📖 This article is part 2 of wider series on “Due Diligence 101 for MENA VCs” – you can check-out earlier instalments here.
In Step 1, we looked at how MENA's top VCs evaluate founders and products in an ecosystem where the data is thin and the relationships are thick. This step is about the other half of the equation i.e. how you assess everything around the founder and the product, which is to say, the market, the macro environment, the regulatory landscape, and the question of whether the risks that make international investors nervous are as scary as they look from thirty thousand feet.
A spoiler: they usually aren't. But they're also usually different from what you expect them to be, and the VCs who get this wrong tend to be the ones who either imported their risk framework wholesale from another market without adapting it, or who assumed that because they live in the region, they intuitively understand risks that actually require disciplined, structured analysis.
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The ten-year lens
We need to remember constantly that VC funds generally are ten-year investment vehicles. So there is not much market timing or a version of that short-term. There's little possibility for averting or avoiding something short-term. You just have to live through it. And you need to try to see: yes, I understand that Egypt has high inflation. Attractive countries, Turkey, Pakistan and others have elevated inflation. But the answer lies in answering the following questions: am I attracted by the size of the market and what do I think will happen in the next five to ten years? And that's a very difficult question. But actually the very thought that you are a ten-year investment vehicle provides some level of comfort, because even if things do get messy geopolitically or macroeconomically speaking, you have to go through them and hopefully they will improve, because that's how society functions. We are not investing for next quarter or next year. We're investing for the next decade. And generally VCs are optimistic people.
"You just have to live through it" might be the single most honest articulation of how long-term capital should think about short-term volatility in emerging markets, especially resonant to our current geopolitical moment. The corollary is that if you're not temperamentally suited to living through it (to watching your portfolio's USD value get halved by a currency devaluation, to navigating regulatory shifts that no one predicted, to continuing to deploy capital while the headlines are screaming), then you probably shouldn't be investing in emerging markets at all, because these things will happen, the only question is when and in what sequence.
An Egyptian devaluation that looks like a catastrophe in quarterly reporting looks quite different in the context of a fund with five to seven years of remaining deployment and a portfolio of companies that are growing at multiples of the inflation rate. A geopolitical shock that paralyses capital markets for a quarter (fingers crossed that's what we're currently experiencing) is a footnote in the life of a fund that won't be returning capital for another six years…
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