Khaled Talhouni on Startups and Regional Plays

Nuwa Capital’s Managing Partner, Khaled Talhouni, has spent over 16 years investing in the region, with a focus on early-stage startups. Prior to joining Nuwa Capital in 2020, Talhouni and his team invested in some of the region’s leading startups during their time at Wamda. Before that, he headed up investments at Abu Dhabi’s TwoFour54, ATH (the precursor to Silicon Badia), where he helped launch one of the region’s first seed funds and angel investing networks.

Nuwa Capital, which launched in 2020, invests in founders with a strong track record that are building scalable, transformational businesses across the Middle East, GCC, and Turkey (MENAT).

Nuwa’s early-stage fund (Nuwa Ventures Fund I) has deployed 40% of its recently closed first fund of $100 million and is currently looking to expand into new market segments. To date, it has backed over 30 companies from Saudi Arabia, the UAE, Turkey, and Egypt, and aims to have a total of 50-60 companies in its portfolio by the end of its investment period. It will concentrate its capital on roughly 10 companies in subsequent funding rounds. 

In a conversation with Inc. Arabia, Khaled talks about MENAT’s startup and VC landscape, and what Nuwa looks for in startups.

Edited excerpts of our interview follow.

Inc Arabia: What does it take to build a fund like Nuwa Capital?

Khaled Talhouni: There are three key stakeholders that are critical to the overall success of a VC fund. The first are the founders, and they are our key stakeholders. When we choose investments, we are also building lasting relationships. While the term “founder-friendly" is bandied about a lot, it should not mean giving founders a carte blanche. Our role is to support the founders in building their businesses, but also to be a sounding board and to hold them accountable.

The second constituency is our investors or Limited Partners (LPs). Fund managers have a wide latitude in discharging funds, so it’s important that managers maintain a high level of trust with investors.

The third constituency is our team. A VC is a very personal and relationship-driven business, and our ability to manage founders and LPs is only as good as the culture of our organization. It is critical to balance aggressiveness and perfection with fairness, and equanimity and to encourage debate around everything from potential investments to portfolio management.

IA: How does building a VC fund in MENAT differ from other regions?

KT: Building a VC is very challenging in any environment, but especially in an emerging market such as ours – not to mention during a downturn in the industry. Building a VC takes patience, spanning a five-year investment period in a typical fund through to a further five-year holding period. Although the market is still quite nascent, companies of scale, like Tabby, Careem, Hala, Jahez, and many others, are emerging.

Another unique element to VCs is that past performance is not necessarily indicative of future performance. We have a strong team with a good track record in the VC investing space, but the nature of this type of investing is highly dynamic and changes quickly, making it critical that we remain agile and open to new concepts, new business models, and new ways of both operating and investing.

IA: How is investing in MENAT different than other regions?

KT: For VCs in a region where investors traditionally held cash or invested in real estate, attracting LPs can take time. However, the success of startups like Careem is encouraging more people to invest in high-quality founders. As a result, the VC sector is maturing very fast.

Our startup ecosystem is highly dynamic and has changed tremendously over the past two decades. We went from an environment where in 2019 roughly $600 million were deployed in VCs across the region to $2.5 billion deployed last year. We went from roughly 400 companies being founded per year to 2,500.

On the other hand, our region has a wide geographical scope, which can complicate sourcing, assessing and portfolio management, as well as managing teams across multiple geographies.

IA: What stage does Nuwa invest in?

Khaled Talhouni: We’ve paced our investments in startups out of the early-stage fund, which has helped us stay focused on founders and business models with potential, and helped us to avoid the hype of high-burn/low-margin businesses. As investors of long-term capital, we are happy to sit on the sidelines and wait for the right opportunities instead of rushing into deals.

Our first fund concentrates on early/seed stage deals up to a maximum of Series A. This really means entry valuations in the range of $5 million up to a maximum of $55 million for a late Series A deal, though that would be stretching our definition.

Although there has been an increase in early-stage funds, we still see a shortage of capital in the ecosystem, especially when it comes to Series B+. Once they reach that stage, most founders struggle to raise and end up patching together the round (smallish checks from many investors rather than larger checks from fewer and more strategic investors).

Most large investors and sovereign funds from the region focus on either later-stage opportunities/PE or global companies. We believe this gap in late-stage capital is critical and must be solved by regional investors.

IA: What do you look for in founders and startups?

KT: Our litmus test for founders often comes down to a combination of their track record, the strength of their network, their reputation in the industry, and their performance during our interactions and due diligence. Founders have to be able to build and sustain high-performing teams that are sold on their vision.

In the popular imagination, founders tend to be in their early 20s with limited institutional experience and maybe college dropouts. That is not necessarily true for our region, where founders tend to be in their late 20s through to late 30s, with some blue chip experience working in their industry or an adjacent industry.

This is an incredibly diverse region, with a rich tapestry of cultures, languages, and economic conditions. For a business to truly succeed, founders need to have or be able to rapidly develop a deep understanding of local nuances. This means knowing more than just the broad strokes of the market and industry they operate in. It requires a granular, street-level knowledge of what the customers really want and how to reach them effectively.

IA:  What’s your investment thesis and strategy?

KT: As a venture capital firm, we believe in the potential of emerging markets, particularly MENAT and the GCC. Our investment thesis is anchored around our conviction that regional markets harbor untapped potential, and with the right guidance and resources, entrepreneurs can create incredible companies that can scale regionally and redefine their respective industries.

Our approach to value creation goes beyond the financials — it extends to helping shape robust business models and enhance operational capabilities wherever needed. Ultimately, our goal is to contribute to the development of companies that not only yield robust financial returns but also have a transformative impact on our economies and the industries they operate in. It's this philosophy of interconnected value creation that sets Nuwa Capital apart.

IA: What sectors are you focused on and why?

KT: At Nuwa, we are sector-agnostic, particularly in our early-stage fund. We look for opportunities with great founding teams that tackle segments of the economy that we think are ripe for disruption and transformation.

Some areas that interest us are private label-driven omnichannel retail or what we call Retail 3.0, such as Eyewa and Homzmart. Other areas of focus include SaaS models across segments, especially those coming out of Turkey and targeting wider markets. Other sectors of interest to us include fintech and fintech infrastructure, healthtech, proptech, and foodtech, among others.

IA: What advice would you give to founders?

KT: The startup environment is very different from the peak ZIRP/hyper driven environment it was a few years ago. This is the advice that we give to our founders:

• Optimize for run rate and not valuation: Now is not the time to try and increase valuation, especially at the later stages as capital is relatively scarce post-Series A and it is very easy to price yourself out of the market. Even if you are able to raise at a high valuation, the subsequent round might be untenable given the high bar set by previous rounds.
• Focus on efficiency: Growing positive unit economics is key, and making sure that founders have a firm grasp of the incremental cost and profitability of acquiring each additional user/customer and their relative profitability is key. It is also critical to prioritize growth initiatives around tangible results in a shorter time frame, namely within the runway of available capital.
• Growth still matters: While the market is sluggish for VC investment, it is important to continue to win in your segment and not take a back seat to a potential competitor.
• Cap table dynamics are key: Always try to attract the right group of investors who can complement each other, are aligned with your overall mission and strategy, and deliver demonstrable value.