BECO Capital, a regional venture capital firm focused on technology investments in the Gulf Cooperation Council (GCC) countries, today warned young Arab entrepreneurs against relinquishing their businesses to investors too soon, and advised Venture Capital investors to allow promising young companies the control and freedom to pivot, experiment and build strong, attractive businesses.
Speaking today at STEP Conference to over 6,000 tech entrepreneurs and investors from all over the Middle East, Amir Farha, Co-Founder and Managing Partner of BECO Capital, said: “For earlier companies, entrepreneurs should focus on ensuring that they have control and only give investors selective control terms such as a board seat, vesting and some limited reserved matters that require Investor Director approval. They must remember that this is a long-term venture and they will be relinquishing more control after each round of funding, so they need to be careful as to what precedent they set at the earlier stages and focus on keeping control over their ventures.”
According to Amir, a good rule of thumb is that entrepreneurs should give away anywhere between 15% and 33% in each round of funding. “Anything less than that signals greediness and future funding difficulties. Anything more than that indicates that the entrepreneur is not fully committed to the venture and willing to get diluted significantly for the sake of growth”, he explained. A lot of entrepreneurs tend to focus on valuation, rather than the more important terms that can affect the outcome of the venture and their control over its success over the long-term. The real VCs should care about the entrepreneur, and that will be reflected in the term sheets they negotiate.
He explained: “At BECO Capital we invest in innovative tech entrepreneurs who have found a local solution to a local problem that is scalable. We look for entrepreneurs who fight hard on the negotiating table as that is an indicator of how they will negotiate with the next set of investors. We also admire those that share the wealth with their employees and include them in their success story as they grow.” Such entrepreneurs are perfect partners and BECO helps them, not just with funding, but also through operational support; developing new products, taking them to new markets and assisting them in every aspect of their operations.
“Treat others how you’d like to be treated”, added Amir Farha. “We do not take advantage of the entrepreneurs’ position when leading a transaction, and ensure that we support them by introducing them to potential co-investors that we think can provide value-add.”
BECO also encourages its portfolio companies to look at allocating shares to its teams through employee stock ownership plans (ESOP). Amir said: “Entrepreneurs should allocate 5% to 15% of ESOP at each round of funding to be distributed among their employees. This is not only good for the startup tech venture, but also to the startup ecosystem as a whole. We have seen the magnifying effect of ESOP in developed markets, when these talented employees monetize their shares on exit and reinvest them into a new tech startup, to create a virtuous cycle.”
Amir Farha recommended young tech entrepreneurs to build their relationships at that early stage of their ventures, whether with early investors or employees, as long-term partnerships: “It’s all about smart leadership and smart money. Whoever you get in your team and in your cap table at this stage is with you for the life of your venture. Therefore you’d want them to be value-added in every stage of growth, so you need to choose wisely.”
STEP Conference 2016 opened yesterday in Dubai, attracting tech entrepreneurs and innovators from all over the Arab World. Topics such as tech wearables, health tech, venture fundraising in MENA, exits and future unicorns in MENA, the fintech revolution, e-commerce and the future of Internet-of-Things (IoT) will be discussed during the two-day event. BECO Capital has conducted two workshops to help assist budding entrepreneurs in getting the funding they need to grow their business at friendly terms. The first one discussed “Bad Terms” and covered Term Sheets, or the binding contracts with investors, and how to negotiate them. The second workshop, titled “Perfect Pitch”, discussed the structure and content of the perfect pitch deck and the anatomy of a great investor pitch.