How venture capitals are disrupting the Arab tradition of sole ownership
* Family businesses have majorly influenced region’s entrepreneurship ecosystem
* Start-ups in the region are often unwilling to give away equity when seeking funds
* Minor differences in equity can mean a lot down the road
The Arab civilisation took a turn in the seventh century when desert tribesmen started conquering and moving into urban settlements. The strong religious influence of the time drove Arabs to pursue trade and knowledge. These became the pillars of the first modern Arab Era: conquests wiped out national boundaries, paving the way to an easier exchange of ideas and an improvement in the trade business.
Modern entrepreneurship started with these traders and merchants. As more Arabs moved into steady communities, jobs and tasks became more specialised. Specialisation led to innovation, competition and, ultimately, empowering self-employment. Trade routes, the creation of the monetary system and, finally, the Industrial Age, contributed to evolving entrepreneurship and building strong family businesses.
Family businesses in the Arab world make up roughly 85 per cent of the non-oil GDP. This had a big influence on the entrepreneurship ecosystem growing in the region. Being in in dozens of interactions with start-ups in the region, we do not know how to give up ownership to give a business a better chance to succeed. Founders and concept owners are not willing to give away equity, raising too little. Unfortunately, there are many unsuccessful stories from the region that we tend to forget.
Most successful start-ups ask for funding at some point. The vast majority of these are non-profitable initially and have a certain runway. By just stating the obvious, you need raise enough money to either fly or die. So why should we alter our habits ourselves and start giving away equity?
Equity for cash
Understandably, this is the most important reason to give away equity. And yes, it’s important not to always spend your personal money thinking your idea is going to make it. You need to make sure you fund the milestones that your start-up believes its necessary to reach a tipping point in the value of its business. This will not only ensure that you don’t under- or over-raise, it also minimises your risk and demonstrates your capabilities to set milestones and achieving them. Money isn’t everything; value is indispensable. Make sure you focus on strategic investors who can add value to your start-up beyond the money. That value can be in connections, knowledge, partnerships, etc.
Equity for employees
There are multiple schools of thought on how to think about employees’ equity. They all agree on one thing though: such equity is crucial to both attracting and retaining top and key employees. As a founder, you need to instigate the act-as-an-owner mentality in your employees. The best way is to have a pool of equity vested over time, where employees can recuperate based on yearly deliverables. This becomes harder for larger corporations: Google, for example, typically issues shares to all new joiners, vested over five years.
Equity for advisors
In many cases, advisors have no formal duties other than endorsing the company and being available when needed. Shares to advisors tend to be minimal and are less about the monetary value. Advisors do it for the exposure, not necessarily for the money. Having them on board might be pivotal to your business (depending on what you expect from them).
Most start-ups bootstrap in the beginning until they have some basics in place. That becomes almost impossible for start-ups requiring a relatively long runway. While equity from day one is not ideal, don’t shy away from knocking your family and friends door, VCs or any other funders. This will help you move faster, avoid personal risk and gain quicker contacts in the marketplace.
As an Arab founder, giving away equity is not easy, especially for a generation built on solid trade roots. Minor differences in equity can mean a lot down the road, which does not mean you can succeed without giving away the right amount to the right stakeholders. Give away as much as you need to succeed, change your habits in this new disruptive world.