The rate of establishment of startups over the last 15 years in the Middle East has increased considerably, with some of these entrants going on to establish a formidable presence in their respective fields. Although the scale and sophistication of these entities evolved over the course of their first 10 years of operations, the financial infrastructure on which these entities depended on for support was limited in a way that was disproportional to the scale of venture activity.
In the early days of MENA startup activity, most founders relied on bootstrapping or friends and family rounds to capitalize their ventures. Although it served as a reliable stopgap measure early on, the lack of scalability was ascertained from the outset. First off, family funds are notoriously conservative in their investment theses and unlikely to devote considerable resources to untested founders and business plans. Secondly, with financing infrastructure centered around families, funds are less likely to flow toward those without access. This presents a serious challenge to the democratization of startup capital in the region. Finally, forming a consortium of investors across multiple geographies could present a serious legal threat to the ability to expeditiously raise funds, as governing language varies. Therein lies the problem – how does the region establish a formal modus operandi to fund diverse founders without immediate misalignment on terms of governance? The answer – the modern unregulated MENA VC was born.
The battle, however, has not yet been won. The third and final crucial facet, after founders and investors, has not yet been brought into alignment – government regulators. The most labored of regulatory proceedings are those that seek to act without precedent, as was the case in Western markets a few decades ago. The MENA region has the unique advantage, by virtue of not having acted earlier and by observing legislative shifts in other markets, of being able to introduce regulatory frameworks that have already withstood legal challenges and legislative refinement. The purpose of this document is to capture the essence of the laws and regulations that have proven effective in regulating foreign investment bodies without undue burdens on investment activity. The aim of the aforementioned goal is to create an environment welcoming of both local and foreign investment in MENA startups via entirely legally compliant Venture Capital firms.
Special thanks for the MENA Venture Capital Association for inspiring us to publish this paper. Please find below the link for the full whitepaper: