This is the first of a series of interviews with top investors from the MENA region, in an attempt to shed light on funding opportunities and entrepreneurs’ resources. 

Investments nearly doubled in the MENA region between 2011 and 2012, and 50 funding sources for entrepreneurs were identified in 2013, up from fewer than 20 in 2008, according to the Wamda Research Lab’s newest study, Enhancing Access: Assessing the Funding Landscape for MENA’s Startups. (download the report directly here).

While challenges differ from one market to the other, there are some similarities across the region. Thirty-six percent of entrepreneurs surveyed said that the supply of venture funding in their countries was small, and 24% thought that investors are not offering enough value beyond cash.

On the other hand, 31% of experts pointed to entrepreneurs’ lack of understanding of what investors were looking for, while 30% cited entrepreneurs’ inability to pitch ideas effectively as challenges to obtaining investments. 

To get an even better grasp of what investors look for in a startup, we asked four funders what entrepreneurs need to have done before approaching VCs, and what they should avoid when preparing for a pitch.

The experts are: Dany Farha, CEO at Dubai’s BECO Capital, Ziad Mokhtar, partner at Egyptian capital fund Ideaveloppers, Walid Hanna, managing partner at the Lebanese Middle East Venture Partners fund (MEVP), and Khaled Talhouni, Investment Principal at Wamda Capital.

Below are their answers:

1. What makes a great startup? Please list elements according to priority.

Dany Farha:

• A unique customer insight to a large pain point
• Technology developed in-house, to create a product that is better by an order of magnitude
• Strong distribution appropriate to the revenue of the product
• Demonstrated impact within the startup’s networks (network effects)
• Potential to scale

Ziad Mokhtar: A strong passionate team going after a big underserved market.

Walid Hanna:

• An experienced team with relevant expertise: average age of MEVP entrepreneurs is 38, none of whom have switched careers
• Great product with an innovative business model
• Large addressable market

Khaled Talhouni:

• Team first and foremost
• Clear demonstrable pain point
• A simple and clear value proposition and particular use of a product (use case)
• Clear execution/rollout strategy
• In some cases, some form of first mover advantage
• Ability to scale the business outside one single territory/geography in the region
• Clearly defined unit economics that are defensible as the market grows

2. What is the one thing entrepreneurs should nail down before coming to VCs?

Dany Farha: It depends on the stage. For very early stage companies, it’s the team and the level at which the product/solution, by an order of magnitude, is transformational.

Ziad Mokhtar: The need to have a good grasp on what the underlying assumptions are, and how they plan on verifying these assumptions. This could be size of potential market, what customers will pay, customer lifetime, needed marketing spend, cost of service, etc. These assumptions might have already been proven by previous entrepreneurial ventures, or could be very specific to the new product or service that the entrepreneur is bringing to market. In the former case, they need to point to relevant benchmarks and show that they have the skills to match them. In the latter case, they need to have a plan to verify them themselves, if they haven't already.

Walid Hanna: The one thing is to be “investment ready” which is MANY things at the same time… seriously, the most important thing is that there is “no free lunch” and we are all here to make money.

Khaled Talhouni: It depends on the stage at which the company/founder is raising. The requirements look different for seed/angel rounds vs. Series A vs. Series B. We are primarily a Series A investor so effectively we are looking at investing anywhere between $1 – $3 million USD at entry. At this stage we are looking for businesses to have demonstrated business model validation and the ability to generate sustainable revenues. The investment at this stage is to scale the business rather than to prove that the business is viable. That is not to say that the businesses need to be cash flow positive, but rather that there is a clear path the funds will use to grow. This is different than seed investment, for which I would think the critical element would be demonstrate clear product/service viability; that the product is at MVP or has a clear path to MVP.

At Series A, the entrepreneur should also demonstrate clear commercial awareness and a commercial strategy that upholds the business model as articulated.

3. What is the biggest turn off you see in a startup pitch?

Dany Farha: The macro top down TAM (total addressable market) analysis that goes something like ‘$10 billion USD is spent in this sector so if we capture just 1% that’s $100 million….’ 

Ziad Mokhtar: Someone who hasn’t done their homework. Someone who is not putting the time and effort to become an expert in whatever problem they are trying to solve.

Walid Hanna: When the founders of a six month-old startup proudly provide us with a $20 million valuation that is based on a 20 year projection.

Khaled Talhouni: No clear understanding of the market in which the business is operating is a major turnoff. A lot of businesses compare their operating environment to Silicon Valley, but I think it’s important to realize the differences between our regional market and what can work in developed markets. Businesses [in the region] need to focus a lot more on the fundamentals, revenues, and profits than they do in places like Silicon Valley because the exit market [here] remains limited at present.