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In the previous post, we looked at how early-stage ventures (as an asset class) outperform almost all others across nearly each time-horizon. Furthermore, we learnt that only 0.05% (Source: Proprietary Research) of wealth in the MENA region is allocated towards this asset class. This is extremely low compared to:
The comparable figure in the US is 0.17%. Although low, this is three times that in MENA.
The overall allocation towards equity (listed and unlisted) by HNI’s in the MENA region is at least 37% (Source: Global Wealth Report 2018- BCG Global Wealth Market Sizing Database). This means that investments in early stage ventures comprises less than 0.15% of the equity allocation in an HNI’s portfolio in the region.
So, what stops investors from allocating more capital to this asset class? We’ve identified four different reasons:
Visibility of the asset class: Many HNI’s and potential investors are not aware of this asset class. In fact, in a survey conducted by the Women’s Business Angels for Europe Entrepreneurs, approximately half of the potential angel investors surveyed said that they weren’t aware of this asset class.
Company: Investors often do not understand the company or their product. As most start-ups, in general, tend to be technology-based, investors often stay away if they do not understand the technology. In fact, a survey of 200 angel investors conducted by Propel(x), a crowdfunding platform in the US, revealed the primary reason for 52% of angel investors was their ability to understand the technology behind the company and its product/service.
Large ticket sizes: The average amount invested by an investor in early-stage ventures in MENA (in 2018) was approximately USD 173K (Source: Proprietary Research). Such a large amount could act as a barrier to potential angel investors (who wish to enter this asset class).
Holding Period: Since early-stage companies are private companies, investments in them are extremely illiquid in nature. In fact, the National Venture Capital Association estimates that the holding period for an investment in an early-stage venture is eight years. Such a long holding period, especially compared to other asset classes, generally dissuades investors from allocating capital towards it.
We believe these four are the primary reasons why investors do not allocate more capital towards early-stage ventures. You can always let us know (in the comments section or through email at snavani@angivestventures.com) if you think there are other reasons. In the next posts, we’ll look at how each of these problems can be solved and how the number of investors investing into startups in the MENA region can exponentially grow.
Note: For further information on Proprietary Research, please reach out to me at snavani@bambucorn.com
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