Are you ready to approach Alternative Finance in MENA? Bring it on!

Alternative finance doesn’t replace venture capital (‘VC’) but complements it.

After your startup signs its first round of equity it becomes a candidate for alternative finance. Alternative finance doesn’t replace venture capital (‘VC’) but complements it. 

When raising capital, founders must look for the right combination of capital sources which allows them to give away less equity. Relying on dilutive capital alone puts the founder at a disadvantage on the long term, given how expensive dilutive capital (equity) is.

So, while equity rounds are necessary to the growth of any startup, startups would approach alternative finance when they’re not ready for a full-fledged equity round but require capital to extend their runway and maximize their value in the next round. 

Venture debt (‘VD’) historically stood at c. 10% of VC. More players and providers of venture debt has been emerging in MENA in the past couple of years given the astronomical growth in the VC market.

Venture debt is here to stay! And It’s expected to grow up to $1.2b in 2026.

Source: Magnitt & Capifly analysis

Now, with more investors and appetite for venture debt emerging in MENA, is your startup ready for alternative finance? Here are few points to keep in mind:

  1. Are you post product market fit? Alternative finance providers go after startups with predictable revenues and positive unit economics to repay back the debt- obviously! As well as to allow them to screen and credit score such startups, which is only doable when a startup has some recurring revenue. Simply put, alternative finance providers will only speak to you if your startup unit economics are positive, and you have data to prove it!
  2. Do you have a specific use of proceeds that will generate revenue? Use of proceeds of alternative financing; be it to support working capital, hiring or adds must be driving revenues, ideally you want to repay your debt out of the incremental spread you achieve in your revenues after securing such debt. Going after alternative finance to repay liabilities or pay founders will not fly!
  3. Are you VC backed? This will change over time, but the reality today, is that most venture debt players in MENA are rule based and being backed by a VC or an institutional investor is a sign of healthy governance and shares comfort that serious investors had carried a due diligence on your startup.
  4. Do you have audited financial statements? While VCs might turn a blind eye to audited financial statements, alternative finance providers will not. Providers of alternative finance are keen to collect comfort that the startup is not carrying liabilities which might impair future repayments, hence, the audited financial statements requirement.  

Alternative finance is an innovative solution to raise capital at low cost, and if you have the above ready then you have a few options today in MENA, which will grow as the ecosystem further matures.

Startups should consider alternative finance providers not only as lenders but as strategic partners, and while MENA alternative finance market is still new and only few players are around today, you need to pick your alternative finance partner wisely!