Two weeks ago I was in talks with a person (that I greatly appreciate) to help them out with their new fund. They wanted to invest in startups and my job was as an advisor in the fund. While I really liked the initial idea and the people behind it, we disagreed on the strategy of the fund and how everything should work.
I had my own investment thesis that I developed myself. I’m no investment expert, I actually never invested in anything before except for a couple of bad stocks that went bust!! But hey, I still worked in Private Equity, passed CFA level II and did my MBA in one of the top 10 schools in the world and been a full time entrepreneur more than 5 years now
Anyway, as most of you know I like to share my crazy ideas, and here is why I decided to share my amazing TOP SECRET investment thesis:
1- It will start an interesting discussion.
2- It will help others to think of their own investment strategy.
3- Some of you might actually get excited and start investing himself/herself.
4- Might open new opportunities.
I constructed the theory based on two main factors:
1- The type of Startup
2- The problem they are trying to solve (is it local, regional or global)
After that I applied many factors based on my personal opinion and experience. The factors used to create the thesis:
1- Type of startup
2- What a startup need to succeed
3- Does the startup has potential to grow globally, regionally or only in Kuwait.
4- Startup stage
5- Acceptable valuation range
6- Potential exit
7- Potential return
8- Potential acquirers
9- Probability to succeed
After creating the thesis I converted it to a guide (aka a cheat sheet) that any Kuwaiti or GCC investor can use. I preferred to use specific numbers and narrow ranges to be more practical. However, these numbers can be far from reality, but it should give you a good sense on what to expect when investing in startups. Again I used so many assumptions to arrive to some of these numbers, so please don’t use this guide as something written in stone.
Here is a link of the full guide in Google Sheets.
Please feel free to write any comments in the sheet, will be interesting to get your feedback. Below is further explanation of the guide.
1- The Pure Tech:
These are startups that are building pure technology and the team should be heavy in technology. These startups usually focus to solve a specific problem for businesses or regular people. Usually these startups comes in a shape of a web app or mobile app. An example of these companies will be something like Google, Microsoft, Salesforce, Mixpanel..etc.
These companies usually charge in a monthly basis or per usage (aka SaaS startups). Usually minimal human interaction is required and often the customer doesn’t really care where the startup is based. A pure tech startup needs to be close to a pool of talented programmers.
2- The Marketplaces:
A marketplace connects buyers to sellers. These startups don’t really have a product to sell, they sell other people products or services. Example is Uber, Airbnb, talabat.com and fishfishme.com.
Lots of ground work is usually involved here and the startup needs to be close to it’s sellers and buyers.
3- The E-commerce:
Either you sell your own branded products or a third party products. Will still see new e-commerce companies emerge as long as we have new platforms coming up. Also we get to see some clothing brands that do online only. E-commerce startups need to focus on their product, UX/UI and marketing.
E-commerce websites need to be close to their suppliers, customers and investors.
4- The Hardware:
Hardware startups develop physical technology. We rarely see these startups in Kuwait and the region, but if we do usually they do well. Why? I think a hardware startup get better media coverage and it’s cooler than a software startup. Also usually they solve a local problem ignored by giant global manufacturers, thus very focused and relevant to the local market.
I have few example of these in the region, but to give you an idea a Saudi women created an electronic coffee maker Yatooq. Kuwaiti Sakhar computer was also considered a successful hardware company back then (I feel very proud about Sakhar being Kuwaiti!).
5- The Social/Content/Media Startups:
These are startups that fall into the social network, content publishing and user generated content category. I usually underestimate these startups, but I see them do very well. I think mostly because of their social and viral element embedded in most of these apps. Some of the success startup that comes to mind are Nabd and Mojaz.
I probably missed some types of startups, such as gaming startups for example. But, I guess you can easily apply the concept to any startup type.
Fund Structure:
Fund size: US$3M-5M
Number of investments: 30 – 40 investments (remember only few startups succeed, high risk high return game)
Duration of the fund: 5-8yrs
Fund deployment period: 3 years (target of 10 investments per year)
Focus: GCC startups (locals and non-locals)
Your job as an investor: help in fund raising (connecting with other investors) and finding potential acquirers.
Duration to make a decision : 1 month (from first meeting to wiring money). However, Round 3 investments should probably require more diligence.
How to get deal flow: Start by co-investing with well know angels in Kuwait. Then co-invest with well known VCs in the region.
