Navigating Valuations and Exits

[Music] salum good afternoon everyone and thank you all for joining us on today's Venture stage I'm excited to moderate today's session on navigating valuations and exit for those of you who don't know me my name is Muhammad Ali I'm a part of the Hub 71 Mission I lead on the value creation focusing on the capital ecosystem where I sit between the startups and our Capital uh partners for today's panel session we have great panelists that joined us to share their insights we have Dr Bilal Bou who's a partner at shuk um shuk for those who don't for those of you who don't know them they are maybe one of the first VCS to set up in adgm and now has grown to have multiple offices in the Mina region with multiple funds between debt and Equity we also have a close partner from Nua Capital who's a KH tuni who's a managing director of Nua Capital as well as a very close partner to hub71 and again one of the earliest VCS to set up and really continue to fuel the Mina ecosystem thank you both for making the time to join us at ababi Finance week um I'd like to have it an open discussion um really I'll go back and forth between you and KH to really understand your perspective as investors when you're looking at valuations uh and exits uh but before we start with the topic maybe we can spend a few minutes uh with an intro on the great work and what you guys do at shuk and NOA Capital so maybe Dr Bal you can start off with you yeah thank you so much uh and uh it's a real pleasure to be here and and what a wonderful few days uh Abu Dhabi Finance week was the first uh conference that I attended last year when I first moved here I see it more as a festival a f of ideas uh and that's clearly been evident in the different sessions that we've had uh in the last 24 hours uh so a bit about me very quickly I'm an accidental VC uh I come from a background in in international politics and Consulting uh but in between that world and this one I founded a company in Washington uh which was in the market intelligence space called inquire AI uh so much of being a Founder is is being in the right place at the right time in terms of Industry stage and the years during which I I founded my company which was a real Boom for for Tech and Venture it was a great time to to build a business which I then scaled from the US uh to Asia specifically Japan uh at sharuk uh we are one of the Region's leading early stage Tech investors we invest in in fintech uh primarily that's less to do with thesis and more to do with where some of the most exciting Solutions are emerging in the region uh but we're also investors in biotech agtech uh for those of you that that live here and have tasted pure harvests delicious tomatoes and strawberries we were one of the earliest investors in pure Harvest um and mainly we're focused on B2B uh uh as was mentioned earlier we do private private uh uh credit as well as Venture Capital uh and have an ambition to be a multi- asset multi strategy firm and it's it's a pleasure to be here thank you it oh thank you very much and um as belad said it's a real uh pleasure to be here at ww Finance week it's always great to see old friends and thank you to the abov finance week team in in bringing this together a little bit about uh myself and NOA Capital so I've been in the early stage Venture Capital space for about 17 years um set up NOA capital in 2000 we set up the new capital sorry in 2020 and launched our first fund there in 2020 1 uh before that I'd been in the kind of VC ecosystem for a long time mostly as an investor uh focused on the GCC uh North Africa turkey and a little bit in Southeast Asia and subsaharan Africa um some of the companies invested in previously include um you know kareim which I'm sure you all know like Mom's world uh Turkish company called Insider which is kind of one of the biggest successes we've ever done and then out of Abu Dhabi uh one of the biggest successes I've ever done was a company called jawaker which is an early stage game gaming company set up down the road in 2010 if you'd believe it sold to a Swedish gaming conglomerate for about 100x so I think one of the first kind of big big stories to come out of Abu Dhabi and 2454 um which is down the road from here um in 2021 we as I said we set up Noah Capital we are primarily an early stage Venture firm so our bread and butter is you know seed to series a so we do tickets of half a million dollar up to $3 million at entry and then we follow on over time uh we then also similar to shuk have a kind of private credit offering um through a joint venture with another asset manager uh and then we also do um some late stage investing uh on a deal by deal basis so we we also kind of build syndicates around series B and Beyond uh we're sector agnostic so we look at anything that's disruptive that has a large addressable market and our our kind of core focus is is is this geography thank you khed and Dr Bilal I think today's discussion is really focusing on navigating valuations and exits right and and you know I want to cover mainly two topics right you know when or what Founders should be thinking from day one on uh exits and how they should navigate to reach that exit right and you know I'll start off with the you Dr Bilal when should a Founder really think of an exit right or valuation you know starting a business is already challenging um they're solving big problems when should they think about it from day one or when does that come in into place um look this is a very important topic let me just put in a Shameless plug that uh we at shurooq uh recently brought together um uh some of the leaders of the ecosystem here to talk about exactly this topic mainly around exits uh supported by adgm um and we did that in conjunction with the London Stock Exchange and the report is out now as of a few days ago on our website sho.com so do download it to my knowledge it's the first report of its kind that does a deep dive on what is needed for IPOs and exits uh and how can we as an ecosystem fuel more of them uh in our region um the short answer is Founders need to be thinking about exits right from the outset and part of that is also to be thinking about how Venture Capital works you know as a former founder and now being on the other side one of the things that I think is you know good Founders think about the science of valuations and good investors think about the art of valuations and what that means is as a Founder as you're navigating your journey and going into the market you really need to think deeply about what is the Mandate that's been given to the VC that I'm looking to have lead my round who have they raised capital from what is the Mandate of those LPS uh what fund number is my investor on what kind of time Horizon are they looking at and what do they expect in terms of Returns on Capital from the Investments That that they're making far too often Founders don't concretely consider those variables and think far more about their own performance and can end up being quite uh inward-looking and within themselves um and so exits and how exits come about is very much important right from the outset now given that the public markets here haven't thrown out as many um uh technology IPOs uh that we would have liked uh a big piece of that is going to be how am I positioned for an exit Visa an m&a and so thinking very concretely about uh who your potential uh acquired targets could be who your potential merger targets can be and not being necessarily explicit about that but thinking that through and pegging that to how you think about your Market size is absolutely crucial hopefully in the years to come and and hopefully in the very near ter um as the capital markets here deepen uh that should then also include your pathway to an IPO so you know hopefully we will see probably three to five technology companies going public in the next 18 months we haven't even seen three to five in the last 10 years um so so that is that's those are some of my sort of high level Reflections on how a Founder can think about these these variables right from the outset let me just add to that I think I I disagree slightly with that idea that Founders should be overly concerned with exit exit the exit is a byproduct of building a great company rather than the other way around so actually I think for me if if I meet an early stage F especially early stage as you go on it kind along the spectrum of the development of a company then that changes if I meet the seed stage founder and he's talking overly about the potential exit opportunity nine times out of 10 that's a big red flag because the the principle driver of a successful outcome is really building a great business you don't try to optimize your business for an exit or design it for exit sometimes you're able to do that and some Founders are able to pull that off but that's not how truly great companies are formed right great companies are formed when uh Founders are obsessed with a huge problem that they want to solve in the best possible way the exit is an investor concern this is our concern we worry about whether the capital markets are there where the m&a opportunities are there Etc and the founders should deliver that for us because we took the risk at some point but the founder themselves being overly obsessed um with the exit outcome or versus actually building a great great company is a major red flag and I encourage Founders that I think think like that to say really are they really want to build a company or they want a big Financial outcome they should come together but the path to it is starting with having a great business first building great business first and then going from there and kind of wearing the investor hat right and in both of you do early stage investors uh Investments do you put the exit opportunity a part of the due diligence or this comes down later on I mean if a company is it is part of it but I think whether a company is exit quote unquote you know I think forecasting that is very hard I think what again going back to the kind of first principes idea which is you want to invest in a company that has great Founders building uh a great product solving a massive uh problem in a big market and then the exit will come so to give you an example from my kind of History so like when we invested in kareim years ago there was no exit opportunity if we due diligence it actually I remember the investment committee meeting well and I can show you my IC memo we said can we invest in kareim and the number we had external IC members non team members they're like who's going to buy this where are you g to list this what are you going to do with it but the fact that the business was growing so quickly with a fantastic team I think spoke to the fact that if you build a great business the liquidity will come especially in markets like ours that are nent and underdeveloped where if you take a moment in time today and you try to say what is the exit opportunity going to be in seven years the nature of our economies generally are so in flux and so uh on a kind of evolutionary trajectory I think it's impossible to kind of forecast that well I think the the the principle element back to the question four is build great businesses ultimately profitable businesses and there's always going to be a buyer or an exit path for a great company always it it kind of brings me into the second discussion right valuations um you know a lot of Founders today think the higher valuation they get the better success they might have right what are your thoughts on this how can you support Founders on having more realistic valuations that support their kind of growth as well yeah so look I think um a Founder is trying to optimize for dilution how their business is viewed and valued and it's something that's not just a business decision it's also something that's very personal for them as well um I think it would be quite worrisome if a Founder was focused purely on moonshot valuations without rooting it in in a specific rationale or logic and that's where to my point earlier understanding how a a venge Capital investor thinks about the market about Returns on Capital how how their LPS are mandated to think about these issues as well is important for for how the the founder is able to articulate that message of course there are structural variables there as well around the potential of their Market um what other case studies have looked like in their market so to the Kareem example you know you had the small matter of uber also existing around around the world Halo doing very well around the world uh in London specifically um and other examples as well so you know there's there's more to it than just you know what your own performance looks like um uh if a Founder is just focused on valuation alone just as a matter of form no of course not because it has to be a matter of negotiation as well but the the entry point on trying to optimize on valuation by virtue of trying to to minimize dilu effects now and in the future as an intention that I understand that right I've built a company myself it's uh it's something that you feel very deeply and personally but uh the other side gets a vote and so it has to be a matter of negotiation and so I wouldn't call it a red flag I think there's very few sort of very stringent red flags it's a matter of negotiation but uh it's certainly an Amber flag if a if a Founder is is not willing to budge and they certainly don't have a rationale for how they're interacting with with the investor yeah I think I agree fully with like what B is saying I think the valuation is a very very imperfect analog for Success so I and I I caution a lot of Founders from kind of falling into that trap of saying you know if I optimize or maximize rather my valuation then that is a leading indicator of the success of my business and that's not always the case because ultimately you know the price of Equity of your firm your valuation is is is just a function of supply and demand if there's a lot of capital in the market right then it's low if there if if there's a lot of demand for your for for your stock then obviously it goes up but I think the caution here is you know within the context of your fundraising journey and your Capital requirements over the long term it can actually be quite destructive to push the valuation beyond what is kind of necessary um because what it does is it doesn't account for fluctuations in the market over the long run so if you are able in a kind of a period of of high valuations generally in the market push your valuation quite high and maximize for that then that's great for you at the moment because you limited your dilution you raised money but it creates pressure on you two years down the line if the market is less frothy then suddenly you're on the wrong side of that trade and if you haven't grown into your valuation and exceeded it then it you start for your next fund raise you're put in a very very precarious position with respect to raising the next one because if you're underwater you know investors will run a mile they don't want to deal with you know a company that's not lived up to its valuation expectation it's too messy to do a Down Round people do it but you know if it just creates pressure that you don't need so there is a balance here somewhere um and I think and I think yeah just the the principal element being not to think of high or relatively High whatever that means High valuation as a stand in for Success there many many businesses here globally and everybody knows their stories that you know you raise at high valuations but that doesn't mean ultimate success success is building a great business that ultimately is profitable um that delivers a lot of value to your stakeholders customers and shareholders and I think a lot of Founders you know don't differentiate between valuations and profit right a healthy cash flow is much important than just running and going for that high valuation um maybe to the second point it's more on you know there's in the region the Mina region there's a lot of incentives programs rebates um that a lot of these startups can get um do you think it affects their valuation as they get these rebates and incentives it is it on the good side and the bad side do you as an investors promote your portfolio companies to access you know either Hub 71 the investment office rebates you know there's a lot of programs happening yeah I think like I'm going to say two things at the same time so I think at on one level I think these kind of inent programs can be quite Accel accelerating to a sector rather than a company so I think of it like more if you want to kind of push electric vehicles for example you give rebates around kind of energy prices there stuff like that that could kind of help support an overall sector um and those can be very very effective if structured the right way so they have this impact of being an accelerant on a on a sector or or kind of a uh an industry as a whole I worry a little bit about companies that responding naturally to an incentive contort themselves sort of um very unnaturally just to get the incentive uh because companies that do that that kind of just try to do anything just to get the incentive probably are not is not a great company to begin with so if the incentive is incidental to the journey of the business and is is is mostly just kind of like 5 10% move on the on the the on the um performance of the business then that's fine that's great actually but some but it's very easy for companies just to pursue an incentive just to kind of get the cash and that's that's a very worrying sign when when companies go in that direction and you see this all over the world and it's a bit of a balancing act like you know how do you kind of advise companies to make use of of these sort of accelerants in a positive way without becoming overly reliant on them valuation wise uh any company that is heavily reliant on incentives whereas a good chunk of their Opex for example is reliant on on on a single point of incentive that's a red flag so we would we would we would be worried about that um but if it's incidental like I said and just merely incremental then I think that that would be a net positive generally yeah and and just to speak to the other side of this uh because what khed said I think is is pretty spot on the availability of these incentives I think is is fantastic for the startups and and hopefully there should be more and more so that contortion act doesn't need to happen so we're seeing more and more for example incentives for companies that are in the biotech space now right uh being able to get access to Labs being able to get access to Grants being able to get access to collaboration opportunities with state run entities I think this is all really valuable because it's the equivalent of speeding up your goto market for a biotech company who you know unless they're a platform uh it can take a long time to get those opportunities so from a supply side Hub 71 being another one the availability of these incentives is uh it's an important marker for the for the deepening of uh of the ecosystem I mean just to add kind of to that it's like where you see incentives and these types of programs working very well is when they are addressing a core market failure to to kind of fix the problem so the lab's example is a great one if there are no kind of infrastructure in the form of um biotech Labs available you know soft soft loans or kind of incentives to get those going enable a wider ecosystem the ones where I'm always slightly cautious about is when they're super targeted on a company like underwriting Opex and that's some that can work and I've seen great examples of that working but a lot of the times it it sort of has a distortionary effect rather than a net positive effect yeah we had a similar experience right as Hub 71 when we launched um initially it's all about packaging it the right way and the right some you don't want the founders or startup to feel too comfortable on incentives and being too slow compared to having the right incentives the right Milestones to to achieve um Dr B I want to come to you I think it's more on comparing you know the US market you lived in the US for quite a while and now in the Mina ecosystem how do you compare the two especially with the us being a hot Market especially for exits right an IPO how are you seeing the the Mina or the UAE kind of compared to the US yeah so I think uh you know khed mentioned earlier you know when you meet an early stage founder if they they dive too deeply into talking about well here's how we're going to get sold uh 7 8 nine 10 years from now um as an investor you think well why are you even focused on that right now right um focus on your business build your business I think that's one of the big areas that separates out the US market from here um while the narrative of hearing that from your from your founder is probably not something you want to hear outright immediately but the reality is in the US you can you can the the variable of exit opportunities is is a constant you know they're there right there you could be brought out by a regional company and competitor it doesn't even have to be a household name you know I sold half my company to a Japanese conglomerate um because the US market is attracting constantly companies that want to tap into its Innovation there are there are capital markets Visa the known entities like the NASDAQ of as well but there are also Nano markets micro markets that you can go and Float on there was the spa opportunities although you know they have a patchy history there are so many ways to quote unquote exit your Enterprise and create liquidity for yourself for your talent for your people if your investors that you can explain away that part and so when I was building my company I wasn't really focused on on exits I was doing what Khaled said I was focused on trying to solve a puzzle build the business to the best of my ability and those of my co-founders and win right because the odds are stacked against you no matter where you build a startup I think here um Founders do need to be a bit more acute they need to be acute to not just exits and valuations but they also need to understand the regulatory environment in which they function you know we I think 40% of our portfolio is in fintech I expect my founders with our help but also independently to firmly have a handle on what is the regulatory environment look like in this market that they might be in tomorrow if they want to go into Egypt or Saudi Arabia what does it look like for payments what does it look like for Integrations with banks what does open banking look like Etc um I expect them to have a firm grasp again independently with us Etc with the ecosystem on um their competitive environment who else is doing what they're doing not to suggest that it's a zero sum because we've seen in many different Industries now you know there's a mushrooming of prop tech companies or mushrooming of expense management companies Etc but you have to have a much more acute understanding of that then you would say for example um in the US because I can win as a regional player or even a state level player I don't have to be panus so these are some of the sort of more uh tactical elements as it relates to to exits um I think that's going to change here I think uh the one of the big shifts uh outside of the changes on the on the on the sort of innovation and pipeline side is the emergence of Saudi Arabia as well right so now you have a sort of you know a competitive environment when it comes to exchanges in capital markets in the region you have options uh I hope the exchanges can come together and r ize some of the the norms and laws around their exchanges so that companies can navigate it better and perhaps one day even dual list which would be great um so I see it changing but but that's as things stand those are the sort of sharp contrasts yeah and I think these are the incentives we're working on right how can we create incentives to support potentially high growth entities to tap into the IPO market and ease up the process for them um KH I want to ask you on your side side right and and we mentioned this a bit earlier um on due diligence right from an Investor's perspective um how does due diligence play in valuations and exits right how deep do fund managers go into it as they're investing into startups either from an early stage or when do investors really look at exits and exits and uh yeah valuations no no awesome question so I think for us um it is a it is a spectrum so the earlier the company um on the kind of on its kind of development scale so preed company for example the less the valuation matters if it's within it the general bound so let's say I mean just I'm just throwing out num so let's say seed companies pre-seed companies very early anywhere from 5 million to 15 million or 20 million even or as low as 3 million it's not going to matter much because what you're underwriting for is a you know possibly 100x outcome from there or a 50x outcome from there so if you're off on that first check by 10 20 30 40% on the entry value even 50% on the entry valuation you are uh you have a lot more latitude to be wrong let's say right as the company evolves and as you're looking at a company that's more developed so like at series a then that window of um of latitude is closing right like it starts kind of narrowing and narrowing and narrowing so by the time you're at like like a series B company or a series C especially in the region if you're in a series B company you're looking at something in the 100 to $200 million range then you're saying from there on out realistically what is the possible exit outcome because if I'm wrong by 30% I could end up in a situation where I'm underwater actually I did I picked the right I did everything right I picked the right company I invested in the right business but actually the exit didn't live up to what um it didn't didn't it didn't work for my underwriting think great example of this is um the last round of s.com for example um you know the investors picked the right the last investors picked the right company Etc and they just mostly made their money back so even though like they they kind of EX they pick the right company in the region so I think that and that's because it's the late stage so stage really matters when it comes to looking at the entry point um the other really important thing is we obsess about the entry point but actually should be thinking about the exit so um value valuation to demystify it is really just a accounting for the potential size of the exit outcome and and putting and and risk adjusting that and working that backwards that's all you're kind of really doing so you know the number at the Forefront is not that meaningful what matters is if things go well can can this give me 10x from here 20x is it possible if so at 500 million no problem right if it can give me 20x from there I mean what's the problem um it's really assessing that potential that matters not so much today even though as human beings it's I think it's hard for us to internalize that and even even though I I you know I'm saying that now but actually in the moment when we're looking at companies it's it's very hard to kind of revert back to that type of thinking um because you're you're you're kind of ascribing a value in the future that's far away based on today's data and that's very hard to to sort of conceptualize I mean the the kind of our brains have not evolved to think like that they've actually evolved to think in the moment right yeah thank you for that um sadly we're running out of time would love to continue this discussion but hopefully next time um that's it for us today thank you khed thank you Dr B for joining us today at ababi Finance week great to hear the continued success and growth at shuk and NOA capital thank you all for joining us today at the finance week thank you [Music]