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Although institutional capital is the bedrock of the venture capital ecosystem, not all institutions possess the same allocation expertise. In recent years, interest in the VC asset class has outpaced the growth in the number of VC professionals and fund managers.
Most institutions inclined to build internal investment ability will poach talent from the ranks of an existing VC practice and empower that person to build their own team. MENA, however, simply does not have a large enough pool to poach from.
To help bridge this gap, Abdulaziz Hayat is aiding MENA institutional investors in setting up their own operations and broadening their investment horizons.
Abdulaziz Hayat is a Kuwaiti investor and entrepreneur with experience in both the United States and MENA. Hayat earned an undergraduate degree in economics from the University of San Diego and a graduate degree in finance from Harvard University. Hayat’s background is in investment banking and venture capital investment management.
Hayat’s Advice to MENA Investors
People like Abdulaziz Hayat, well versed in the investment mechanics of both the US and MENA, are a rarity.
Acting as an advisor to a notable MENA wealth management institution, Hayat stresses the importance of maintaining a deployment strategy and adhering to it. He argues, “a deployment strategy over multiple years during both good and bad economic times is essential to success”. Continuing, he believes that it is also because seed-stage prospects and valuations are not closely correlated with the immediate prevailing economic conditions, and so poor macroeconomic conditions are no reason to halt a deployment strategy.
Abdulaziz believes the best investors are those who are broadly indexed across a wide variety of early-stage deals so that they may secure follow-on investment opportunities in breakout stars. He advises wealth management offices on creating and fundraising for new funds internally. Having advised on numerous growth stage deals, he remarks, “Getting into growth stage deals without having been an early-stage investor is virtually impossible without being a serious brand in the VC space”.
A Peek into the Investment Psyche of MENA Investors
Having interacted and worked with MENA investors and US startups for years, Abdulaziz boasts intricate knowledge of their issues, strengths, and general investment philosophies. Here, he shares a glimpse of the MENA investor mindset.
Hayat explains, as a group, MENA investors confront two chief challenges: they are unaware of how to allocate capital to promising startups and managers, and they do not possess the ability to build allocation expertise internally.
Several US institutions, like PE funds, have developed the habit of leading later-stage rounds for startups. However, MENA institutions who are wary of early-stage risk do not have the brand power or clear value add proposition to reliably gain late-stage access.
Furthermore, most MENA institutions lack the knowledge of crafting and executing an early-stage investment thesis. It is usually because the investors and executives in these institutions have not garnered any experience in VC, having focused on public equities and real estate. Analysis in VC can be substantially more qualitative than quantitative.
Most MENA investors are notoriously risk-averse. “MENA investors have more of an extreme aversion to losses than other emerging market-based investors”, says Hayat. Their desire to restrict their portfolios to secure investments is a culmination of the practices of their older family patriarchs, who needed to guarantee steady income sources. Among some family funds, this investment philosophy persists long after patriarchs relinquished control to younger family members who are more willing to accept risk.
Some younger family investors are only willing to accept risk knowing that this maximizes the probability that their modest family fund will be exposed to a unicorn in the future, despite losses on other bets.
Abdulaziz underscores that, even during the normal course of their investments, successful early-stage investors have negative returns in the early days. Early bets usually fail and shut down, and the eventual winners have yet to outperform the rest. Some risk-averse investors, then, wish to sell early for capital preservation purposes. Abdulaziz views this as his biggest challenge: to teach local investors to exercise patience and have faith in the long-term vision.
As an investment advisor to institutions, Hayat has two objectives. First, get investors to agree to a predefined allocation of capital for early-stage investing via an indexing approach. Second, get investors to double down on portfolio winners by increasing their exposure to startups with explosive growth.
Hayat’s Top Recommendations to Investors
Having had extensive hands-on experience with funds, Abdulaziz has built a solid, hassle-free, reliable method for investors. He divides it into four crucial steps:
Index: Get in on as many quality deals as early as possible.
Collaborate: Network, interact, work, and invest with emerging managers with sector expertise.
Patience: Remain patient, and do not panic or halt new investments when early losses occur or when the market softens.
Vision: Preserve capital for when your breakout stars outperform their peers in the growth stage.
Abdulaziz’s excellence and visionary approach in the areas of strategy design, fundraising, investments, and value addition have led him to act as an advisor to many new investors.
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Photo provided by Mansi Dutta.
