En­trepreneur­ship: Re­gional ac­cel­er­a­tors

The re­gion’s ac­cel­er­a­tors are grow­ing, as are its startup ecosys­tems

Executive Magazine - - Contents -

Likely due to some well pub­li­cized suc­cesses, the con­cept of startup ac­cel­er­a­tion has spread like wild­fire over the past decade. This idea — nur­tur­ing nascent in­no­va­tors for a small slice of the pie — has de­vel­oped world­wide. Ev­ery clus­ter of star­tups that con­sid­ers it­self an ecosys­tem needs at least one ac­cel­er­a­tor to take it­self se­ri­ously. The first Mid­dle Eastern ac­cel­er­a­tor, Jor­dan’s Oa­sis500, saw the light of day in 2010. Le­banon’s first ac­cel­er­a­tor, See­qnce, launched its first batch of star­tups in 2012 but then dis­banded soon af­ter the group grad­u­ated. Since See­qnce was es­tab­lished, many calls have been made for a new ac­cel­er­a­tor as some­thing badly needed for the en­tre­pre­neur­ial ecosys­tem. Fi­nally, a well mean­ing and per­haps a lit­tle ex­as­per­ated group of in­di­vid­u­als from Bader, Bery­tech, Le­banon for En­trepreneurs and Mid­dle East Ven­ture Part­ners came to­gether to cre­ate Le­banon’s sec­ond ac­cel­er­a­tor, Speed@BDD, which will launch its first round of ac­cel­er­a­tion in early 2015, ac­cord­ing to Fadi Bizri, Speed’s CEO.

ADAPT­ING TO LO­CAL SPECI­FICI­TIES

But the re­gion’s rel­a­tively new ac­cel­er­a­tors couldn’t sim­ply copy their peers else­where. Ac­cel­er­a­tors in the Mid­dle East have some ba­sic el­e­ments in com­mon with ac­cel­er­a­tors in Europe and the United States: a busi­ness devel­op­ment pro­gram last­ing sev­eral months, where the ac­cel­er­a­tor’s fund takes an eq­uity stake for a cash and in-kind in­vest­ment. How­ever, ac­cel­er­at­ing in the Mid­dle East is a dif­fer­ent beast from op­er­at­ing any­where else, and ac­cel­er­a­tors have to adapt even fur­ther to take lo­cal speci­fici­ties into con­sid­er­a­tion.

Mak­ing a car­bon copy of a for­eign ac­cel­er­a­tor in the Mid­dle East is per­haps among the worst ideas if one wants to be suc­cess­ful. “If we just tried to copy and paste [US based ac­cel­er­a­tor] Tech­stars’ model in Bahrain it wouldn’t have worked,” says Hasan Haider, CEO of Bahraini ac­cel­er­a­tor Ten­mou. “We looked at [their] pro­gram, looked at cur­ricu­lum [and] it just didn’t sit with [the] char­ac­ter­is­tics of the mar­ket. We did a lot of niche things to change the way it’s de­liv­ered. We also de­cided we’re not go­ing to fo­cus on tech, we’re not go­ing to be a Sil­i­con Val­ley, we’re go­ing to in­vest in any good team,” adds Haider.

Those be­hind the ac­cel­er­a­tors con­fess that they had to adapt their pro­grams to lo­cal speci­fici­ties. Ramez Mo­hamed, CEO of Egyptian ac­cel­er­a­tor Flat6Labs, ac­knowl­edges that their pro­grams have to pro­vide more ba­sic train­ing, since they were see­ing en­trepreneurs in emerg­ing or de­vel­op­ing mar­kets with lit­tle ex­pe­ri­ence in busi­ness. “The for­mat of the pro­gram kept de­vel­op­ing cy­cle by cy­cle un­til we de­velop[ed] some­thing fit for Egypt and the re­gion,” he says.

Those familiar with the lean startup model know that you have to keep chang­ing, iter­at­ing and adapt­ing your prod­uct un­til it fits the mar­ket. The work of those guiding an ac­cel­er­a­tor is not dis­sim­i­lar to this. Over the course of sev­eral cy­cles, a suc­cess­ful ac­cel­er­a­tor adapts to the mar­ket and fig­ures out the best way to help the star­tups it is sup­port­ing meet their busi­ness goals. This, per­haps more than longevity, can ac­count for some ac­cel­er­a­tors’ suc­cesses. “Our ac­cel­er­a­tor has been de­vel­op­ing to the needs of the mar­ket since we be­gan in Septem­ber 2010. So we’ve been very fluid [in or­der] to iden­tify the most ap­pro­pri­ate way of what works

and doesn’t,” says Oa­sis500’s CEO, Yousef Hami­daddin.

THE LINEUP

In this con­text, Ex­ec­u­tive took a look at three re­gional ac­cel­er­a­tors to ex­am­ine the mod­els and the value that they add to their in­cu­bated com­pa­nies. While mea­sur­ing the per­for­mance of ac­cel­er­a­tors is an im­per­fect science (see box), one ball­park met­ric is how well th­ese com­pa­nies are do­ing.

The ac­cel­er­a­tors iden­ti­fied were es­tab­lished be­fore 2012, as it is dif­fi­cult to as­sess the per­for­mance of com­pa­nies es­tab­lished much later than this. We looked at Oa­sis500 in Jor­dan, Flat6Labs, which was es­tab­lished in May 2011, and Ten­mou in Bahrain, launched in Novem­ber 2010.

The first on the list and by far the most suc­cess­ful is Oa­sis500. Out of 75 star­tups that have grad­u­ated from it since the first quar­ter of 2011 when its first batch was launched, 55 are still ac­tive and nearly half have raised fol­low on fund­ing with a com­bined to­tal of $18 mil­lion as of Q3, ac­cord­ing to the Oa­sis500 team. It is the only re­gional ac­cel­er­a­tor that has wit­nessed an exit for one of its star­tups. In 2013, their grad­u­ate, Run to Sport, was ac­quired by Jab­bar In­ter­net Group, an in­vest­ment group made up of for­mer em­ploy­ees of Maktoob, a Jor­da­nian in­ter­net com­pany ac­quired by Ya­hoo in 2009. The deal brought the Oa­sis500 share­hold­ers a re­turn of three times the orig­i­nal in­vest­ment of $30,000 for 10 per­cent eq­uity, ac­cord­ing to Hami­daddin, mean­ing the com­pany was ac­quired at a val­u­a­tion of lit­tle un­der $1 mil­lion. Hami­daddin sees ex­its, rather than reap­ing div­i­dends, as the only strat­egy by which the ac­cel­er­a­tor can be­come fi­nan­cially vi­able. Their strat­egy thus is to hold eq­uity for five years and then di­vest in the next five.

The team states that now for a 10 per­cent eq­uity slice, Oa­sis500 gives be­tween $53,000 and $80,000 di­rect cash in­vest­ment per startup, in ad­di­tion to $12,000 worth of inkind ser­vices, such as of­fice space and in­ter­net con­nec­tion. For mak­ing th­ese in­vest­ments, Oa­sis500 cur­rently taps into a $6 mil­lion fund. They are also launch­ing two more funds ac­cord­ing to Hami­daddin, though they still have to deploy 20 per­cent of the first. Ac­cord­ing to Hamid­dadin, the an­chor in­vestor is the King Ab­dul­lah II Fund, a non profit ini­tia­tive by Jor­dan’s king.

In terms of their ac­cel­er­a­tion model, Hami­daddin stresses that it is the ac­cel­er­a­tor team that adds the most value to the pro­gram. “It’s the group of peo­ple who spend hours with the startup [work­ing] on how to de­velop value. We work a lot on bring­ing things back to the fun­da­men­tals. And the fun­da­men­tals are im­por­tance of de­liv­er­ing a busi­ness.” Ev­ery­thing else is “dress­ing on the salad,” he says. Even men­tor­ship takes sec­ond stage next to the core team. “Men­tors, if they are given too much high ground, dis­tract the busi­ness,” ex­plains Hami­daddin, cau­tion­ing against too heavy a fo­cus on men­tor­ship. “Men­tors, be­cause we

IN TERMS OF A SUC­CESS FOR­MULA, “THERE IS NO MAGIC WAND ... JUST PUT THE STRUC­TURE FOR THEM IN THE EN­VI­RON­MENT, AND IT’S AL­WAYS UP TO THEM TO DRIVE”

po­si­tion them as a thought leader and a ref­er­ence, some­times, or in other cases many times, cause the busi­ness to lose fo­cus. And they do be­come a crutch and a hand­i­cap for some star­tups.”

Hami­daddin also frowns on prac­tices that fo­cus too much on pitch events, and claims that he only lets some of their en­trepreneurs do them. “There is a buzz around star­tups. You push them into com­pe­ti­tions, you push them into PR [public re­la­tions] driven ac­tiv­i­ties,” says Hami­daddin.

But not all PR ac­tiv­i­ties are bad PR ac­tiv­i­ties, es­pe­cially when it comes to at­tract­ing deal flow to the ac­cel­er­a­tor. To spread their name, Oa­sis500 or­ga­nizes ‘boot­camps’ across the Mid­dle East — train­ing pro­grams last­ing sev­eral days with the chance of be­ing ac­cepted into the ac­cel­er­a­tor — to at­tract com­pa­nies to their pro­gram in a re­gion that lacks deal flow. Ac­cord­ing to Hami­daddin, they have re­ceived ap­pli­ca­tions from com­pa­nies from as far away as Rus­sia, Kenya, Brazil and the US.

Flat6Labs, the Cairo based ac­cel­er­a­tor, has had com­pa­ra­ble suc­cess hav­ing grad­u­ated 57 star­tups, 70 per­cent of which are still ac­tive, ac­cord­ing to CEO Ramez Mo­hamed. Over 50 per­cent raised fol­low on fund­ing to­talling $2 mil­lion as of Q3, ac­cord­ing to Mo­hamed. The ac­cel­er­a­tor takes a 10–15 per­cent eq­uity slice for $15,000–$20,000 in cash in­vest­ment and $15,000–$20,000 of in-kind ser­vices.

Mo­hamed ex­plains that Flat6Labs has a heavy fo­cus on men­tor­ship. “It’s more like Tech­stars than Y Com­bi­na­tor [an­other US based ac­cel­er­a­tor] be­cause we are more men­tor­ship driven. Tech­stars has a huge net­work of men­tors and sup­port,” he says. “I think it stands for ev­ery ac­cel­er­a­tor in the world; [it’s] not just about pipe­line, [but] all about [the] qual­ity you pro­vide, the qual­ity of the men­tors, what men­tors you are en­gag­ing with,” says Mo­hamed.

In terms of a suc­cess for­mula, “There is no magic wand,” says Mo­hamed. “Just put the struc­ture for them in the en­vi­ron­ment, and it’s al­ways up to them to drive. We buy them the car, show the road, but never drive for them. We al­ways push the en­trepreneurs in any coun­try to have con­fi­dence to drive the team [and] talk to in­vestors. This is one of the very ba­sic steps that we tell them at the be­gin­ning of the cy­cle. It’s your busi­ness,” he ex­plains.

Bahraini ac­cel­er­a­tor Ten­mou has a dif­fer­ent ap­proach to sup­port­ing star­tups. CEO Haider says, “We try to give the star­tups enough money to make the cash flow break even. We try not to rely on rais­ing money to sur­vive.” This has proved suc­cess­ful thus far; of the 18 star­tups Ten­mou

THE SE­CRET TO SUC­CESS IS PER­HAPS NOT JUST IN THE CON­TENT OF THE PRO­GRAM IT­SELF, BUT ALSO IN THE RE­SOURCES AT THEIR DIS­POSAL

has grad­u­ated, 10 are still ac­tive, ac­cord­ing to Haider. They in­vest be­tween $53,000–$80,000 for eq­uity stakes of 20–30 per­cent. As of Q3, seven com­pa­nies have raised fol­low on fund­ing, for a to­tal of $500,000 ac­cord­ing to the CEO.

Haider de­scribes Ten­mou as a hy­brid be­tween an ac­cel­er­a­tor and an an­gel net­work. About $2.7 mil­lion has been in­vested to build the ac­cel­er­a­tor, while its share­hold­ers con­sist of 14 pri­vate sec­tor fam­ily groups and two semi-gov­ern­men­tal en­ti­ties. Ten­mou’s pro­gram com­prises a three month ac­cel­er­a­tion pe­riod in which the ac­cel­er­a­tor’s ‘strate­gic part­ners’ come in to pro­vide ad­vice on mar­ket­ing, fi­nance and PR, at the end of which they have a ses­sion with in­vestors. Haider ex­plains that they also or­ga­nize one on one men­tor­ship. “I think hav­ing a struc­tured pro­gram to take the en­trepreneurs from the idea stage is use­ful. There is a ma­jor dif­fer­ence in com­pa­nies who have gone through ac­cel­er­a­tors.”

DEEP POCK­ETS

But the se­cret to suc­cess is per­haps not just in the con­tent of the pro­gram it­self, but also in the re­sources at their dis­posal. Ac­cel­er­a­tor pro­grams re­quire an im­por­tant up­front cap­i­tal in­vest­ment, since the com­pa­nies do not start mak­ing re­turns for the share­hold­ers in the first few years af­ter they are cre­ated. The ac­cel­er­a­tors then need fund­ing un­til they be­come sus­tain­able from the re­turns of shares they take from their grad­u­ated com­pa­nies, a sit­u­a­tion in which no MENA ac­cel­er­a­tor is yet find­ing it­self.

Even man­age­ment fees de­rived from the seed in­vest­ment fund would not nec­es­sar­ily cover any given ac­cel­er­a­tor. Ac­cord­ing to Hami­daddin, Oa­sis500’s func­tions run on a bud­get de­rived from a 3 per­cent man­age­ment fee per year, pro­vid­ing them a to­tal of $180,000 per year. While he would not spec­ify the ex­act amount, Hami­daddin con­cedes that op­er­at­ing costs are more than $500,000 per year; how­ever, con­sid­er­ing they have a staff of around 22, th­ese costs are likely to be much heftier.

With no im­me­di­ate re­turns, ac­cel­er­a­tion is cer­tainly a project for the long haul. No Mid­dle Eastern mar­ket is alike, and ac­cel­er­a­tors will face vary­ing de­grees of suc­cess not only based on their pro­grams and re­sources but also on their lo­cal busi­ness at­mos­phere. Ac­cel­er­a­tors in the Mid­dle East are still quite young and it is im­pos­si­ble to com­pare them to the big play­ers in the US and else­where, yet a glimpse at their per­for­mance is worth­while to make sure they de­liver tan­gi­ble busi­ness goals to the com­pa­nies they host, and not just glo­ri­fied of­fice space.

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