Khaled Talhouni is the Founder and Managing Partner of Nuwa Capital. Previously, he served as a Managing Partner at Wamda Capital, where he invested in companies such as Careem and Insider, among others. In 2020, he founded Nuwa Capital and successfully raised over $100 million for its debut fund to invest in startups across the Middle East, Africa, Turkey, and Pakistan.
In this interview, he sits down with Zubair Naeem Paracha to discuss how he got into venture capital, the founding of Nuwa, the types of companies they have been investing in, the ones they prefer to avoid, VC as an asset class in the Middle East, startup governance, and much more.
The transcript of the interview has minor edits for clarity. You can watch the full interview on YouTube or listen to it on Apple Podcasts, Spotify, or Google Podcasts.
———
Zubair: Hi everyone, Welcome to The Postmoney Show, a new podcast where we speak to founders, investors and other stakeholders of startup ecosystems across the Middle East, North Africa, Turkey and Pakistan.
Today in this episode we’ve got Khaled Talhouni with us who is the founding partner of Nuwa capital, a Riyadh and Dubai based VC firm that invests in startups all across the region. Khaled has been investing in startups across the region for a little over 10 years and has made some pretty big significant investments in the region with his current firm that he founded a little over three years ago.
They have made over 15 Investments, some of which have not been announced yet so we’ll talk to learn a little bit about his background and see how the ecosystem has evolved and what he thinks of the current landscape. Thank you so much Khaled for joining us taking the time today. It’s a pleasure to have you here.
Khaled: Thank you Zubair, it’s always great to see you. Just an update. I think we’ve done 30 investments from this fund so far. I don’t think many of them are announced yet. We are keen to announce but our founders are much more circumspect when it comes to announcing these days so there’s a lot more reticence to kind of make a big splash which is a healthy thing.
Zubair: A lot has changed over the last 12 months. One of those things is that founders don’t really care much about going and announcing their rounds as they would maybe a year or two ago. Back then founders would plan almost everything around it including their hiring.
They’d go announce the round and then plan their recruitment around it and sometimes even product launches but a lot has changed and given everything that that’s going on it makes a lot of sense. You keep a low profile, try to build your products and then see whenever is the right time to perhaps go and make those announcements not just whenever you raise the round.
Khaled’s background
Zubair: Let’s just start with your background. It has been over 10 years since you first started investing, you started as an associate if I remember correctly with twofour54, I mean that’s where your VC Journey started.
Khaled: Not to bore you but it’s been over 16 years. When I got out of University, I kind of went, I studied in the US and then I didn’t know what I want to do next with my life so I ended up here in Dubai and trying to kind of figure out what’s next. The typical career path for me would have been to become an investment banker and then maybe go to law school.
That was my original plan at least and then when I got to Dubai, I joined, [it] doesn’t exist anymore but there was a private equity group called Dubai International Capital and they wanted to launch the region’s first seed fund along with an Angel Network to encourage high net worth individuals to invest in entrepreneurial companies so that’s where I started really. I helped put that fund together.
We created the network, and we invested in some early companies. It wasn’t only tech focused so it was a bit more broad but eventually there was the great financial crisis and that the whole private equity firm wound down. I went from there to another firm but by then I was really interested in founders and startups, investing in early stage companies so from there I went to what later became Silicon Badia. This is about 2008 and so we also started investing in early stage companies.
Then I got to TwoFour54 where I ran early stage, I started as an Associate but then I eventually became the Head of Investing. We had $1 million media tech fund. I did a lot of early stage investing. Most notably there invested in Jawaker which is still today my best performing company. I think we did a 100x cash on cash when we exited but it took a long time to exit but we also did other things like we did some IP based investing and in gaming companies which did very well. We invested in a Ubisoft property and stuff like that.
From there, I went on to Wamda Capital where I helped set that up. Probably the region’s first kind of and largest at the time in 2013-14, the region’s first institutionalized VC platform and ended up investing in some great companies out of that, the likes of Careem, Insider, Mumzworld some really great kind of marquee assets. That fund has done remarkably well.
Then in 2020 as you mentioned, I spun out with my partners Sarah and Stephanie and then eventually Nitin, all kind of former Wamda Capital to set up Nuwa Capital and then we subsequently raised our first 100 million dollar funds and it’s been quite the journey.
Zubair: After you graduated, were there any notable investments that you still remember, I mean companies that have managed to stay alive or turned into decent exits for you.
Khaled: Not really. I’m sad to say so because we invested in an Ostrich Farm in Jordan which I don’t think led anywhere. We invested in a company in Lebanon which did reasonably okay in the end which is called PinPay, which basically enables you to do mobile credit top ups from grocery stores and places like that in Lebanon that did all right. That was probably the most successful out of that portfolio.
The most interesting one we invested in is a company called HayatiHealthcare. Basically, it was an early fintech, in 2007, that allowed you to get on the spot financing for elective medical procedures not covered by insurance so think of like cosmetics, dermatology, even obstetrics.
That company didn’t survive because of the crisis but it was really ahead of its time, a precursor of its time the founders were two really great entrepreneurs called Titi and Michael Mutley. I have no doubt that if that company was found like three four years ago it would be like one of the major kind of players in the region but timing is everything as they say.
Zubair: You spent quite a lot of time at Wamda as well, where as you mentioned you made investments in some of the biggest companies to come out of the region, Careem being one of them. Talk a little bit about that, what kind of companies you were looking to invest in?
How did you pick these investments and how that led to the founding of Nuwa Capital? Why did you think that you want to start a firm and essentially invest in startups all across the region, plus some parts of Africa as well? These are two different questions you can answer one by one.
Khaled: The genesis of Wamda, as you know, Fadi Ghandour, who’s the founder of the Wamda, was a really prolific angel investor at that time, he was an early investor in Maktoob.com, which exited and spun out and many others, so he’s a huge believer in entrepreneurs and backing founders and pushing that forward.
Basically, like faith had it come together where he was, there are different potential in investors, specifically the IFC that wanted to create like the one of the first like VC platforms in the region and back that.
So I’d known Fadi for a couple of years and so we kind of put that together. And the idea behind Wamda was how do we take what was already built before I was there, like in Wamda, the platform around supporting founders and turn that into an investing platform.
So historically Wamda had done mostly entrepreneurship support capacity building that kind of stuff and how do you kind of parlay that into an investment platform really the first and largest of its kind in the region at that time.
We kind of put together the theory for the fund or the thesis and we kind of pushed it forward at the time. I mean, I like to situate that within a specific context so if you think about that vintage 2013 to 2015, I like to think about the companies that emerged from then within cohorts so you have certain types of companies that emerged between 2013 into 2017.
That four year period and so that’s when really I like to say the region started to grow, I hate to say it but my early career was really like treading water. I was learning how these things were happening but there wasn’t that much to invest in, principally because there weren’t that many users.
The penetration of the internet was quite low or at least high speed internet was relatively low but you started to see the dividends of mobile first high speed penetration emerged during that time and then suddenly the internet population skyrocketed, so all of these people coming online across the Middle East and Africa and Turkey.
They wanted digital services of different multitudes, so whether that’s commerce, whether that’s kind of financial services, I mean you name it people started to interact online and the timing was excellent. You started that kind of process of maturing in the region and it’s still to this day quite new even relative to other emerging markets like Southeast Asia and Latin America, so we lag behind the rest of those markets by anywhere between six to eight years.
It started maturing, so you start to have like companies emerge that could be of scale, like within our portfolio, the likes of Careem and Mumzworld, those were kind of large businesses that had real kind of ability to scale across the region and have hundreds of thousands of users.
You also saw a deepening of talent in other markets like Turkey where you started to have the emergence of SaaS platforms that could compete on a global scale, so that’s how we invested in company called Insider, which is a marketing SaaS business, SaaS/AI now but you started to have a maturation of the type of talent and the type of companies emerging at that time.
We didn’t overspecialize and even today within Nuwa, we continue forward not to over specialize because we still think the depth of opportunity is still reasonably shallow, where over specialization might lead to a kind of a bit of adverse selection. So you want to be able to make sure that you can still invest in whatever sectors are emerging because there isn’t that much there compared to like six years ago, it’s like a change but still you don’t want to overspecialize because you don’t want to miss the next large opportunities that are emerging that might change over the next 5, 10 years as the market deepens.
We were quite agnostic and Nuwa is the same. We want to kind of invest behind opportunities as they emerge.
As I mentioned, myself, Sarah, Stephanie and then eventually Nitin we spun out of Wamda, we wanted to kind of build something different. We talked about before you and I, a few times, so it was time for us to kind of set up our own thing, timing was, I don’t know if it was great or awful but it’s just the beginning of Covid, well before covid happened but it turned out to be quite fortunate so we’ve had a good run.
Nuwa Capital and its structure
Zubair: How did you decide the fund size, the markets you want to invest in, the opportunity you want to go after and then there was something very specific that you wanted to build with Nuwa which was a network of founders who could help your portfolio found companies.
I don’t remember the details but you wanted to emphasize, you were very focused on that from day one. So, how did you structure the entire fund and the thesis around it? Talk a little bit about that please.
Khaled: I think we wanted to do a few things. So around the kind of wider Nuwa platform and that’s evolved since then. So the first thing was, we felt that founders in our part of the world needed a lot more support than elsewhere, so if you benchmark against Andreessen Horowitz in the US, Andreessen for example, was able to scale very quickly. They compete in many ways, they’re kind of a market leader. [They] compete with the old aristocracy of Silicon Valley, the likes of Sequoia, by having this kind of operating partner model where instead of hiring a bunch of people who lead investments which they did, they instead focused more on building an operating model.
There are a lot of people who are subject matter experts in areas that are very useful to founders, such as technology products, recruitment, finance, legal, etc. So we wanted to kind of work to build on that model. Their theory was that the best founders want to come work with them because they can get some mileage out of their talent for us.
We also thought that would be useful but also we thought that our founders will need more help because we’re in a much more complicated environment, the depth of talent is not as deep as in the US but also like we can help lead to a kind of better outcome.
So the first thing we did was, we created this network of entrepreneurs and subject matter experts that we make available for our companies and Nitin leads that function, so he makes himself an operator, so he actually works very deeply with those companies as we’ve had a few years of experience of working in this model.
We’ve found out that it’s much more useful to have people operating as partners full-time rather than part-time. Now as we scale the platform we’re adding to that team rather than half people on a part-time basis as we grow our AUM and the amount of fees we can generate as we are principally hiring, so that’s the first thing.
The second thing we found was that we wanted to figure out how we unlock the Saudi opportunity. That is the largest consumer market in the region and a principal area of focus for us is figuring out how do we crack Saudi for our companies and we do that in two ways, we have presence on the ground there, we have part of the team on the ground like working out of there. Number two, we partnered with a Saudi institution in our GP that’s an investor in our hold, who helps add value to our underlying portfolio companies that’s Alfaisaliyah Group which is 60-70-year-old institutionalized conglomerate with a strong private equity arm, so they understand our business very well. They anchor our funds and they’re also a shareholder in our management company.
We also have figured out that we can engage with a lot of our LPs, particularly in Saudi around verticals. They are involved with our companies around unlocking new products and new opportunities or investing in them. We think that’s a really interesting way to kind of grow the platform and then lastly something we’re building towards which we’re not really announcing yet but we’re starting to kind of build towards is this, kind of multi-product, multi-strategy firm, where we have an early stage fund which is our first fund of hundred million fund.
We’re looking to develop in partnership with another asset manager where they would manage it and we would advise basically a venture debt and private credit fund. We’re also looking at a late stage fund like a growth fund but the idea is how do we build vehicles that solve for the capital needs of founders across the region in specific ways.
A seed fund is very different to a late stage fund so we want to make sure we have the tools available to be able to help founders cradle to grave, throughout their life cycle and that’s kind of part of how we want to build the platform long term. We’re still figuring it out but that’s something that we want to kind of build towards in the long run.
Zubair: I mean you’re obviously working towards other things as well but the seed fund, tell me a little bit about what kind of companies it invests in, what are the check sizes, how do you go for the founders that you want to invest in? What do you look look for in them and general thesis of the form.
Khaled: If you read our initial documents, it started out as a Series A fund but we started raising for this in 2020 and then something interesting happened. As we got to first close of the fund in 2021, we started thinking about deploying in the middle of that year.
If you cast your mind back to that time, iit was a crazy time. The valuations were through the roof, round sizes were exploding, rounds were closing within days. You get a call on a Thursday and you have to sign the document by Friday otherwise on Monday it’s done you lose your allocation and it was a very strange time.
I’ve been doing this a long time and I’d never seen anything like this before. I wasn’t really kind of accustomed to it but then we spent some time thinking about what does this all mean for our portfolio construction and can we really be a Series A fund with a $100 million fund size, given that the series A was now like a 10 million, 15 million round right at valuations of 80 to 100, 120 million.
Even seed rounds were being done at 30, 40 [million], so we felt that something was amiss so we did a couple of things. We shifted the entire strategy of the fund early, to do seed only because we felt that you could end up in a situation where you are invested in the right company so you’ve picked the right portfolio. But if the market turns, the valuations are all wrong, so you’ve overpaid and you can’t generate a fund wide return.
I’ll give you an example. If you enter at 100 or 120 million, which is a very reasonable valuation but the company, doubles or triples in size but the multiple compresses by half then you’ve not really moved the needle at all at exit.
You may end up in a great company, you’ve done everything right, you’ve exited but then you’ve made no return for your shareholders besides making the capital back which doesn’t work in our kind of fund model so we decided we’d rather take the early stage risk – the stage risk rather than systemic risk, meaning you do everything right but then the market shifts on you and then you run out of road. So that’s why we shifted the whole fund early. That’s the kind of first thing we did.
The second thing we did is we really slowed down deployment so rather than speed up as the world was speeding up, we slowed down and the reason for that is because we felt that this was not sustainable. The market must turn and even if we missed some stuff [in the meanwhile], that’s fine.
We’d rather have the dry powder which we do today or the capital available to deploy in a market that’s more favorable to capital rather than against capital – so more favorable to the investors. So that’s kind of what we did, it is too early to say that the bet paid off but at least we’re not on the wrong side of many kinds of investments. We’re on the right side of many trades so we feel really really good about that and that’s kind of an important lesson that we took from this period.
You’re also asking how we think what the thesis is for the fund overall so sector-wise again like I was mentioning earlier we’re quite agnostic.
We do have some areas of focus so we think there’s a huge untapped opportunity in building local brands for the region overall, so we think that’s an untapped market whether that’s in fashion or furniture or eyewear across these different sectors. Private label, omnichannel retail, we think is a huge untapped opportunity, not the sexiest thing.
People don’t really think about this segment but it’s a big untapped segment. You think about large brands that have emerged, like The Giving Movement that came out of nowhere and has a lot of scale.
The reason for that is consumers are looking for something that identifies with them that speaks to their respective price point, to quality tradeoff ratio and that are digitally native, which are kind of online and offline at the same time.
From our current portfolio, we have two companies like that that we’re really proud of; Eyewa and Homzmart that are within that kind of space. We invested early [in them].
The other big area for us is food-tech evolution, so we think food is, F&B generally is undergoing a massive transformation the same way retail did a few years ago and that includes everything from brand building in food to SaaS models to kind of like user experience like across the board. It’s an interesting segment obviously.
Fintech is a big area for us, if I were to kind of capture how we think about investing in fintech, generally it’s democratizing or allowing or enabling access to financial services to both consumers and to firms, SMEs, where really traditional financial services have not done that in the region, for a variety of structural reasons.
Healthcare is another big area for us so we’re quite active in the space, and proptech, so real estate related ventures. So those are kind of general areas but like I said it’s quite broad.
The way we like to think is we want to develop a thesis around the segments, we go deep into that. We decide whether we want to invest or not and go from there because this is a seed fund. We really focus on the founders and the founding team. We will back companies with not fully-fledged concepts as long as we really like the founders, the founding team and people around it, we think, will be able to kind of develop the proposition and pivot, grow, develop and evolve as time goes on.
So that’s our main focus for the seed fund. Do we really like the people who are behind [the company], so that’s kind of the second part beyond the kind of segments that I mentioned. Founders are a really important part and then three, key focus for us is regional so we really want to invest in companies that have a wide regional footprint rather than a specific local footprint.
It’s a really important factor for us in determining what we’ll invest in. There are some exceptions in Saudi. You can invest in companies that can be Saudi only but generally we want companies that are region-wide or at least aggregate three or four key markets.
The other one that we’re really focused on is SaaS in Turkey that goes global so that’s another big area for us that’s a bit separate to what we traditionally do but we had some success with that in our previous lives and that’s also slightly untapped that we want to kind of invest behind.
Zubair: There’s a lot to unpack here, now you mentioned that after starting the firm with a focus on Series A, I mean that’s what you had thought that you would do. Then you moved towards seed but if I remember correctly some of your first Investments were in the companies that Wamda had previously invested in or had some sort of relationship with; Eyewa and a couple of others. So you made a few Series A investments or Series A plus investments and then you moved to seed?
Khaled: Correct, like Eyewa was a Series A round but I think it was early enough, pre the kind of hype in valuations where the timing was good so we came in at what we thought was and at the time the founders also thought was a fair valuation, good valuation and we had known those guys since the very beginning and they’re kind of really remarkable set of founders and we were able to take it to the next level based on our prior relationship at Wamda, so yeah that and then we haven’t done much overlap with Wamda since those companies got larger and successful ones got larger, too large for us.
Valuations and momentum based investing
Zubair: When you said that, even when you were trying to invest in seed round you were very strict about discipline in terms of valuations. You wouldn’t invest in companies that you at the time thought were overvalued or were asking for valuations that were unrealistic so what was sort of the range that you were trying to invest in?
How has that changed over the last two or three years because I mean as everyone says the valuations have come down but one argument that keeps coming up is that they haven’t changed much at seed or pre-seed. They have changed a lot in Series A and beyond but at earlier stages that hasn’t been the case.
Khaled: I don’t think it’s just a function of valuation. The other thing worth mentioning, we shifted around was what we call momentum based investing, meaning if you go back to 2020 or 2022, there’s a large number globally. I’m not singling out our region but we know our region the best so we can talk about it here.
There are a lot of companies that we would label as momentum driven. These were high GMV, high growth companies, the growth in GMV month to month, year to year, was extremely high. [They] were able to attract large amounts of capital to fuel that type of growth but their value proposition was not super well defined as reflected in their margins, basically specifically their gross margins or their contribution margins.
I’ll give you some examples, so one sector we stayed well clear of even though there was lot of debate internally whether we should do it or not, for these types of B2B marketplaces, companies like MaxAb for example, Sary, Retailo, Bazaar and Chari. There was a ton of these and I do think there’s an opportunity there. At some point we may invest in something like that but it has to be not driven by just, “we’re able to kind of scale GMV super fast but we’re going to figure out how to expand margin later through ancillary services.”
I feel that’s always an intellectually slightly dishonest way of approaching it because it’s very hard to tag on anciliary services that generate margin. It’s intellectually possible, you can conceptualize it but then actually reality is it’s very hard to do that, so we ended up staying very clear of those types of businesses because the value proposition was weak. It was really focused on just growth through subsidy which we couldn’t wrap our heads around at all.
Swvl is a good example. We were talking about it before we started. There’s an example of that in their B2C product. Their B2B product which is the solution for companies, that’s a good product, it has good margins but on the B2C side, you’re not really solving a problem big enough where you can extract value through your unit economics and margin, so the only way to grow is through some kind of subsidy and the value proposition becomes a subsidy and once you’re subsidizing, you’re just taking someone else’s problem and making it your own without solving it.
That’s true of B2B marketplaces, true of what happened with Swvl, and many others. So we tried to identify the companies that looked like that and steered clear of them. So that’s kind of like a big segment of what we try to avoid.
Zubair: In terms of the kind of companies that you want to perhaps stay away from, how has that changed over the last two or three years. Has it changed at all because of the slowdown in different sectors and venture overall?
Khaled: Yeah, so that remains true, the sectors I mentioned. It’s easy to kind of beat up on these FMCG and B2B marketplaces but what we’re saying here is we’re avoiding companies who cannot demonstrate their value proposition through their margin. If it’s unclear that you cannot extract value from the market you’re operating in and you can only do that through subsidizing or taking someone else’s problem and making it your own. Typically that’s what we don’t want to do.
We want to see companies that are solving for a real problem and extracting value from it by solving that problem and that is often reflected in the unit economics or the margin at some point.
You want to dig into that and understand how that works so that’s a big kind of sector that we try to avoid stuff that looks like that. I’m talking with the benefit of hindsight so we were very tempted to back some of these momentum plays before but we feel a bit validated now, so probably we’ll continue to avoid that.
Within this fund, the seed fund, it’s really always, back great founders that you feel good about up front. Your instinct is almost always right around founders, like 80 percent of the time you’re right. What you feel initially is what’s right and it’s hard to articulate and hard to quantify but leaning into the instinct that we have as a team matters a lot.
D2C in the Middle East
Zubair: This is interesting that you mentioned these companies now and you also mentioned that you are very interested in D2C and creating these local brands out of the Middle East that can go and tap this very large market opportunity and you have some of those companies in your portfolio as you shared, Eyewa being one of them and then obviously Homzmart is another.
Now when we look at D2C in the US, it hasn’t done as well as many people expected it to, over the last few years and that has primarily to do with the margins, they just don’t make sense at all. The unit economics are not there for them to be sustainable businesses.
They were flooded with VC money and they built their businesses with that but they struggled to to do well once it became difficult raising more money or they went to public markets, so how is the D2C space in the Middle East different from the one in the US?
Khaled: That’s a great question. I avoid that [term] because we’re not really doing D2C per se, it’s actual brand building but we’ll get to the nuance of the difference of that. But in the US, it was also like these momentum driven stuff. So, if you produce cheaply, you grow your GMV and then you ship primarily online. It’s omnichannel but primarily online but you make it very cheap to get to the customer and then you’re just arbitraging the price compared to other brands.
The difference here in our region is that what we’re looking for is building products that speak to local tastes and preferences, first. I mean, that’s why they’re not necessarily tech companies per se. Take Eyewa for example, builds products based on what the market really likes at that price point.
It’s not about being an online provider or having a D2C like an online channel. It’s about focusing primarily on products that customers want, that tailor to their local idiosyncratic preferences in this region at the price point they’re willing to pay.
Once you go back to the first principles on that basis, on building products, that’s the kind of core difference in a market in the GCC specifically where we don’t make many things. We don’t make many brands. You name We don’t actually create many clothing brands, we don’t create many locally made eyewear, furniture. Even F&B, we don’t create that many local brands on a per capita spend basis.
That tells me that every other market in the world, we lag behind on this metric. The reason why you have global chains or global brands but then you have a space for local brands is there’s always that kind of specifics of a local market that are not catered by global brands, that only a local provider can figure out and that’s the area we want to invest in.
We don’t want to invest in companies that just sell online and sell very quickly at very low margins. That’s not interesting to us and that’s what I think D2C [in the US] really is. [But] the more successful ones in the US are the ones pivoting away from that, like Warby Parker, is probably the closest to the stuff that we want to do.
It’s had its challenges but that’s closest in terms of the type of approach we have. So our criteria for this kind of D2C segment is building products that solve for local tastes at the right price point for that consumer segment an omni channel experience where it’s both online and offline. That’s what we want to build for.
SaaS and Turkey
Zubair: You mentioned SaaS from Turkey. Everyone knows about Insider, how big of a firm they’ve been able to create coming in from Turkey and arguably using very little resources compared to the same size of firms that would have been created in the US. They’ve done fairly well and it’s a brilliant team.
What is it in Turkish market or the talent over there that it continues to produce these software companies or gaming companies that have been able to build products for global markets and have done an excellent job at building big businesses out of them?
Khaled: The first thing and most important thing is they have world class engineering schools across the country; excellent sources of engineering and technical talent whether in Istanbul across the country. I’m not going to single out specific universities but they have really excellent kinds of talent on that level.
Secondly, historically it has been a very large local market. It’s one of the largest economies in the world and historically a lot of the world’s multinationals, bluechips would enter that market beforehand. So they have a lot more exposure to working on a global scale or with global talent, so you see a lot more of that.
Thirdly, they’re much more integrated with Eastern and Western Europe (the Balkans and Western Europe) economically and you have a lot of talent that has come and gone from from Europe, specifically so they’ve kind of got a bit better exposure on the commercial side but also like companies formed there have an aspiration to grow globally so you see that a lot. That kind of experience is extremely valuable.
And then lastly their currency situation is quite chaotic and quite inflationary. It loses a lot of value. The past seven or eight years is not their first experience with this type of currency instability. They’ve been through it many times before. This is built into into the Turkish entrepreneurial ecosystem, generally. Not just in Tech but generally, this need to kind of build for global markets not just for domestic consumption.
And that ethos translates through in many sectors and is really well established in the tech sector. That really helps, so a lot of companies are built for global consumption from day one. For everything, from dairy to textiles to gaming, they’re all looking global and they build that into their DNA day one, and coupled with the depth of talent that has more global exposure plus excellent engineering schools.
I think that really helps and then lastly related to the Lira issue is the cost of talent is not as high, so they’re able to compete globally. So you combine all of those factors together, you have a good mixture of the ability to build software driven businesses on a global scale starting with gaming. It’s very clear that’s the mixture that made it work.
Currency Volatility
Zubair: Speaking of currency volatility, the two markets that you have made some investments in Egypt and Pakistan that have seen their currency is getting devalued by a very big number over the last 12 to 18 months. Does that play into your decision when you’re looking at investing in companies in these markets or is that not something important for you?
Khaled: Principally, we look to invest in companies who have diversified sources of revenue outside of that geography, so looking at Egypt or Pakistan, we’re looking at companies that have demonstrable or already demonstrated revenue outside, either in dollar or dollarized terms so we really look for that, that’s one and then secondly, there are some companies that can potentially outrun it but those are super rare or benefit from currency instability.
We have one portfolio company in Egypt, Sylndr which is a used cars marketplace. The car becomes a store of value so people use it as an inflation hedge, like real estate, so in dollar terms that company is doing remarkably well and the founder of that company Omar El Defrawy has just been incredible at navigating that space, so there are some opportunities like that but they’re very few and far between.
The rule of thumb for us is we’re looking at companies that are building in local currency so they get the kind of the price arbitrage of that but then their markets are outside of their home countries.
VC as an asset class in the Middle East
Zubair: When you started Nuwa in 2020, as you said it was a different world back then. Things have completely changed over the last 3 or 4 years and you are now on your way to raising a late stage fund, as you said earlier and you’re also looking to partner with another asset manager on a debt fund, how has fundraising changed for fund managers like yourself over the last two or three years?
Now we keep hearing that there’s a lot of money in Saudi and that’s one market you want to focus on, if you want to go and raise from LPs over there but generally speaking what is the sentiment of the market at the moment for a fund manager like yourself?
Khaled: I don’t think it’s easy, we’re a bit more blessed in our region compared to other markets because there are as you said like more sources of capital locally and our economies have been a little bit more insulated. I wouldn’t say unscathed but like a little bit more insulated but again, people forget that in the Gulf and Saudi, the same allocators that are investing for us, most of their exposure is global. So, they took a hit in public markets, they took a hit in private funds that they invested in abroad. I think sometimes [we] paint a rosier picture than it is.
So it is also a little bit more challenging here. One thing that was really interesting to see is that the allocators have become much more sophisticated here, whether the family offices or the sovereigns, in investing locally. They are much more metric driven so they’re really looking at like what you did in the past few years.
We benefit by the fact that we were a bit early but in a year or two, these allocators are going to start asking real tough questions about DPI which is Distribution to Paid In (Capital), meaning you can mark at a certain value but then did you realize that value. Did you exit and exit and and give the proceeds back to the investors. Not to go too much in the weeds, but there’s this big delta between TVPI which is Total Value to Paid In (Capital) and DPI, Distribution to Paid In (Capital).
TVPI is basically what you mark the value of your portfolio at. So you say I have company X, the last round was at Y value, so I’m holding the value of my equity at this and then distribution is what you actually sell it at and what you give back to the investors. Because you get a little bit of latitude within a fund to mark TVPI at a certain level, I suspect a lot of it is just not honest, if I’m being very honest. I can see many [local] managers being slightly disingenuous with keeping the company at a certain value knowing that it’s way overvalued but then another round hasn’t happened so I’m not going to mark it downwards.
The real pain will come when they come to exit these companies and then when they come to exit these companies, you’ll know the difference between the DPI and TVPI is going to be a reckoning, unless we go back to that period we had a few years ago, then all is well. But I suspect that you’ll end up in good companies where the TVPI is very different to the DPI.
Your paper money value is very different to what you actually sell out and a lot of allocators investors in our region are aware of this and are thinking about it. That’s a worry about the industry overall when it comes to that because if you have a bunch of distributions that are nowhere near the TVPI, it’s going to cause a backlash for us as fund managers.
I feel like there’s a lot more sophistication, there’s a lot more reticence to commit so people are much more careful, much more kind of circumspect and thoughtful. Diligence is much better and that’s all good for our industry, generally.
Zubair: Speaking of this, what are your thoughts on Venture Capital as an asset class over the last 10 years in the Middle East and North Africa? Has it lived up to the expectations because I mean some would argue that it hasn’t generated the kind of returns that would be promised to LPs maybe in vintage 12 or 13 or 11 some of those funds should have been able to produce some very big companies.
Khaled: Some of those early funds actually have done reasonably well. I can speak for the Wamda fund. [It has] done very very well. I would say [in terms of] global standards would be in the top performers and some of our others. Some of the early BECO funds are really good. I can’t speak for BECO because I don’t know the specifics but I can kind of guess which companies are in which portfolio, so you can say this fund is better than that fund.
I think reasonably the early regional funds did quite well, the ones that are later are the interesting ones. You’re going to see some great funds that came out of the 2017 to 2020 vintage. They are really interesting because you have interesting companies that came out of them; the likes of Hala, Tabby, Salla, so [funds] that had those assets will start exiting in 2025 or 2026. Those are really good assets and really scalable large assets, Tamara and Fresha. Those are some great companies within that cohort that will drive the vintages of those [funds].
Our vintage in Nuwa is later so it’s interesting to see what we’ll do within that. Bu, no the asset class overall will do reasonably well [against] benchmark to global standards but also benchmark to local public markets.
If you benchmark us to the local public market, we will do reasonably well. We will outperform most likely or be in line with the benchmark. That’s my thought.
The asset calss has done reasonably well and people say they didn’t do well when a lot of family offices invest directly and then they choose two or three assets and they get their fingers burned. That’s where some negative noise around that happens, but then if you bought (interesting exercise to do maybe we can do it) the index of venture in different cohorts in MENA to see what they look like (and I don’t think anyone’s done that study), it beats the local exchange index as a whole. It probably does reasonably well but I mean let’s see we have to run that.
Routes to exits
Zubair: Speaking of the companies that you think of, I mean the ones that you mentioned, Tabby, Hala, a few others that you think potentially could exit in 2025. What do you think their exits would look like?
Khaled: These are not my portfolio. I don’t know if they’re going to exit. Well, Tabby was a portfolio company from Wamda but I don’t know if they’re going to exit.
Zubair: What I’m trying to understand is that we’ve seen different paths to exit a company in the Middle East and North Africa, one is you sell to the global leader which for a lot of companies in the Middle East has been, Delivery Hero. They’ve made a lot of acquisitions in F&B, logistics, in these spaces.
And then we’ve seen two companies trying to go public through SPACs which haven’t done well, both of them, I’d argue. And then you have Fawry and Jahez which have gone public through local markets and I’d say they’ve done reasonably well. I mean, obviously the public markets have changed but especially Jahez has done remarkably well considering that it did not raise a lot of money as far as the publicly available data.
How do you think the paths would change in 2025? Do you see more global companies coming into these markets and acquiring the local market leaders? [Or] Do you think more companies, for example, will list on Saudi Stock Exchange and some of these other stock exchanges in the region?
Khaled: I think it’s important to distinguish between Anghami and Swvl.
Zubair: Obviously, these are two completely different companies, but please go ahead.
Khaled: Even their experience with listing. Anghami, relative to its list price obviously has come down. Its list price was 200 million if I’m not mistaken and now it’s around 25 million. Anghami is really not a large business. Its a top line of of like 45 to 50 million, in that range, so it’s not a huge company and it’s not with explosive growth but it’s a company, it’s a real business that generates profit or close to it and it has hundreds of thousands of users and it’s a real honest to God business.
It’s just the question of was the value the right value and was the SPAC the way to go. So for Anghami, it was a bad experience for the SPAC but at least they are a public company and hopefully, it’ll keep going in the right direction.
Swvl went public when arguably was never a real business, and didn’t demonstrate its value proposition. That I mentioned earlier around like actually solving a problem and then extracting value by that solution so Swvl never got to that point. So its SPAC and the “exit” totally unrelated to the size, profitability, value proposition of where the company was, so it’s not the fault of the SPACs. It’s the fault of the company being there.
It was just way too early for that, like years. That’s what I’m saying. I’m cautious not to kind of overlearn that lesson from from Anghami and Swvl because it’s not that you can’t exit, it’s more [on] you have businesses that work, they have to have actual size, scale, profitability, [and] value proposition is clear.
Jahez is a clear example of that. That is a successful approach. If I was to look into a crystal ball and say what’s going to come next in terms of exits, I would say definitely there’s really interesting stuff happening on the Saudi exchanges whether that’s in the parallel exchange Nomu or in the primary exchange Tadawul, and even in Abu Dhabi, there’s a lot more liquidity so if you look at the level of depth of those markets compared to five years ago, it’s a sea change. It’s like a totally different world.
Even the volumes are on a different planet, particularly on Tadawul and projecting outwards because so many firms have gone public and I’m not talking about tech companies. Your traditional businesses have gone public at a rate specifically in Saudi, that’s never been seen before. [By] evolving and maturing that market you’re creating the environment necessary to have a much more robust IPO route and that’s happening.
The regulators are on top of it. The exchanges are really keen on it and are hounding companies to list, the companies want it so the IPO route will really heat up over the coming two or three years. Obviously, overall market conditions are a big factor. It’s a question of when not if because I that Rubicon has already been crossed, so we’re already well down that path so I expect a lot more IPOs.
I expect a lot more companies in the same way Jahez has acquired a number of smaller businesses, I expect a lot of that to happen whether in private companies or public companies and the regional guy to be much more acquisitive. I expect that to happen and the global market will continue to acquire. Once the interest rate environment settles at a lower stage, you’re going to see more and more people looking for growth elsewhere.
Startup governance
Zubair: We’ve seen a lot of companies in the region struggle with governance issues and some of them have had to shut down their businesses in the last 12 to 18 months as somebody who invests in seed stage companies.
When do you think the founders and investors should start looking at creating governance structures for a company? Some would argue you don’t want to do it too early because it distracts founders if [they] put a lot of efforts into it. What’s the right time and where do you think we’ve made some mistakes as an ecosystem and what have you learned from those mistakes, I mean even if you’ve not made any?
Khaled: Always make mistakes, mistakes are part of it. On governance specifically, I want to reframe. It’s not about when you do governance, there’s always governance, there should always be governance.
To deconstruct governance, it is basically how you structure the relationship between a principal and an agent, between capital and the operator. So you have asymmetric information as the investor and you’re trusting someone to use your money in your best interest and in the best interest of the company.
That’s what it is as its most basic form. It’s about holding the founders accountable to their behavior and asking the tough questions and making sure what’s going on, where it matters and then the legal part and contractual part of it; structure, the mechanisms, that’s just the way in which once you figure out what’s going on is just how to formalize the relationship.
I had this discussion with another investor recently where they were going a bit overboard with the shareholders agreement and the board because they were saying, oh there’s so much governance failures that have happened and I’m like yeah, you can put these 20,000 reserved matters inside there and they can’t do anything till they have 12 signatures from all the investors but if the founder is rotten, if the founder wants to do something, he’ll do it if you’re not paying attention to what’s going on inside the business, not because he has to get 12 signatures from you.
The point here being is you have to really be on top of what’s happening, really understanding the financials, making sure that you understand what’s going on and then questioning discrepancies, challenging what doesn’t look right, asking the tough questions, holding people accountable and creating the ground rules. That’s what matters more than what the mechanics are. The mechanics can help for sure, don’t get me wrong but that’s not the essence of it.
And so those questions are from day one. Those are not about having a board day one or not having a board, if you’re at seed stage. That’s about you see something, create the ground rules from which you want to ask what you want to know or the information you want to know and then when you see something and that you ask the question, you hold the founder accountable and then later on as it develops, you create more of the structure to make sure there’s a better enforcement mechanism if something is not right.
So that’s kind of my take on it, I don’t know if it’s super helpful but it’s less about the structure and the mechanics and more about as an investor being open, being eyes wide open asking, questions, not being worried about being slightly confrontational. The founders are your friends but you have to be able to ask a tough question when something doesn’t seem right.
Zubair: Okay, thank you so much for taking the time. It was a pleasure to have you here.
Khaled: Awesome! All right. Thank you, Zubair.