Most technology investors are hunting future “unicorns”, as start-up ventures valued at US$1 billion or more are known. But with millions of businesses launching each year, these are proving ever elusive.
Step in one new fund aimed at Middle Eastern investors, which – while certainly not promising to scout out the next Facebook – does offer regional investors access to “cherry-picked” US start-ups.
The Arab Angel Fund was launched earlier this year by Kyle Hendrick, who until April worked as a commercial specialist at the UAE embassy in Washington DC.
Most start-ups do, of course, fail. But Mr Hendrick says his fund’s policy of only investing in tech businesses alongside established venture capital (VC) firms does at least mitigate some of the risk.
“We’re giving proprietary access to deals that US venture firms are taking lead positions in,” says Mr Hendrick, who is a general partner of the Arab Angel Fund.
“Co-investing with these VCs is really cherry-picking some of the top deals. Because if they’re turning down thousands of start-ups and investing maybe in 50 or 100 a year, they’ve gone through some serious hurdles.”
The Arab Angel Fund, which is registered in the Cayman Islands, is capped at $25 million and has so far raised about $11m, primarily from the Arabian Gulf. It has struck at least 14 deals to date – although Mr Hendrick says he cannot yet disclose details – and plans to invest in a total of 150 to 175 start-ups over three years. The vast majority will be US-based, with the fund specifically targeting early-stage start-ups in places such as Silicon Valley, Boston and New York.
Mr Hendrick says the fund has already attracted at least 38 investors from countries including the UAE, Saudi Arabia and Kuwait. Several top executives and two UAE ministers have invested in the fund, he says, although he could not give names.
The maximum an individual can put in is $1m, and the minimum investment is $100,000 – something Mr Hendrick says was a relatively low threshold.
“Venture returns can happen throughout the life of the fund but we generally expect to see returns within the first three to five years,” he says.
“For a lot of these investors – I would say about 95 per cent of cases that I’ve seen – this is their first foray into this asset class.”
Mr Hendrick says it was his experience working in the trade and commercial office at the UAE embassy that made him realise there was a gap in the connectivity between US start-ups and “everyday” Middle East investors.
“Family offices and individual investors really didn’t have a vehicle that was giving exposure to the top-tier US venture funds,” he says.
While there is nothing stopping Arab investors pursuing US start-ups through individual investments or other more established US funds, Mr Hendrick says the fact that the fund will co-invest alongside multiple VC companies – he name-checked the likes of New Enterprise Associates and the notable angel investor Mark Cuban – was a major draw.
“There has to be a notable VC in the US that has taken a lead position before we can invest. So we’ll never be the first money in on a start-up. And that’s really a risk-mitigation tactic,” he said.
Another aim of the fund is to help some of the start-ups it invests in enter the Middle East market, building on the fund’s connections in the region and the prominent UAE business people on the Arab Angel Fund investment committee.
While one UAE investment expert says there would probably be strong demand for an investment vehicle such as this, he strongly cautioned against individuals putting their money in such an asset class.
“Shiny new ideas and exciting tech investments sound great and will likely attract investors,” says Sam Instone, the chief executive of the fee-based financial advisory AES International, which has an office in Dubai. “[But] everyday investors shouldn’t be speculating in angel investing … Evidence suggests that most normal investors can get better returns net of fees and charges by investing in index funds.”
Mr Hendrick acknowledges that venture capital was typically riskier, and the Arab Angel Fund is not suited to all investors. But he says that, in a wide portfolio of start-ups, a handful of star-performing ventures can compensate for the many that, inevitably, fail.
“Risk is generally frowned upon in the Middle East. So it’s sort of a changing of mindsets. Yes there’s going to be some failure, but the success within this fund is going to make up for that,” he adds.
So the odds of a business success may still be stacked against you – but so it goes when you’re scouting for start-up unicorns.