For most startups, raising capital is often a tedious and arduous process. From convincing people to contribute large sums of money to ensuring attractive funding terms from the right investors, fundraising can seem like an alien puzzle to many founders. In the Middle East, the challenge is even greater. Startups have very few sources of financing, and most are dependent on personal resources, family, and friends. In addition to bearing the burden of debt repayment in the initial stages of development, they face immense difficulties in obtaining bank financing. The limited amount of funding sources has produced an estimated funding gap of about $360 billion in the region. To overcome these difficulties, some startups have turned to private financing sites, utilizing technology to raise money from many investors at once.
The Global Private Financing Market was valued at 10.2 billion USD in 2018 and is expected to reach 28.8 billion USD by the end of 2025, growing at a CAGR of 16% between 2018 and 2025.
What is Private Financing?
Private financing allows organizations to raise funds by collecting small amounts of money from multiple individuals. It is changing the way startups raise money by freeing them from having to depend on banks or venture capital (VC) funds. This had led to a fundamental shift in how young companies not only raise funds but grow their businesses as well. Rather than replacing angel investors and VCs, the model serves as a vehicle for retail investors to gain access (with a small investment amount) to an asset class previously reserved solely for institutions and other large-scale investors. The most popular private financing markets are the United States and Europe, with 69% of the total funding volume coming from these two regions alone.
Some of the key benefits of private financing include:
- Faster funding and more efficient funding processes
- Access to a wider and more global investor base
- Improved company visibility
- Allows entrepreneurs to determine the possible demand and viability of their products without having to invest huge amounts of capital
Types of private financing:
- Equity-Based: This provides investors with shares of the startup in return for their investment
- Donation-Based: This type raises funds for social causes and non-profit companies. Usually, investors are not promised anything in return
- Reward-Based: This is the model made famous by the platform Kickstarter. In return for investing in a project, you get the product when it’s completed, along with various other rewards, depending on the level of your investment
- Debt-Based: All investments into a project are treated as loans that need to be paid back according to a specific schedule
Private Financing in the Middle East
At first glance, the Middle East seems like an ideal market for a robust private financing economy. Last year proved to be another record year for the MENA startup ecosystem with 366 deals, more investments than ever before in MENA-based startups, and total funding up 31% from 2017. While private financing is slowly gaining popularity in the MENA region, it is still in the early stages and the growth of this peer-to-peer form of financing has been sluggish.
While this can be partially attributed to slow-moving regulations, the uptake of available private financing in the region has also been slow due to risk aversion and lack of awareness. Some startups have also been put off by the slow payout timings and concerns over future fundraising efforts. They fear that potential VCs may be turned off by too many investors already being on the capitalization table.
With the first private financing deals are reaching the point in the cycle (around five years) where returns are expected, the private financing industry in the Middle East is now at a turning point. With the addition of increasing government engagement and investor appetite, all these factors may very well be the fuel that the private financing industry needs in the MENA region.
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