An edited version of this article was published in Islamic Finance News.
The world economy is navigating severe turbulence – with volatile energy prices, high inflation and geopolitical instability dampening investor confidence. Nowhere is the slowdown more evident than the venture capital industry, which has witnessed deal flow decrease by more than half in the past twelve months and the high-profile collapse of Silicon Valley Bank.
Against this precarious backdrop, the Gulf region is proving to be an oasis of opportunity. With Saudi Arabia and the UAE among the world’s fastest-growing economies, entrepreneurs are flocking to take advantage of the Middle East’s bustling entrepreneurial ecosystem. The deep pockets of regional sovereign wealth funds, meanwhile, are attracting Silicon Valley’s most celebrated venture investors to build long-term ties with the region.
While the world may only be waking up now, I have been an investor in regional businesses for over a decade now and witnessed first-hand the rich history of Dubai, for example, as a hub of entrepreneurship, innovation and financial growth. This is why it was the perfect location for us to launch Tenami Capital, the first DFSA-regulated fund manager under the DIFC’s new venture capital funds regime.
Our mission at Tenami Capital is simple:
To provide regional entrepreneurs with non-dilutive growth capital and to solve for the problem of exits in the venture capital industry.
In order to achieve our mission, we have pioneered an innovative, Shari’a compliant and equity-based form of Revenue-Based Financing (RBF).
Traditional venture capital funding involves a high degree of risk and uncertainty, with the potential for significant returns but also the risk of significant losses. RBF has recently emerged as a relatively new form of financing to fund companies with volatile cash flows. Put simply, an investor provides a company with financial capital in exchange for a share of its revenues until a capped return is achieved (typically 2-3x the investment amount and without a fixed term). Lighter Capital, which was established in 2008, has been credited for popularising RBF in the venture capital industry by providing funding to software start-ups that were not yet profitable. Since then, several other RBF platforms have emerged, including Clearbanc, Earnest Capital, and Decathlon Capital Partners.
Tenami Capital’s revenue-based investment structure provides an alternative and fairer approach. Instead of burdening a company with debt, we acquire equity ownership in a company which has the ability to buy back our shares based on a price linked to its revenues. By combining equity ownership with regular cash distributions, we are able to offer a unique investment opportunity that is both founder and investor friendly.
In February, we announced our inaugural revenue-based investment in YOUGotAGift, the leading digital giftcard marketplace in the Middle East. YOUGotAGift ticked all the right boxes: sizeable and growing revenues, strong unit economics, a fully-funded business plan and a track record of efficient capital use. With technology-enabled firms, such as YOUGotAGift, at the heart of the Middle East’s transformation, we need more innovative and partnership-centric capital that caters to the region’s unique requirements.
Tenami Capital’s philosophy is rooted in the equity-based heritage of Islamic Finance, which advocates the sharing of risk and reward between investors and entrepreneurs. At the heart of our structure is the alignment of interests between the entrepreneur(s) and the investor. The investor only makes money if the business is successful. There are no fixed monthly coupons, but rather a share of revenue. Above all, an investor’s returns are not linked to volatile valuations or interest rates but underlying revenue growth.
In one of his recent posts to the public, His Highness Sheikh Mohammed bin Rashid Al Maktoum, the Prime Minister of the UAE, powerfully stated that
“to take a risk and fail is not a failure. The real failure is to fear to take any risk.”
The launch of Tenami Capital comes at an important inflection point for the Gulf region as it becomes an increasingly important destination for risk-takers. Our approach to venture investing provides a unique, transparent and innovative solution to the challenges faced by entrepreneurs and investors in the region and will help to propel our entrepreneurial ecosystem to new heights.
