How to attract VC funding in today's market, according to Basil Moftah

The Investor's Corner is back! In the first episode, Basil Moftah, General Partner at Nclude talks about VC funding in the economic downturn, emerging trends and financial inclusion in Egypt.

How to attract VC funding in today's market, according to Basil Moftah
Basil Moftah, General Partner at Nclude

After Basil Moftah graduated from university in 1997 with a degree in Mechanical Engineering, a twist of fate led him to Reuters’ GreenHouse Fund, where he was a Junior Analyst working on investments in companies like Yahoo, Netscape, Verisign, and Webex.

In 2002, he pursued an MBA and later oversaw Intellectual Property and Science, a billion-dollar business, which he successfully helped sell to a private equity firm for $3.5 billion. Afterwards, he returned to venture capital, joining Global Ventures. There, he served as a GP for Fund I and Fund II before founding Nclude, a fund dedicated to positioning Egypt as the fintech innovation hub across the Middle East and Africa (MEA).

In the debut episode of The Investors Corner season two, Basil shares insights into successfully fundraising into today’s market, building strong founder-investor relationships, and the emerging trends that will shape the African startup ecosystem in 2024. 

From global success to impactful return to Egypt

Having already achieved remarkable success in North America and the Middle East, Basil found a compelling motivation to bring his expertise back to his homeland, Egypt. This desire led to the establishment of Nclude, a venture with deeply personal significance for him. 

Basil shared, "Founding Nclude held personal significance to me because I am originally from Egypt, and I left the country 25 years ago. I wanted to make a meaningful impact and give back to Egypt through technology and investments, leveraging the skills and knowledge I had acquired along my unique career journey."

Securing $105 million to fuel Nclude's mission

Having a clear mission is one thing, but having the necessary capital to support it is another. In Basil's case, he and his team were fortunate to secure an $105 million fund with the backing of Egypt's largest banks, including Banque Misr, the National Bank of Egypt, and Banque du Caire. Basil firmly believes that their commitment to a clear purpose played a role in their success.

According to Basil, most investors are not primarily swayed by personal connections or their perceptions of the General Partner's potential. What truly matters to them is understanding your core purpose and how it will unfold over the fund's extended lifespan. To address this, Basil and his team crafted a compelling narrative centred around "Nclude," a name that directly mirrors their primary focus on promoting inclusion, especially in financial services.

Egypt, with over two-thirds of its population lacking sufficient access to banking services, provided a significant backdrop for their mission.

Basil explains further, "During our discussions with potential Limited Partners (LPs), we highlighted real-world issues and challenges that have a direct impact on people's daily lives. Notably, the limited acceptance of credit cards, the prevalence of cash as the primary currency, and the prevalence of non-digital transactions create multifaceted challenges for various stakeholders, including the government and corporations. These challenges affect areas such as tax collection, revenue generation, and accurate record-keeping. By articulating these challenges and aligning them with our mission, we successfully piqued the interest of numerous investors, including three of Egypt's top banks who came on board as Limited Partners (LPs)."

Furthermore, they have garnered the support of corporate entities like Mastercard, Egyptian Banks Company (EBC) and eFinance, who have all united to address this pressing challenge and seize the significant opportunity it presents.

Nclude's hands-on approach to investments

Nclude has put a portion of its capital to work, investing $22.5 million in eight portfolio companies. Basil outlined the criteria they used to choose these startups, explaining, "To kick things off, we start by pinpointing the problem a startup aims to solve and gauging the problem's scale. We don't invest in ventures tackling small or non-existent issues. As an investor, I need to understand what problem they're addressing, how big it is, and how many people care about it.

Once we've established the significance of the problem, the focus shifts to the startup's team. This means closely examining the management team, founders, advisors, and investors. The behaviour, communication, and overall approach of the management team are crucial considerations.

After the team assessment, we dive into technical and financial due diligence. This involves evaluating the technology itself, its construction, and potential issues. Financial due diligence includes scrutinizing the business model, revenue prospects, profitability outlook, and the timeline for achieving profitability, especially when addressing significant problems.

Regarding our investment approach, we usually take the lead when it makes sense. We're flexible, with investments ranging from $500,000 to $5 million, and we're prepared to play a leading role. However, we also believe in creating a well-balanced cap table.

We advocate for active involvement in the day-to-day interactions with the founder and the team, often by serving on the board. Other investors may take a more passive role, depending on the co-investors involved. It's about collaboration and practicality, not ego, recognizing that successful investments require ongoing effort and cooperation from all parties involved."

How to build a strong founder-investor relationship 

For Basil, merely writing a check isn't sufficient. He recognizes the importance of supporting founders and emphasizes the significance of a strong founder-investor relationship. Explaining how such a relationship can be cultivated, he highlights, "A healthy founder-investor relationship thrives on openness, as both parties, driven by different goals, rely on each other for success. Founders aim for a lasting legacy or solving problems, while investors seek financial gains. Nevertheless, both parties depend on one another, and trust and open communication are crucial for their success.

The true test of this relationship arises during tough times. Success hinges on founders being candid about their challenges. While it's worth noting that there are situations where investors might not have immediate solutions, sharing these problems builds deeper trust and communication in the relationship."

Attracting VC investor attention in today's market

There is a noticeable global trend of declining technology investments, mainly due to the increase in interest rates and the substantial inflow of capital over the past decade. As a result, investors are re-evaluating their previous investments, making it more challenging for founders to secure VC capital.

In response to this situation, Basil offers valuable advice for founders: "If you originally anticipated a three to six-month fundraising period, be prepared for it to potentially extend to six to nine or even nine to twelve months. Effective financial planning is essential to prevent running out of funds before securing the next round of investment."

Furthermore, investors are closely examining emerging markets, including Africa, to determine whether the potential returns justify the associated risks. Factors like currency volatility, economic stability, and political unrest are critical considerations.

To navigate this scrutiny successfully, Basil recommends, "In today's market, achieving growth rates of 5% or 10% month-on-month may no longer be sufficient to capture investor attention. Businesses may need to aim for growth exceeding 10% annually. So, assess your business model's aggressiveness and establish a clear timeline for reaching profitability. Investors are not only interested in the quality of your idea but also in understanding the capital required to attain profitability, aiming to avoid continuous substantial investments year after year just to achieve profitability."

Moreover, Basil suggests highlighting the potential positives of risks like inflation.

He advises, "Entrepreneurs seeking investment should articulate the beneficial aspects of risks to potential investors. For example, in Africa, companies have the potential for rapid growth, often exceeding 30% or more month-on-month, due to the continuously increasing price inflation in the market. Additionally, they should outline strategies for mitigating any adverse effects. This comprehensive approach can facilitate fundraising and encourage more informed and constructive discussions regarding investments in Africa."

Avoiding the fundraising mirage

Even though the advice mentioned earlier is valuable, Basil offers a cautionary note to prevent founders from becoming overly fixated on their fundraising objectives.

He emphasises, "It's important to recognize that the ultimate aim isn't simply to raise money; this misconception can lead founders astray. The genuine goal is to tackle a real problem or challenge. Founders who maintain a steadfast focus on this objective, ensuring that their product delivers an outstanding experience to their customers while effectively addressing the problem, typically achieve better long-term results."

Basil provided insights into the emerging trends set to shape the African startup ecosystem. His observations shed light on three key developments.

Firstly, Basil anticipates a wave of consolidations in the African startup landscape. He explains, "There will be extensive consolidations in the coming months and years. This can manifest in two ways: companies either closing their operations or being acquired by their competitors. This trend, particularly in the fintech sector, holds the promise of weeding out redundant ideas and driving greater scalability."

Additionally, Basil highlights the increasing demand for profitability from investors. He emphasizes, "Another significant trend revolves around the concept of profitability. While businesses require injections of capital for growth, it's increasingly imperative that they outline a clear path to profitability. Investors are likely to enforce more stringent criteria to ensure this trajectory. This reflects a growing emphasis on sustainable financial models."

Lastly, Basil discusses the growing prominence of ESG (Environmental, Social, and Governance) factors in the startup ecosystem. He notes, "Lastly, the issues surrounding ESG will gain prominence, especially for startups. This encompasses aspects like governance, transparency, and responsible money management. The days of investors simply writing checks and hoping for the best are dwindling. Governance, in particular, has become a pivotal point of consideration for investors worldwide."

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