from the GCC are interested in gaining access to our network in the US and the relationships we have built. They are busy here and simply do not have the time to be active in sourcing deals or networking in the appropriate ecosystems.
There are many established US venture funds, sector specific funds (i.e. a cyber security fund or cleantech fund) and even regional funds that are always looking for new investors. Family offices and HNWIs should be participating in these. There are also specialised funds like ours that are working specifically to bridge the gap in connectivity between regional investors and the US venture space. It is vital to have knowledgeable and connected fund managers that can get into the right deals with the right co-investors to support and help entrepreneurs grow and scale their start ups.
It is estimated that nearly $1 trillion dollars in wealth succession will transfer to a younger generation in the GCC in the next 10-15 years. This market will continue to be highly sought after in terms of investment and capital for a wide range of assets.
It is absolutely crucial that investors here gain access to deals that will allow them to capitalise on the undeniable growth of technology and venture related investments can play a leading role in doing this.