From Careem to Ziina, how Class 5 Global views the MENA startup ecosystem
In a conversation with YourStory Gulf, Zachary Finklestein, Managing Partner of Class 5 Global, talks about the San Francisco-based VC’s investments in the startups of the untapped MENA region.
Since 2015, Zachary Finklestein and Joel Ayala—former startup operators turned venture capitalists—have been working together to better understand emerging markets that generate significant returns.
This common vision got the duo to start San Francisco-based Class 5 Global, an emerging market-focussed VC fund that actively invests in the Middle East and North Africa (MENA) region.
To date, it has invested in the likes of Dubai-based fintech startup Ziina (successfully exited), super app Careem, Latin America-focused cashback app Meliuz, and San Francisco-based fintech startup Finix.
YourStory Gulf [YS Gulf]: Why did you decide to focus on the Gulf and the MENA markets?
Zachary Finklestein (ZF): In emerging markets, you have an opportunity to invest where the tailwinds are very clear, the ecommerce penetration and technology are growing at double digits annually, and it becomes a self-fulfilling prophecy where you get higher returns.
Sometimes, these markets lag behind developed markets like the US and China. However, it gives you a crystal clear idea of the various business models in the region and how they can effectively work in different markets.
The Middle East is a larger market than people realise. There are over a dozen countries, with hundreds of millions of consumers largely ignored by the broader tech community.
These countries majorly have middle-income consumers with purchasing power and hunger for goods and services, like everyone else.
When you see a blank canvas that shouldn’t be blank, it calls your name. We like the Middle East because it's disproportionately under-penetrated for its market size.
Earlier, I was the Vice President of Corporate Development at Careem—the startup that managed to stitch together 15 countries from Morocco to Pakistan—something no other company had done before.
Careem demonstrated that a strong team can turn this regional concept into a massive market.
Khwarizmi Ventures Managing Partner Abdulaziz Al-Turki on what Saudi Arabia offers for the startup ecosystem
YS Gulf: What is Class 5 Global’s investment thesis?
ZF: We focus on early-stage tech startups in emerging markets and pick them as early as possible. We benefit from leaning into various themes and emerging markets that will generate disproportionate value over the next five to ten years.
At any given time, we look into at most three or four themes and try to understand all the relevant companies. Importantly, while we do have deep relationships in these markets, we're very proud of our 50-member scout network, which helps us surface these deals.
In fact, Class 5 Global was the first institutional investor in 13 out of 18 startups. Moreover, the VC spent over a year with the founders of 12 of its portfolio startups.
We aim to use our scout network to surface the best entrepreneurs before they're even entrepreneurs.
Next, we focus on winning the deals. We use that broad remit to understand how business models are developing globally.
For instance, if you pitch a company in Brazil and you're familiar with the workings of its counterparts in Indonesia and Egypt, you have a unique value-added proposition for the country.
Joel Avala
Dubai aims to support growth of startups, become global capital of digital economy
YS Gulf: What do you look for in a founder and the founding team?
ZF: A few abstract qualities of a founder are important across sectors. First, leadership qualities. These individuals can rally the necessary people and resources behind them to accomplish impossible tasks.
They should inspire employees, excite customers, and VCs like us to continue providing capital throughout the company's life, and it’s a very hard skill to do without.
Grit and determination is the second most important attribute. While starting up is hard and exciting, it is lonely and volatile at the same time.
Even in great companies, you have as many bad days as good, and individuals who stay unfazed and take them in stride make the best entrepreneurs.
YS Gulf: Earlier, you worked at Careem, and now, you are an investor. What does it mean for VC funds like yours and the ecosystem at large?
ZH: New York-headquartered Endeavor Global has done a lot of work around real ecosystem-building companies. Usually, these companies have a large exit relatively early in their lifecycle. Class 5 Global operates on the same model.
At present, we have three to four partners in the VC fund who are ex-Careem employees.
Careem plays the role of Fairchild Semiconductor or PayPal, where you build investor confidence for potentially large outcomes in the region and generate a lot of talent.
Today, if you look at the large portion of entrepreneurs thriving in the MENA region, most of them are ex-Careem employees. So, we now have a second order of entrepreneurs.
Zach, Angus Patterson (STC Ventures), Mazen al Jubair (angel investor in Careem), Joel
YS Gulf: How is the Middle East or the Gulf region different from Southeast Asia or India?
ZH: When you look at Latin America, Southeast Asia, India, etc., the Middle East—depending on what sector (and who you ask)—is behind by two to ten years.
So, we have a lot of visibility into what companies will do in a particular region based on what we have seen in the US, China, and other emerging markets. Oftentimes, we have a chance to know what's likely to work in the Middle East before the business starts.
Many don't realise the Middle East is relatively affluent compared to other emerging markets, and entrepreneurs don't need to bend over backwards to make the unit economics work.
Saudi Arabia and other GCC (Gulf Cooperation Council) countries comprise middle, upper-middle, and the US and Europe level income consumers. We have a major gap to fill here with emerging market-level services.
This Dubai-based fintech startup aims to make credit more accessible to consumers
YS: What advice would you give entrepreneurs who are looking to startup in the Middle East?
ZH: Smart people can get behind proven models. When you have that formula, you will have a higher probability of success than in other markets. Sometimes, the competition is few, which generates a great opportunity to build dominant and significant businesses in the region.
However, most of these startups operate across multiple markets. For instance, to unlock a significant addressable market for a fintech startup, it needs to strengthen its operations across multiple markets and deal with organisational complexity.
Another downside is the talent drain in the region. In the last five to ten years, while the startup ecosystem is seeing stronger talent, the MENA region is suffering from a talent drain situation, depending on the country and socio-political issues.
Thus, entrepreneurs end up spending a lot of time convincing people who have moved abroad to come back.
Several founders have managed to build work environments that suit their employees. Founders need to work harder to hire and retain talent and expand globally.
Nonetheless, entrepreneurs are rewarded with this special opportunity to build huge companies in the MENA region.
(This story has been updated to correct two typos.)
Edited by Suman Singh