MENA Alternative Finance, It’s about time!
A Promising Option for Startups in Today’s Climate.
Unlike conventional businesses, startups need a steady flow of capital to continue to scale and grow. Ensuring that startups have access to capital, when they need it, is the cornerstone of any healthy innovation ecosystem. However, not all capital is created equal, and many founders encounter obstacles in accessing the right type of capital financing for their startups.
Limited financing options under challenging conditions
Equity financing is often the first type of capital that is sought for MENA startups in the early funding rounds (seed to series B). This is because it is often extremely difficult for startups to borrow from traditional sources such as banks and financial institutions. While equity financing can offer great opportunities, it can be the most expensive form of capital. It’s dilutive and takes a long time to secure. Additionally, equity financing is largely dependent on the valuation of the startup, which is vulnerable to changing market conditions.
With the recent hikes in interest rates and drop in SaaS valuation multiples, equity fundraising became more challenging, and founders need to make sure they have runway.
Here are 5 reasons why now is the right time for tech startups to seek alternative financing:
1. Access to cash when you actually need it: On average, it takes no more than 3 weeks from application to deployment for startups to receive alternative financing. On the other hand, with equity financing it often takes at least 3 to 6 months to get funded. It might even take longer in the current climate as VCs are taking a more cautious approach to deals.
2. Avoid valuation discussion: One key difference between alternative financing and equity funding lies in the approach. Alternative financing providers focus on the overall viability and performance of the tech startup through analysing growth metrics such as unit economics, efficiency of spending, and ARR growth and churn - regardless of the startup’s valuation.
SaaS valuation multiples dropped by 50% in 2022, going back to their normal levels before COVID-19. As such, most founders of SaaS companies will want to shy away from valuation discussions, making alternative financing even more attractive.
3. Extend your runway: Alternative debt financing allows founders to extend their cash runway and achieve their next milestone, particularly between financing rounds, and more specifically, during unprecedented economic conditions. With additional cash, founders can enhance their valuation, and they will have more leverage to negotiate better terms for their upcoming financing round.
4. Maintain control through capital structure: It’s understood among tech startups that “growth sucks cash.” Alternative financing allows founders to fuel growth and improve liquidity, without getting diluted and losing control of their startup over time. It also provides an opportunity to achieve a more balanced and less costly capital structure through a combination of debt and equity capital.
5. MENA fragmented market: While MENA is experiencing fantastic growth, MENA markets are very fragmented. Moving from country to country with different regulatory environments and licensing requirements is challenging. Therefore, VC available capital for most MENA startups is conditional to them demonstrating agility to move around. On the other hand, alternative debt financing allows founders to finance such requirements and unlock VC funding.
Having access to sufficient capital is vital to ensure startups are prepared for challenges and can respond efficiently to new opportunities. And now that alternative financing options are emerging in MENA, startups should explore such options to help bridge their growth journey between funding rounds and fuel their growth with minimum dilution.
Additional resources for founders and startups can be found below:
https://sifted.eu/articles/startup-founder-interest-rate-rise/
https://www.saastr.com/saas-multiples-are-at-a-3-year-low-where-it-goes-from-here/