Why VC Firms choose to operate from ADGM’s business-friendly hub
15 September 2021, by ADGM's Staff Editor
Abu Dhabi Global Market offers an attractive value proposition for VCs looking to invest in UAE-based startups and beyond.
Venture capital firms are all about taking a leap of faith. Most people assume that venture capital fund managers are strictly concerned with numbers and ROIs, whereas they are firstly investing in entrepreneurs, and secondly in the disruptive technologies and the potential impact they could make on societies. They can perform all the due diligence there is, however, risk will always remain a major part of what they do.
Simply put, venture capital firms provide the financial cover needed for startup founders to innovate and build world-defining technologies, they don’t just write a cheque and stand by. Venture capital funds hold the potential to drive forward the entire startup ecosystem, and it is therefore critical for them to be close to where all the innovation is happening.
The MENA market venture capital market is nearing an inflection point now that the ecosystem is starting to emerge from the COVID19 pandemic. We’re seeing more international VCs eyeing MENA-based startups, more diversity in funding sources for startups both young and mature, and also the emergence of exits, M&As as a scale-up strategy.
ADGM and VCs: An ongoing conversation
In recent years, Abu Dhabi Global Market (ADGM) has created the perfect environment for venture capital (VC) funds to establish an office in the United Arab Emirates, and invest in cutting-edge technologies and businesses. ADGM ensures that all stakeholders within the industry work in cohesion and synergy, which entails that regulatory frameworks must continuously be updated to match current industry needs.
‘ADGM has simplified its regulatory framework to promote investment within the region, creating a system that allows companies and individuals to understand a system that can be hard otherwise,’ commented Mahmoud Adi, co-founder at Shorooq Partners.
‘With excellent customer service and clear guidelines, it allows anyone to invest locally following shariah-compliant standards. ADGM makes it acceptable for those looking to invest in the region to follow said guidelines, in a simplified way, that are constantly changing to fit new business environments,’ he continued.
The agile and forward-thinking model that ADGM has created in the region makes its offering for venture capital funds even more attractive. By actively engaging the existing VC funds in Abu Dhabi, ADGM knows that VCs want flexible regulators who speak their language, low cost for operations, access to private capital, tax protection frameworks, and a sustainable deal flow.
Venture Capital (VC) firms select the location for their offices based on potential risks, rewards, and opportunities that arise by physically being in a particular geographic area. At ADGM, the cost of leasing or renting an office space offers great value for money, especially that it comes with superb infrastructure empowering each business transaction like high-speed internet and inspired lifestyle spaces. Beyond the upfront cost of setting up an office, venture capital firms could effortlessly conduct business by leveraging robust legal frameworks built on the English common law.
“ADGM and the Financial Services Regulatory Authority (FSRA) have designed a regulatory framework tailored to cater for the nature of Venture Capital Managers activities, business model, and the startup space in general,” commented Jad Salame, Managing Partner at Phoenician Funds, one of many Abu Dhabi-based venture capital firms.
“This includes waiver on minimum capital required and certain functions, incentives/ subsidies. But most importantly, it is the ecosystem and the support mechanism that has been created to support companies, investors, and service providers to operate in a friendly environment conducive to high productivity and performance,” he added.
However, 2 key factors determine the attractiveness of a location for venture capital firms, and Abu Dhabi Global Market successfully manages to combine them through an integrated approach that involves the community and regulatory environment: Active VC ecosystem and flexible corporate vehicles.
An active venture capital ecosystem
Venture capital firms open new offices in a specific region based on the success rate of venture capital-backed investments in that area. The more startups and success stories emanate from a region, the better the chances that firms decide to open an office there, and Abu Dhabi is not short on startup success stories. Even more, when VCs see other firms making successful investment rounds with UAE-based startups, they are further encouraged to establish an office here.
As of today, there are over 300 Abu Dhabi-based startups, 50 of which are VC-backed and working in various industries like healthtech, e-commerce, fintech, and artificial intelligence. The opportunity in Abu Dhabi is real. Startups are coming from all over the world to benefit from government-backed incentive packages and to create world-changing solutions right from the heart of the UAE. Venture capital firms in Abu Dhabi could have a steady flow of investment-ready startups who have made the rounds.
Deal flow potential is a deal-breaker for many of the world’s venture capital firms, though Abu Dhabi’s thriving startup ecosystem Hub71 has made it much easier for VCs to establish themselves in Abu Dhabi. Hub71’s startup ecosystem hosts over 102 startups with 500 entrepreneurs coming from all over the world, all ready to change the world from the heart of Abu Dhabi.
What’s even more impressive is that almost all those startups graduate from locally available accelerator programs like Techstars, Plug and Play Abu Dhabi, and Gotham, and create a steady flow of investment-ready startups for VCs. The conversations held between Abu Dhabi-based startup founders and VC are at a higher level because of the extensive training and preparation that founders receive.
Whether it’s startup accelerators like, access to financing through the AED 535 million ‘Ventures Fund’ launched by the Abu Dhabi Investment Office (ADIO), or countless events and support programs: In Abu Dhabi, venture capital firms have all that they need to invest in startups.
There are currently over 20 venture capital funds based in Abu Dhabi Global Market, each with their priorities and strategies, yet all searching for the next unicorn to emerge. That number is expected to reach almost 30 by the end of 2021, given the increasing interest in maturing markets like Abu Dhabi. The clustering of VCs in one city has proven to be an effective strategy to attract entrepreneurs and create momentum for technological innovation and adoption.
“Unlike other sectors, venture capital is usually a very collaborative industry where investors join their funding and business capabilities to create value for portfolio companies. By essence, each VC Manager has differentiating factors which could be put at work and be synergized with other players to advance the overall ecosystem. Therefore, clustering of VCs with diversified backgrounds and capabilities could be very beneficial for stakeholders including regulators, Limited Partners, investors, companies, and service providers,” mentioned Salame.
Indeed, on the topic of VC clustering, Adi added: “Having multiple venture capital growing at the same time allows collaboration between them, creating a network. This network creates an environment of mutual benefits where we can promote the flow of information, access to resources, and entrepreneurial collaboration. Not just for the benefit of the ventures but also the startups and investors as well.”
In a nutshell, VCs are even more encouraged when they’re around other VC firms, Family Offices, and Sovereign Wealth Funds, particularly as they see them as potential collaborators rather than competitors.
On that front, the VC community formalized itself under the Middle East Venture Capital Association (MEVCA), comprising 13 of the region’s most impactful funds with the aim to raise awareness to the industry and its role in accelerating the startup ecosystem. The association has, so far, organized over ten events which bring industry thought leaders to unravel key forecasts and trends shown in their research.
Since its creation in 2015, ADGM has designed numerous initiatives and events to further create synergies between Abu Dhabi-based startups and VC to meet, network, and engage. However, when offshore VCs attend those events they often realize that the startup market is no longer considered to be a ‘growing market’, but rather a mature one. For example, Fintech Abu Dhabi will be holding an invite-only ‘Global Investors & Founders Forum’ on 22 November 2021, where VCs can network with fintech innovators from the region.
VCs are increasingly realizing the need to be at close range from Abu Dhabi-based startups if they aim to seize the GCC market opportunity.
The location of VCs accelerates the growth and development of the entire startup community, especially as firms offer more than just risk capital. For example, when a VC firm invests in an early-stage tech company, it becomes diligently involved in the governance and management of the startup, either by being on the board, recruiting talent, or provisioning management incentives. For that to happen efficiently, there need to be clear regulatory frameworks that remove obstacles and encourage innovative risk-taking.
More importantly, proximity to portfolio startups allows VCs to continuously mentor and coach the management team. The value creation team at a VC works directly with founders to streamline operational growth, shape post-IPO performance, drive innovation, and IP activity, and maximize the potential for a scaleup. Plus, the more a VC makes investments in a certain region, the more that monitoring cost falls (flights, hotel stays, etc.)
Salame continued to say that “geographic proximity at ADGM is very important especially for seed-based investors and companies. At early stages, companies require regular and timely support and monitoring across talent attraction/ retention, operations, business development, strategy, etc. For investors too, proximity to the ecosystem gives direct access to a pipeline of potential investments which is a crucial element for a fund’s sourcing capabilities.”
Commenting on the importance of geographic proximity to an abundant pool of investment-ready startups, Adi said: ‘With new ideas continuously emerging in a city that is not only strategically positioned but also welcomes change, therefore becoming a perfect place to see an exponential rise in startups in the past years. Being geographically proximate to startups in Abu Dhabi certainly makes it easier to come across information that otherwise would not have been available, like subtle signs of the founder’s personality, trustworthiness, and competence. We believe that the recent explosion of the startup ecosystem is indicative of the dawn of a new era.’
Flexible corporate vehicles
Foreign ownership of companies in the UAE is a complicated matter. There is currently a strict federal law requiring all UAE-incorporated companies to maintain at least 51% UAE ownership at all times. Another obstacle is the need for approvals for companies’ investments in certain regulated sectors like energy.
That translates to VC funds avoiding making any investment in onshore UAE companies, and instead opting for companies incorporated in non-restrictive common law jurisdiction.
Luckily for both startups and VCs, ADGM, as an international financial center, offers a financial free-zone that’s based on the common English law and regulated by Financial Services Regulatory Authority (FSRA). Meaning, startups can establish their corporate vehicle in Abu Dhabi by utilizing one of the Special Purpose Vehicles (SPVs), which unlocks multiple opportunities for all stakeholders and could be customized to their specific needs.
“The availability of various types of investment vehicles which could be domiciled in ADGM and aligned with international standards/ regulations make it very easy to invest both domestically and internationally. For investors and companies alike, this enables a two-way investment flow including facilitating investment into ADGM based companies from internationally-based investors without the need to reestablish top cos in other recognized jurisdictions,” added Salame.
ADGM’s SPVs offer VCs and entrepreneurs the flexibility to hold shares and protect their IP rights, further streamlining operations by segregating risk across assets and holdings.
To sum it up, while global venture capital firms are actively investing in regional startups from afar, their physical presence in Abu Dhabi would undoubtedly accelerate the development of the startup ecosystem by multitudes. The symbiotic relationship between startup founders, investors, and regulators is crucial to lay the foundation of a sustainable industry that is safeguarded against any future megatrends like COVID19.
Venture Capitalists who are reading this are encouraged to request a callback from ADGM’s team.
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