State of play

What we've been up to at Nuwa Capital and where we're going

What We’ve Been Up To at Nuwa and Where We Are Going

• Launching a Substack

• Invested in 35 companies to date, and more recently, we’ve deployed around $10.0m in nearly 11 companies. Seven of these are new portfolio companies, and four are follow-ons.

• $41.0m left to deploy, aiming to add 10-12 companies to the portfolio over the next 18 months.

• Types of companies in MENA very different (more unique and intricat business models) compared to 36 months ago, highly original and addressing wider changes in regional economy and society

• Founders are now averse to announcing rounds (net-net, a good thing IMHO).

A note on the newsletter

For the past few weeks, I’ve been working on sharing some thoughts on how we operate as a VC, how we think about investing, and how we manage our business, with the goal of creating a deeper and more direct dialogue with the wider startup community. I’ve received a lot of positive and constructive feedback on the first few posts, both online and offline. To take this to the next level, I’ve decided to use Substack as a central point for publishing.

I’ll ask people to subscribe (for free, of course!) so they can receive the newsletter regularly, and I’ll commit to posting an article at least once every two weeks. I’m extremely keen on people engaging and, most importantly, having a conversation, including thoughtful disagreement.

Most of what I’ll post will be VC/startup related, but I’d also like to write on other topics that are adjacent or any other subjects that I might find of interest from time to time.

I’ll also repost on other platforms like LinkedIn but will use Substack as the primary medium going forward.

In the spirit of transparency, I’d like to talk about Nuwa Capital and where we are.

We raised our first fund in 2021 and made our initial investments in the second half of the year, including companies like Eyewa, Calo, and Homzmart. As we approached 2022, we noticed that the market was significantly overheating in terms of valuations, which were 50% to 75% higher than their ten-year historical average. Seed valuations were at $20.0m-$30.0m, and Series A valuations were north of $60.0m-$100.0m.

In response we did two things:

• We shifted our strategy to seed and pre-seed stages, whereas we had previously been focused on Series A and Series B. We took lessons from earlier exits, such as Souq.com, which showed that even if you invest in a great company, you might not make a decent return if you enter at the wrong valuation at a later stage. However, at earlier valuations, you can still make a reasonable return.

• We slowed down deployment, anticipating a market correction, and planned to re-enter when valuations had cooled down.

With that in mind, we took our foot off the gas and slowed deployment, anticipating a market correction. This correction, according to MAGNiTT data, did come, but it was uneven and much slower than expected. Deployment in MENA slowed from $3.5b in 2022 to $2.7b in 2023 (-23% YoY). However, KSA grew by 33%, with $1.4b deployed.

The impact on valuations was more acutely felt at the late stage versus the early stage. Mean valuations at the late stage decreased, while seed valuations grew by 114% over the same period.

This means that while our hypothesis was correct, the rate of change, as evidenced by deployment, was slower than we had thought and unevenly distributed from both a stage and geographic perspective.

So where does that leave us?

We have so far invested in around 35 companies through our mainline investments and scout investments (smaller tickets under $100.0k), totalling $38.0m , including multiple follow-on rounds in some of our leading companies, primarily those we invested in during 2021 and early 2022.

We have about 20 months to go in our investment cycle (the period in our fund life where we can invest). We have remaining investable capital of approximately $40.0m, split between capital earmarked for new investments and follow-ons. Our ratio is 45% held in reserve for follow-ons.

This means we need to invest in 10-12 companies (assuming an average entry ticket of $1.0m- $2.0m) in a relatively short period of time. We feel this is a great time to invest and that a positive environment will continue for two principal reasons:

• The valuation slowdown is catching up to MENA and Turkey.

• The calibre of founders and founding teams, as well as the types of business models being built, are truly exceptional. In my 17 years in the industry, I have never seen anything like it. This is somewhat intangible, but one measurable area is the types of businesses being built.

The companies we’ve most recently invested in are also quite unique. In a new trend for the region, founders seem to be a bit media shy. Frankly, I find this healthy and positive. There was way too much self-congratulatory promotion going on beforehand.

I believe this is a derivative of a shift in focus away from high cash burn/negative unit economics and large amounts of capital raised to feed them, with the goal being to get to the next funding round rather than focusing on building a great business.

This the shift away from announcements reflects a wider focus shift from funding for funding’s sake to a return to fundamentals, positive unit economics, and building great businesses targeting profitability.

That being said, without giving away too much, I’d like to talk a little bit about some of the companies we’ve invested in, especially given their uniqueness as a stand-in for how the ecosystem has evolved.

We recently invested in a SaaS business that is based regionally but wholly focused on US markets, which is unusual. The founding team originates from a global talent pool but is based in the GCC and leverages AI as an integral part of their value proposition.

We’ve also invested in a capital markets infrastructure business, which would have been unthinkable only four years ago. This builds on the incredible momentum generated in deepening global capital. In 2023, there were a total of 48 IPOs in the MENA region, raising $10.7b. Tadawul’s market cap today stands at $2.9t, up from $2.4t in 2020 (+19%). In 2023, 8 companies had IPOs compared to 3 companies in 2020. ADX's market cap today stands at $724.4b, up from $204.2b in 2020 (+255%). In Q4 2023 alone, 3 companies had their IPOs. DFM's market cap in 2022 stood at $158.5b.

We’ve also invested in a business focused on servicing consumer credit, building on the huge expansion of consumer credit in the region led by the likes of Tabby and Tamara. In the UAE, the number of credit card applications has increased 65% year-on-year since 2017, and UAE Consumer Credit increased from AED 326.0b in Q4 2020 to AED 416.0b in Q3 2023. In KSA, credit card loans increased 17% annually, reaching $7.2b, with most of the growth of companies in the BNPL space like Tabby and Tamara coming from KSA.

The above demonstrates a coming maturity in the regional ecosystem, where companies are now servicing specific aspects of the wider regional economy.

Given where we are in our fund deployment, we are looking to deploy expeditiously in the coming 18 months.