Islamic Finance 

INTERVIEW-On assets, risk appetite and role of banks in venture capital funds and investments: Henri Asseily

| 08 December, 2016 | Interview

 

As part of the Bahrain Economic Development Board and Thomson Reuters' Bahrain Islamic Venture Capital Report that focuses on the regulatory and market infrastructure needed for building a venture capital ecosystem in Bahrain, Founding Partner of Leap Ventures Henri Asseily – who is an active investor in (and mentor to) companies in the United States and MENA with 20 years of experience as a serial entrepreneur focused on internet-related businesses – answers questions about assets, risk appetite and role of banks in venture capital funds and investments.

The report can be downloaded from HERE.

Q: Is there sufficient institutional capital available with the risk appetite for venture capital funds?

Henri Asseily: This is an oft-asked question that touchesupon two key issues: “sufficient” institutional capital, and “risk appetite”. First, we need to discuss the problem of risk appetite. The MENA region suffers, in my opinion, from acultural distrust of anything long term, let alone long term high-risk high-reward capital gains from companies with zero hard assets. MENA discounts anything not physically visible or touchable, and that is clear not only culturally but also in the legal frameworks ofmost countries in the region.

For example, in Lebanon there is no concept of goodwill, and no value can be attached to goodwill. Similarly, few if any countries allow employee stock option plans: either you put money in the company and you receive shares, or you’re working for the company and you get a salary.

Second, the issue of sufficient capital: the answer last year would have been a clear NO. This year, with the advent of Lebanon’s central bank circular 331 injecting over US$400 million in this small country’s knowledge economy, and all other countries wanting to follow suit or at least tracking closely its development, there is a lot more capital available. At least in Lebanon, and to a lesser extent the GCC, capital is now available.

Raising money in GCC for internet/tech is still difficult because few returns have been seen. I expect that to change instantly the day well-known local investors get a major exit, as the herd mentality is strong.

Q: How much of an obstacle does the lack of a tangible asset as collateral (like in real estate private equity funds) present for building risk capital?

The main obstacles are in working capital lines of credit and bridge loans. Those are impossible to get due to the collateral issue. If a company doesn’t need those, or has secured enough capital from a raise to handle this, there’s no problem. Otherwise the obstacle is insurmountable.

Q: In your opinion, would there be more of an appetite for investing in venture capital in businesses that serve the local/regional market versus one which is export-focused?

On the one hand, local/regional support is good and nationalism plays a big role, but on the other hand the world is a much bigger market, validates your business model much better, and allows for much more interesting exits.

Q: Can banks play a role in either arranging for or financing venture capital investments? If they do have a role, can they make investment decisions in-house or should they hire external managers with more experience in investment selection of venture investments?

You can look at the Lebanese ecosystem today to answer this question. The central bank is injecting through the banks over US$400 million. The vast majority of that is going through VC funds because banks know very well that they cannot properly analyze VC investments. Their risk profiles are markedly different, and they do not wish to invest in building an in-house VC arm. Those banks (BLC comes to mind) that went at it alone are showing their limitations: extremely complex deal structures making further investments difficult, incredibly long cycles (over a year for asingle investment) and a focus on reaping deal fees as opposed to long term returns.

Q: In what sectors is demand highest for venture capital? How much overlap is there between the anticipated supply of risk capital (fund investors) and the demand for risk capital (businesses needing capital)?

Demand has been skewed by the lack of supply,so it’s difficult to look at each independently. An all-too-common example is a startup founder looking to raise US$700k “because I’ve been told that there’s no chance I can raise US$2million”. Such founder should have probably raised US$4 million to give himself proper leeway to achieve the necessary milestones.

That said, demand and supply are high in marketplaces of all kinds, and in hardware. Apps makers have a problem with supply and are self-censoring themselves because there’s very little appetite to fund companies that will spend most of that in marketing. The F&B business is in high supply (investors love food), and in general successful B2C businesses easily attract capital thanks to their buzz.

DOWNLOAD THE REPORT

BahrainEDB-TR Bahrain Islamic Venture Capital Report 2016

Copyright Thomson Reuters 2016

© Thomson Reuters 2016 All rights reserved

Like 

MORE INTERESTING TOPICS