Is it an accelerator? Is it an incubator? No, it's a venture builder and it could be the key to unlocking even more potential in the region. But what's the difference?
The merger of UAE-based venture builders CE-Creates and hatch & boost, resulting in hatch & boost Ventures, is an exciting indicator of the SWANAP region’s expanding entrepreneurial ecosystem. The region’s players will certainly be keeping an eye on the firm and its ventures in the coming years. Its mission to focus on ESG investments, including startups in the spaces of agritech, foodtech, fintech, and femtech, signals the impending emergence of sustainable solutions. But it is the venture building model itself by which the firm operates that has piqued the interest of the SWANAP entrepreneurial community.
The region comprising South West Asia, North Africa, and Pakistan has become an undisputed hotspot for startup activity in the last decade, and while the number of funded startups and the size of deals has grown at a rapid pace, the variety of players and funding models in the ecosystem has remained somewhat limited. The rise of venture building joins trends like debt financing and crowdfunding as a signal that the ecosystem’s funding landscape is expanding and diversifying in exciting ways.
So What is Venture Building?
Venture building is a startup enabler. Like accelerators and incubators, venture builders provide a specified level and form of support to founders in exchange for returns on investment, equity stakes, or payment for services. But there are some key distinctions between venture builders and other ecosystem players. Unlike the others, venture builders are in it for the long haul.
-Incubators provide support to startup founders from very early stages, often at concept phase. Incubators work with founders to develop a minimum viable product and seek market validation.
-Founders benefit from the incubator’s infrastructure and resources to develop their idea into an operational venture.
-Incubators can either be unique for-profit entities or non-profit structures tied to academic or governmental institutions. While for-profit incubators may take an equity stake, most incubators operate on a fee basis.
-The support provided to startups from incubators can vary in duration from a few months to a few years, depending on the pace of the startup’s growth from concept to validation.
-Accelerators work with startups at an early, but more developed stage - those who have proven market viability.
-The services are designed to accelerate the startup’s growth, offering the necessary tools for rapid scaling up of the venture’s operations.
-Accelerators provide funds directly to the startup in exchange for equity.
-Accelerators work directly with startups for a brief period of time, typically 3 - 6 months, during which time they provide an intensive amount of support and resources to enable the startup’s development.
-Often, accelerators are entities within larger organisations, who may provide follow-on investment to the venture after the accelerator program has been completed.
While these ecosystem players provide much needed infrastructure and network support for the development and growth of startups, their services are limited in scope. Both incubators and accelerators are designed to get startups to a specific stage of development.
-Venture Builders, on the other hand, enter a long-term relationship with founders. Venture builders come on board as co-founders.
-The venture builder will either work with the entrepreneurial founder in conceptualising an idea, or the idea may originate from within the venture builder entity, which will seek out and partner with founders.
-In exchange for a significant equity stake, the venture builder provides long-term support to the startup through provision of capital, infrastructure, and resource support at every phase of the startup’s development, from concept to exit.
Founders benefit from the venture builder’s support along the value chain through the duration of the enterprise’s journey. Founding teams who work with venture builders are often motivated by the opportunity to significantly expand their knowledge and resource network, increasing not only the likelihood of development and launch of their idea, but its success and sustainability in the market. For a small founding team with a narrowly specialized skill set, the opportunity to partner with a venture builder has the potential to change the entire trajectory of the startup. Of course, this comes with conditions. The startup founder relinquishes a significant share of equity to the venture builder as well as sharing the status of co-founder. Venture builders are not designed to be silent partners; they bring a vast network or resources and knowledge to the table and expect to build the company together. For founders with a fixed idea of how they intend to develop and grow, the venture building model may not be appropriate. Yet a collaboratively minded founder may be enticed by the opportunity to develop an idea and align strategic goals alongside such a network. From the venture builder and investor side, this long term strategic alignment is a primary driver for the model.
Not all startup enablers with “venture” in their name are venture builders, however. As the venture builder model gains traction globally, another “lighter” model has been born as something of a hybrid between venture builders, incubators, and accelerators. These entities are typically known as venturestudios or startup studios. They may combine elements of venture builders such as access to resources and support raising capital without the strict constraints of accelerators or incubators. Typically these studios do not come on board as co-founders and may develop relationships with startups who are past the concept phase (remember that venture builders work with founders from the earliest days in the startup’s history). Studios also typically do not support the startup for the duration of its journey as a venture builder would, though are often engaged with the startup for longer than an accelerator or incubator might do. Dubai is showing strong support for such models; DIFC’s newly launched venture studio platform will support fintech startups through a network of 20 studios.
What Does the Future Hold for Venture Building in MENAP?
In the context of the regional landscape, the advent of venture building is an exciting prospect.
Until now, the region’s startup founders have primarily been supported by incubators and accelerators and funded by small seed checks and later stage venture capital. The value provided by these players has undoubtedly benefited the region’s startups, yet founders face challenges nonetheless. Venture builders can bridge certain gaps and ease critical pain points that the first generation of the region’s ecosystem players are not designed to address.
By most measures, startups in the region have prevailed through the last two years of global economic uncertainty, continuing to reach new funding milestones. Yet while SWANAP’s startups are better funded than ever before, a significant funding gap remains. Access to capital remains a hurdle for many of the region’s founders. One of the promises of the venture building model is the ease of this pain point. The venture builder leverages its network to raise capital at critical junctures, while investors may feel more confident investing in startups that are backed by the venture builder and its expertise and resources.
Despite the immense talent and entrepreneurial drive, the region’s startup landscape suffers a knowledge gap - young founding teams often face one or more gaps that would be considered critical to the startup’s success in the market. Hiring a team of employees and advisors to fill these gaps is not always feasible. Other startup enablers may only be able to provide effective support for knowledge and resource gaps that are addressable at the time of the startup’s involvement with the incubator or accelerator program. Venture builders provide the resources to solve these challenges from within their existing network over the long-term.
Each of these players provide a unique proposition to founders, with distinct benefits and trade-offs. Whether the model is a good fit for a founder is determined on many factors including the phase of the startup, the amount of investment and support sought and equity willing to be exchanged. Venture building will not be the right path for every startup, and the model’s success in the region remains to be proven, but we expect founders and investors alike will be eager to test the waters.