Valerie Red-Horse Mohl (Social Venture Circle): Our criteria are very strong on impact, but we also expect the financial return, this is not a philanthropic giving
04 Jun, 2020
Tarek Assaad is a managing partner at Algebra Ventures, and he holds the same position at Ideavelopers. He has a rich experience in technology development and managing investments, including some of the most famous Egypt’s startups.
My background is in technology development. I used to be a software developer and actually started that career in the San Francisco Bay Area. That was a great experience for me to see startups in action and the impact of how entrepreneurs can really build great companies in a very advanced environment, and how success can inspire other early-stage entrepreneurs who are trying to do the same thing.
After that, I went to business school in the same area and I also got to produce so more of that in the Silicon Valley context. I’ve always wanted to do something that can have a very high impact in the part of the world I grew up in.
I wanted to be in that career, but back then there weren’t many opportunities, so, about 10 years ago, when I had the opportunity to join a fund that is called TDF (Technology Development Fund) which back then was the only venture fund in Egypt and had been already started by my colleagues who launched the fund and made investments in it. And once that happened, that was the start of my VC career.
At Algebra Ventures we have 17 companies in our portfolio, we’ve seen quite a few different businesses. The things we typically look at would depend on the stage of the development of the opportunity. The two things that are the most important for us is the market and the team. We need to see a company, a strong team going after their large opportunities. Sometimes if the product itself is not completely figured out yet (for earlier stage opportunities) we are okay to take that risk. But these are the two fundamental things that we really have to see to get excited by those opportunities.
But there’s a number of other things: how the economics works, the competition, and the whole bunch of things that you can find in many VCT blocks. We are not different from anyone else except, maybe, one thing: in the context of Egypt we like businesses that are very local, that are solving very local problems, and therefore have built their model in that context particularly increasing. So we are looking for businesses that touch the bottom of the socioeconomic pyramid where we believe the only way to efficiently serve that segment is through technology because of the low cost of serving, particularly consumers, in that segment. But initially, this is more around consumers, and that’s something that we are starting to see. We’ve got every company in the portfolio that is touching that segment, and that’s something we are very excited about.
Out of the 17 investments we have today 14 are in Egypt, 2 are in Jordan and one is in Dubai. We can and we are investing in companies outside of Egypt within the region around Egypt. But we are an Egypt-focused fund. As you can see from the numbers, our investments are predominantly Egypt-focused, but I think it’s important for us to as well have our investments outside of Egypt.
We will invest in anything that is tech or tech-enabled. On our website there is a guideline. I think the portfolio would be telling the story, that’s, at least for almost the past 3.5 years, more indicative of the types of opportunities that are tackled. You will find that many of the opportunities and many of the portfolio companies fall outside of the six categories that are included on the website. These six categories are something that we have put on the website when we started. Our industries are moving too fast for us to do a good job of maintaining that.
We are typically a series A investor. It’s different from one geography to another, but we’re in at the time when we’ve seen product-market fit to a visible degree. It’s an ongoing process, but we want to see it to a reasonable degree. And typically that means in Egypt a ticket size of 500k to 2 million dollars. However, in some exceptional instances, we have made investments that are early stage, closer to the seed investments where we have seen teams or opportunities that we were very excited about, that we want to question it about coming in early and be the part of the story and helping entrepreneurs build up these businesses. And where also we see an opportunity of a quick series A. We’ve done a couple of later-stage teases where the company raises more than, let’s say, 10 million dollars and where we participate again because we see a unique opportunity with a strong team, and sometimes a lot of series B were postponed.
We are looking for strong teams that are going after large markets. You get overwhelmed sometimes with the pipeline of the companies presenting to us, but we are an active investor, we’ve made 17 investments in three years, so we are actively looking for companies to come and work with us. I like to think we’re open and available. I haven’t heard of people complaining they were not able to access us. Sometimes we can be faster and responding. But I think in terms of accessibility in this part of the world, given how nascent the ecosystem is, the structure of connection and so on that had not been set as much as they have been in more advanced parts, I think we’re quite accessible.
Absolutely, yes. We have a sourcing strategy that has several components to it. The whole team is involved in that, at the level of the partners and at the level of the principal associates – our entire investment team is involved in that. With that on our mind, we will go out and seek investment opportunities, we work with partners and are present at different events and so on to actively seek investments.
I think that all the very strong investments that we made caught our attention at the very first meeting. Of course, if we see a very strong team, a very large market, a very big opportunity, we get very excited.
For instance, there was one company that was using a magician to pitch at the event. They were walking around the event and they had a magician with them. And the magician would come and shake your hand, pull out a deck of cards, do a magic trick and so on. And the idea is that this is a platform for influential marketing, and that magician had a pretty strong Instagram presence and people followed him, saw the magic tricks that he did, so she was there catching the attention of investors in a way different, sort of drive-home as well the taxis of people who are on the platform. It was certainly memorable, but honestly, on the fundamentals of the business, if you’ve got a strong story you will be able to get the attention.
We haven’t ever written a check to a company that has one employee, let’s put it that way. As I’ve mentioned, sometimes we do seed investments. For example, there was one company where we’ve met the founder initially for the employment capacity and we wanted to recruit that person for one of our startups because that’s a big aim we are focusing on. And then, after some conversations, we evolved the thinking that there is this opportunity that he wants to do and it does make sense for him to start it. We were very impressed by the caliber of the person and by the market that he was going after and provided him the support for him to be able to grow that business as a sort of soft-launch. And as soon as it became a company where he gathered the team, let’s say, two or three months later from the time that we’ve met him, we made the first investment. We’ve done that two times actually, within a slightly different context.
Yes, definitely. We help with most of the things that venture investors tend to focus on. One thing that we’re putting a lot of effort and time behind is a focus on keeping, on the recruitment particularly and the retention. We have an in-house team that does nothing but hire for the portfolio. That’s something that we think is critical.
I think all of us in Algebra have operational experience. We’ve all either started businesses or we’ve been in the position of entrepreneurs before. So we can draw on this expertise to help companies think about strategic issues, help with interactions, sometimes help with operation issues like data insights and things like that. We’re definitely very involved with our portfolio companies.
It varies. I’d say it’s hundreds. Sometimes we have more of an influx, sometimes less of an influx. What I can tell you is that that number is multiplied to what it was three years ago. We have certainly seen a certain rise in a number of people interested in entrepreneurship in Egypt both from the numbers perspective, and from the opportunity costs. We’re seeing entrepreneurs who can do a lot of very attractive things, work for a multinational, work for a large local company, earn high competition and so on, and they are deciding to leave that, as a sort of lucrative, but not very highly lucrative career, and go to entrepreneurship because they are starting to see others succeeding. I think for us (at least, for me personally) it is the most inspirational to work with: the younger entrepreneurs who see more advanced ones either succeeding, building a company, or getting an exit or getting interest from investors, or being able to hire people who build very strong teams and so on. That is the trigger for these young entrepreneurs (or early-stage – they don’t have to be young in age) which provides them with the inspiration to say “I can do that, that inspires me”.
Our process is we do the opportunity assessment. We have a team, our partners, principle associates who are engaged with the company to look at data to access the opportunity, the team and all of that stuff. We have to go through this. Once that happens, we issue a term sheet to the company and then, once the company accepts the term sheet, we have legal and financial diligence that usually doesn’t take very long.
The fastest we’ve have ever given anyone the term sheet was 10 days. That obviously doesn’t happen every day. Whereas other businesses have been for months in that process. I think the biggest factor here is how clearly we can see things and how ready the company is with information. We are very data-oriented, so we ask for numbers and we crunch on numbers, and sometimes we cipher these numbers 6 times. We got a lot better at being responsive but when it comes to legal diligence, financial diligence and shareholders agreement as one package, that could take a month or 6 weeks as a base. But typically it’s the investigation part that’s much more valuable to the fund.
We have a million red flags, for sure. Many things around the level of commitment from the founders. I’ve been in VC in Egypt for 10 years and 5 months for now, so we’ve seen quite a bit and we’ve had a lot of red flags on founder commitment. Because at the end of the day what you want is a strong team that is going after a large market. If you initially begin in a market that is less likely to change, and if we believe in the skills of the team, a very big question for us becomes the commitment. Commitment and chemistry among the team members and things like that.
So I think these things are the things that we look out for. And we’ve learned over time to look out for some telltales of how well something is going or what are the potential risks and so on. So there’s a whole bunch of the things that we watch out for. Just like every venture investor we are aware of those things, and sometimes we are very right, and many times we are very wrong. But we have been exposed to different experiences on the people side.
Yes, many, many times. But that’s the nature of the venture industry. The venture investments are very high at risk by a definition. So we’d take a look at the opportunity and give it our best assessment, which, given the level of the risk involved, is maybe sometimes correct, and many other times incorrect. If in 3 or 5 years when we look back we could say “Yes, we’ve looked at this properly” or “No, we didn’t”. But we don’t invest our of formula. We invest because we really believe in the opportunity. If there’s something in it we’re not comfortable with and somebody else wants to do that – that’s fine. I think there’s enough opportunity to be shared amongst other investors. That’s something we would like to see happen, something we’d want to see industry grow and eventually become an all-sufficient industry itself which in our part of the world today is not is. But that’s something that we look forward to.
Hopefully, if you’re doing a good job, once you’ve got a decent portfolio, then you focus more on supporting portfolio, you’ve got a certain sense of pride when you see it succeed more than regretting the investments that you did not see clearly.
In venture investment success ratio is low. So eventually many companies that we invested and still invest in, we know a lot of them are successful and we know which ones, but as an asset class, we know the percentages work out clearly and see exactly how that changes in our part of the world. But by and large, we know that there will be a lot of unsuccessful companies. Hopefully, we get to learn enough from these investments so we could help other companies avoid some of the pitfalls, but of course, when the company we invested is shutting down that’s not something we wish for.
I can’t quite think of the startup that was unusual, but I can think of: right now we’ve invested in a company that six months ago was at a certain level of revenue, let’s say, X. And then, in three months it went from that X to 5X. Out of the base of a few million dollars. So, a few million dollars into a dozens of millions of revenue per month. And then, today is about 1 to 2 because of Corona. So it was a very rough floating course, something that I’ve never seen before, many people haven’t. In 6 months it multiplies by 5 and then from off that peak it gets divided by 10.
I think it’s very, very contextual. Particularly this week we’ve been on the calls with companies trying to understand the impact of Coronavirus. We’re seeing some companies like the one I’ve mentioned as an example whose revenue is getting divided by 10 in 1 month. A very rough hit there. And we’re seeing many others where the revenues are actually being multiplied or the number of orders is being multiplied by 5 particularly people who offer electronic access to a service. The population is now at home, they are not going out, they want still to access the services. So that characteristic of it is an opportunity.
I think it’s very bad news for most of us. As you can see, the impact is very big. But it’s good news for some of the portfolio companies for sure.
If we really like, we would invest in them if it’s within the tech mandate that we have from our investors. There are some industries that we don’t like and we don’t invest into. I’m not picking for all at Algebra, but personally I don’t like games for example. I’ve invested in games before and found that it’s a very difficult business to scale consistently, very dependent on sort of the next card game. And we haven’t seen any companies being able to consistently lead in that market. So that’s the space I personally am not excited about.
Some of our companies are very strategic particularly around logistics where they are involved in different parts of the supply chain and can complement each other. Our role there is the connector and the support. So we make sure that these guys sit together and they understand very well what each of them does, and sometimes try to moderate the conversation for the potential cooperation. Of course, it’s easier if they are both in our portfolio, but we do that as well when we need companies that are defined to be potentially good partners with some of our portfolio companies and connect them all together. Just by a virtue of our position that we see many deals, we’re able to be a good connector.
We’ve certainly invested in many businesses that were the first to market of that type. Sometimes the business will not have the market per se, but it is operating on the back of a very large market. If you take for example a company like Trella which is a tracking marketplace, they were able to see the opportunity of the marketplace that connects shippers and fleet managers. When they started out, the matching was happening offline, but there was no aggregation. But once they started, they were able to create efficiency in that market.
There’s always some market in the back that you’re trying to shift people to get to that space to make a certain process more efficient. But most of the investments that we make are if not first to market, then one of the first. That’s the nature of technology startups.
Our thesis is we want to back entrepreneurs while building solid sustainable businesses. We understand and sometimes encourage people who don’t have clear unit economics in the early stages of their businesses and wanting that unit economics overtime to materialize more. Personally I have a hard time believing in businesses where there is no eventual monetization. We have to be able to see it at some point, and then we work out backward what the plan to get there is. But we are not a charity, we are a pure for-profit venture fund. And we don’t really believe in an opportunity where there is no monetary story at all. We can help, if there will be one in the future, maybe even in several years, but if we don’t see it, I have a hard time buying that.
The one that always comes to my mind is Google. Personally I went to Stanford and I was around the time when Google was just getting started. I was there when they were coming out and I’ve met one of the founders. And the tremendous growth journey that they’ve had, the impact that they have grown, the ability to really change peoples’ lives, and all the things that they did in terms of adapting AR, the whole bunch of things and how they are allowing people to work on projects and other things that everybody knows about. That to me was very inspirational.
There are a few conferences in Egypt that are starting to attract attention and the largest one is RiseUp. We’ve seen that grow as well as the ecosystem in general of Egypt has grown. We actually did an event when we started out ten years ago. Back then we had like 200 or 300 people in that event and we said: “Wow! This is amazing, people are coming to our events, that’s encouraging.” And I believe that last year we’ve had about 8k people at RiseUp. That shows how the ecosystem has grown and how it has got more attention over the years.
I feel quite fortunate to be where I am at right now. Because like I’ve said, I’ve been in this career for a little bit over 10 years, and in the past 2 years it sort of started to become to fruition, I’m starting to see companies build significant scale and very strong entrepreneurs launching new businesses, and I feel like this is a good time to be in this particular position.
I remember when I came back from the US people would tell me: “Why are you doing this? You’re well educated, you have US experience, you can go work for telecom operators, why are you doing this crazy stuff?” And right now I’m on a very different position when my second and third-degree business owners would say “I’m interested in angel investment, can you recommend someone?”. I think finally it’s starting to develop good momentum, and that’s very exciting. And I also get to work with some very talented people, be they my partners at Algebra or the rest of the team, or the entrepreneurs in the portfolio or someone who I meet during the routines of the pipeline. I feel like I’m very privileged and grateful to be able to work with people like that.