On the surface, Zach Finkelstein may seem like an unlikely investor in the Middle East. Having grown up in the U.S. with no personal connection to the region, Zach did his undergrad at University of Pennsylvania, and went into investment banking in New York City. However, after moving into venture capital as his next career step, Zach quickly warmed to the potential lying in emerging markets, including the MENA region. After leading investments in MENA, Southeast Asia, Latin America, and elsewhere, Zach actually jumped into the operating seat with a particularly well-known and growing portfolio company at the time, joining Careem as their VP of Corporate Development. Since 2018, he’s brought that experience and confidence in emerging markets to Class 5 Global as a Managing Partner. Zach, and Class 5 have led investments in some of MENA’s hottest recent startups, and I’m so excited to share his perspective on investing in the region. Read on to learn more!
Can you start by introducing yourself and Class 5?
I’m Zach Finkelstein, I’m a Managing Partner at Class 5 Global. We’re a VC fund focused on emerging markets. Most of us are actually former operators and we love to get involved at an early stage with great entrepreneurs. We work hard to be hands-on and add value. Since we invest across emerging markets, not in just one. We also like to give our companies access to what’s going on in other markets around the world. That’s part of what makes us unique.
Can you just walk me briefly through your studies and your professional career arc before getting to Class 5?
I did my undergrad at the University of Pennsylvania. For my first job out of college, I worked for the Federal Reserve Bank of New York. For those that aren’t familiar with the US central banking system, that is a branch of the US Central Bank. I worked there primarily on capital markets-related projects. I ended up moving into investment banking at Citigroup, where I focused on media and telecommunications space. Since then, most of my career has been in venture capital. I’ve led investments in companies like Careem, Fresha, CargoX, and others, especially in emerging markets. I’ve also been involved in investments with amazing companies like Mulesoft, PagerDuty and Procore, which have gone on to become large public companies. More recently, I was Vice President of Corporate Development at Careem. I had been an investor in the company, but I loved it so much that I dropped everything I was doing, and joined. While I was there, I led mergers and acquisitions, investments, fundraising, strategic partnerships, and all sorts of other projects.
Since those first two positions out of undergrad, you have mostly been around startups and venture capital. What is it that led you into that space in the first place, and what’s kept you in it?
Honestly, it’s just more fun. It’s a really dynamic space, almost by definition. There’s nothing more satisfying than seeing a company bloom from an idea into something that’s really big and impactful. That’s what gets me excited. Maybe even more so it’s about the people. I get to work with great entrepreneurs, who inspire me and teach me. Honestly, I couldn’t think of a cooler job.
Talk to me a little bit more about the Middle East. What’s your connection to the region? How did you end up working there, and why do you continue to invest there to this day?
The region really came onto my radar with Careem. I ended up finding that deal from a friend who lives in Bogota, Colombia. She had previously worked at McKinsey, Dubai, and she told me I have these people that you have to meet. I thought it was a crazy idea at the time, and then did a total 180 and became a Careem fanatic. As an investor, there’s nothing cooler than a market that’s wrongly overlooked by many of my peers. The Middle East fits that definition perfectly. I think it’s wrongly perceived as a niche market, which is crazy when you think about the fact that there are over 400 million people who live in the region. These people are hungry for innovative solutions to their everyday problems, just like consumers everywhere else around the world. I think there’s also this misconception in the US that the Middle East is already awash with investor cash.
But, if you speak to a lot of entrepreneurs in the region though, they’ll tell you that they don’t see that cash. In a nutshell, you have a major region that is wrongly overlooked broadly by the VC community. As an investor, that’s kind of where your lightbulb goes off.
I also think that there’s a lot of cliches about the region, and it’s almost cliche to point out these cliches, but I’ll go ahead. The common misconception is that it’s a place where you can’t do business because bad things happen there. I’m a bit of a contrarian, so I like the chance to prove common misconceptions wrong.
I’d love to just hear more about Class 5’s origin story and mission. Why did you decide to focus on emerging markets, and what’s got you excited about those markets in particular?
Most of us at Class 5 are former tech operators with experience in emerging markets. We wanted to build it to be the VC that we would have wanted when we were sitting on the other side of the table. Our excitement about emerging markets is twofold – On the one hand, these markets are still very inefficient. It’s hard to do basic things like pay for goods and services, get credit, etc. if you’re a consumer or small business, and these basic needs aren’t being met, an investor sees the opportunity in that unmet demand. But what I think is even cooler about emerging markets is the opportunity to almost design these economies the way that you would want an economy to work, You don’t have the legacy infrastructure to build over.
Look at China, and the way that things like digital payments have completely leapfrogged any offline framework. That’s an exciting opportunity, and there are many more like it out there, out of which entrepreneurs in these regions can create disproportionately large businesses.
We invest early, but we’re not a spray and pray shop. We get very involved in the companies that we invest in, and try to add as much value as we can. That help can come in the form of hiring executives, contributing to product roadmaps, connections to peers around the world, or help raising a major financing round. We try to be in the trenches with our founders, and really give them 100% from a very early stage.
How do you provide value to your portfolio companies? Do you feel like you offer specific things to the founders from the region?
If you’re an early stage company, there’s a lot of things that you need just by default. You’re usually one, two or three people. You kind of need a little bit of help with everything. Over time, you build more of those capabilities in the house. Where we’ve been able to help our companies is a lot of day to day things. In the majority of our companies in our portfolio, we’ve placed at least one senior hire into that company, often multiple. Talent is very important. Sitting in San Francisco, we like to think that we can sort of radiate talent out to a lot of these emerging markets.
Another thing is just strategy, because we invest across emerging markets, and we sit in the United States, we have a slightly different perspective than most of our founders. We’re also here to raise these companies’ profiles, especially when they come from places like the Middle East that investors don’t know much about. We can help by just being a cheerleader for them and helping them to fundraise. If we can help our companies raise capital at not super dilutive valuations, that will help give them a competitive advantage versus their peers.
In the Middle East, where capital is far from a given, these kinds of things are even more important. We can do a good deal when it comes to raising a company’s profile. We just ran the numbers and six of the 13 investments we’ve made have subsequently got into Y Combinator. We work to put in a good word and prepare them and all sorts of things that can put them in a position to turn access to capital from a disadvantage to an advantage.
Who do you have working on the Class 5 team with you?
We’ve known each other for a long time. There’s five of us, and the majority of us had already been working together as VCs. Most of the team was working together at another fund, where we were leading the emerging markets practice. In many ways, Class 5 is really a continuation of the work that we’d already been doing together. Youcef Oudjidane is our awesome partner based in Dubai, who used to work at Dubai Future Foundation. He’s the one who’s actually brought in a lot of the amazing advisors we were talking about before, such as Mesut Ozil, because he used to play football with a lot of these guys. I’ve known Youcef for years, we’ve angel invested together, and he’s someone that all of us had always wanted to work with. I would be remiss not to mention our rockstar associate, Khalid al Saud who’s also based in the Middle East, and is fantastic.
What are the specific characteristics that you look for in successful founders in the region? What about emerging markets in general?
I don’t want to imply that there’s “one size fits all,” but I’ll do my best to answer. What you typically want on a founding team is a good balance of skills. You need leadership. You need the ability to inspire people, whether it’s investors, talent, or customers. In this day and age, where speed of execution is so important, it’s also really useful to have a technical co-founder. It’s not 100% necessary, but it’s highly valuable. I think the most important quality is somewhat intangible, but it could be described as grit. That’s doubly the case in emerging markets. There will be ups and downs. There will be days, maybe weeks, maybe months, where a founder might be asking themselves, why did I choose this career track? The best founders are the ones who can be unfazed or minimally phased, by the lows and the highs as well, and just continue to execute at a fantastic level. That requires a tremendous amount of grit.
Do you find that your deals in the region have a unique structure, or even just a little bit of a different unique cultural flavor?
When it comes to the Middle East, and this is true of other emerging markets, the charisma, the ability to communicate, and frankly, the ability to sell, are even more important. In MENA, capital doesn’t usually show up, knocking down your door. Neither does talent or customers. So that ability to convey your own internal excitement to others is extra important. If you can’t do that, you can be easily overlooked. We need founders who can really go that extra mile to get other people to believe in what they’re doing.
Do you feel like you have to pitch your fund differently to founders (and other investors) in MENA, and focus on unique value props for the region?
No. I think you touched on something important – when we’re investing anywhere in the world, we’re selling ourselves more so than the company is selling us. Alot of those attributes that I just said that founders should have, are certainly attributes that VCs should have too. Whether it’s the Middle East, or Silicon Valley, I think you need to get the best entrepreneurs to be as excited about working with you, as you are to work with them. In many cases, they have a lot of choices, so it’s no small feat.
As much as you can do into detail, can you share a bit more about some of the investments in the region that you’ve already made?
We’ve made eight investments in the region. You mentioned Telda and Baraka. We’ve also invested in penny, Ziina, Denarii Cash, Invygo, Dapi, and Nomad. In most of these cases we’ve known the founders for a significant period of time before investing, and we actually got involved at the idea stage. In other words, before there was a clear business in place.
If you take Ziina as an example. Ziina is a neobank for the GCC, based in Dubai. We’d known Faisal Toukan, the founder, for five years before investing. We’d also had plenty of time to get to know his rockstar cofounders, Sarah and Andrew. When they were thinking about starting a business, they came to us, and our first question was, “how can we help?” We tried to be partners from that idea stage. “Another example is penny. I worked with Iyad at Careem so I knew he was highly talented before he even started his company. He’s based in Saudi Arabia which is an illustration of how you can find great founders in places where a few years ago the ecosystem was nascent.”
We take a very talent-centric approach. We love to be these idea partners for top talent from the very beginning, before there’s even an entity, before there’s even a business. Baraka was very similar. We knew Feras from his time at Wamda, we always thought he was a rockstar, and we couldn’t believe our luck. When he told us he was thinking about leaving to start a commission free brokerage for the region, we said, “Absolutely. How can we start?” Our sourcing tends to happen very naturally, it’s a very talent centric approach. We back people who we have very high conviction in as individuals and as leaders.Everything else is secondary.
Are there any portfolio companies that you’d like to “shout-out,” with a market that you’re particularly excited about?
While we’re talking about the portfolio in the region, I think a company that deserves a huge amount of recognition, and maybe doesn’t get quite as much press is Denarii Cash. They’re a remittance business. The market for remittances in the GCC is massive, perhaps 80% or so as large as the United States, and it’s largely overlooked. Jonathan Santillan, who runs the business is a very talented and determined founder, and we couldn’t believe our luck when we saw such an amazing business in such a big space.
We love spaces like that, ones that we feel are overlooked by our peers. I bring it up because remittances are a great example of where a space is disproportionately large in a particular market, yet, it’s not really appreciated by the investor community. That’s our Goldilocks sort of opportunity.
There’s a lot left to be done in the Middle East. There’s still huge issues with payments, there’s major issues with running small businesses, whether it’s having decent software to operate on top of or getting access to credit. These things are just changing now. At the same time, we don’t like to pretend that we know everything that’s coming up around the corner. We’re making educated guesses, just like everyone else. Sometimes it’s better just to take that talent-centric, bottom-up approach – sit with smart entrepreneurs, let them tell us what they’re willing to bet their career on. If it’s convincing, maybe we incorporate that into our thesis as well.
What’s the impression of the MENA region in the eyes of outside investors today, and do you see that as something that’s in the process of changing?
Very much in the process, and it is changing, but slowly. I think a lot of the new wave of momentum began after the Careem exit, and international investors started to see the region as a place where maybe you could build a big business. Along the way, we’ve had a lot of other milestones – Sequoia’s investment in Telda was a strong signal that smart and well-known global investors are starting to take the region seriously. We’ve seen other top-tier funds, take very serious looks, and actually invest into our portfolio companies in the region. There are some great U.S. funds that have done so recently that I can’t yet announce, but I will tell you as soon as I can.
Yes, the perception is changing andt’s a combination of push and pull. The pull is what I talked about – seeing great outcomes and great entrepreneurs. The push is that, elsewhere, markets are becoming so competitive that even great funds don’t want to play ball there anymore. In the Valley, it’s not uncommon to see five or six term sheets thrown at one deal, by all amazing, storied funds. That’s scary for some people, so they look at other regions. It started with Latin America and Southeast Asia, but now those regions are starting to attract more capital. The question is increasingly, okay, “where can we look next?” The Middle East is starting to enter the investor lexicon, slowly but surely.
How do you stay motivated? What keeps you taking on this day, day in and day out?
I don’t see it as a chore. I’m really motivated by the opportunity to work with the founders. I consider it a privilege. I think my teammates happen to be rock stars. Joel Ayala, Youcef, Jon Krause, and Khalid, they make my life so much easier than it would otherwise be. Also, as unsexy as it is, I try to get a good night’s sleep. I try to take care of myself in other ways, so I don’t burn out as well.
If you were to look 15 years down the line, what would you have hoped to have accomplished?
I don’t want to sound uncreative, but I love what we’re doing now, and I want to do more of the same. I think we found a strategy that works, and really resonates with our entrepreneurs. It’s working well enough that perhaps we can do it at a slightly larger scale. I want to build around that, and see where it can take us.