Rise of Arab star­tups sig­nals shift to en­trepreneur­ship

The Daily Star (Lebanon) - - BUSINESS - By Matthew Martin and Gwen Ack­er­man

In the rapidly evolv­ing gig econ­omy, there is a new way to car shop: spot one on the road that ap­peals, snap its photo with your phone and an app will con­tact sell­ers of sim­i­lar cars near you and ne­go­ti­ate the low­est price – all within a few min­utes.

It’s re­mark­able not only for its tech­nique but its lo­ca­tion – Dubai. A few months ago, Tarek Kabrit, coowner of Seez, the startup that makes the app, left a stel­lar ca­reer that in­cluded stints at Deutsche Bank AG and the Abu Dhabi sov­er­eign fund Mubadala In­vest­ment Co. to fo­cus on his new ven­ture.

And while that’s a rel­a­tively com­mon move in North Amer­ica and Western Europe, it’s been vir­tu­ally un­heard of in the Mid­dle East (apart from Is­rael) where, de­spite oil wealth and grow­ing smart­phone pen­e­tra­tion, startup cul­ture hasn’t started up. Un­til now.

With Arab gov­ern­ments seek­ing to diver­sify away from crude sales, young, wealthy and tech-savvy pop­u­la­tions are launch­ing en­ter­prises and get­ting lo­cal in­vestors to back them.

“A big bunch of peo­ple from my gen­er­a­tion are see­ing this as the op­por­tu­nity to move into en­trepreneur­ship,’’ said Kabrit, who said that his fam­ily and friends thought he was crazy.

Over the past year more than $3 bil­lion has been raised from Mid­dle Eastern­ers for tech­nol­ogy in­vest­ments in the re­gion, ac­cord­ing to Bloomberg cal­cu­la­tions based on pub­lic an­nounce­ments.

It’s a shift that’s been largely caused by out­sider in­ter­est. In March, Ama­zon.com Inc. ac­quired Souq.com, a Dubai-based eCom­merce plat­form, for $580 mil­lion, shock­ing lo­cals.

And in its last fund­ing round, Ca­reem Net­works FZ, a re­gional Uber Tech­nolo­gies Inc. ri­val, be­came the Mid­dle East’s only Uni­corn – a tech startup with the val­u­a­tion over $1 bil­lion – draw­ing back­ing from Daim­ler AG and Saudi bil­lion­aire Prince Al­waleed bin Talal.

Walid Hanna of Mid­dle East Ven­ture Part­ners, a Dubai-based ven­ture cap­i­tal firm, called both moves “ma­jor wake-up calls to in­vestors not to ig­nore the siz­able startup op­por­tu­nity in the re­gion.”

The knock-on ef­fect is pump­ing money and tal­ent into the lo­cal startup scene.

In­vestors now in­clude some of the Gulf’s wealth­i­est in­di­vid­u­als and big­gest com­pa­nies.

Alain Be­j­jani, CEO of Dubaibased Ma­jid Al Fut­taim Hold­ings, owned by the rich­est man in the Mid­dle East, said the com­pany is fo­cus­ing more on the area (while de­clin­ing to pro­vide specifics). This year it in­vested in Fetchr, which of­fers de­liv­ery and lo­gis­tics ser­vices to e-com­merce firms. Ab­dul­rah­man Tarab­zouni, a Saudi na­tional who was at Google in Sil­i­con Val­ley, re­turned last year to run a $500 mil­lion in­vest­ment fund for new tech­nolo­gies at Saudi Tele­com Co.

Dubai-based ty­coon Mo­hammed Alab­bar says he has raised $1 bil­lion from in­vestors to put into tech deals in ad­di­tion to the $1 bil­lion he has put in place with Saudi Ara­bia’s sov­er­eign wealth fund to cre­ate Noon, an eCom­merce plat­form.

A year ago, Saudi Ara­bia’s Pub­lic In­vest­ment Fund said it has $1.1 bil­lion to put into ven­ture cap­i­tal firms in the king­dom.

There is room for mas­sive growth, says Tarab­zouni. “Take the pool of ven­ture cap­i­tal money avail­able and di­vide it by any met­ric – GDP, pop­u­la­tion, con­nected users – and the num­bers will speak for them­selves com­pared to ad­vanced economies,’’ he says. “We aren’t talk­ing of the need to dou­ble or triple the num­bers to get to those lev­els, we’re look­ing at the need to de­ploy more than 10 times what we have to­day.’’

Why it’s taken so long for the Arab world to catch up is a mat­ter of de­bate. “The ed­u­ca­tion sys­tem, fund­ing avail­abil­ity and lack of bank­ruptcy laws and well-paid pub­lic sec­tor jobs have not fos­tered a risk-tak­ing, en­tre­pre­neur­ial spirit in this re­gion,” said Mon­ica Ma­lik, chief econ­o­mist at Abu Dhabi Com­mer­cial Bank PJSC.

The avail­abil­ity of fund­ing closer to home will mark a sig­nif­i­cant change for re­gional star­tups. When Joy Ajlouny was co-found­ing Fetchr in Dubai, the $11 mil­lion that got the idea off the ground all came from Sil­i­con Val­ley. The last fund­ing round, in May, raised $41 mil­lion from nine in­vestors – seven of them based in the Gulf.

“If we hadn’t got money from Sil­i­con Val­ley to be­gin with, we wouldn’t be here,” she says. “Now, we’re start­ing to see in­vestors in the re­gion get the fear that they could be miss­ing out on the next big thing.”

On its face, the Gulf is fer­tile ter­ri­tory for star­tups. In the two big­gest economies, Saudi Ara­bia and the United Arab Emi­rates, eco­nomic out­put per per­son is $22,000 and $40,000 re­spec­tively, ac­cord­ing to the In­ter­na­tional Mon­e­tary Fund. Mo­bile broadband sub­scrip­tions in the Mid­dle East and Africa are ex­pected to grow three­fold be­tween 2016 and 2022, ac­cord­ing to re­port by Eric­s­son AB.

But it took out­side in­ter­est to con­vince lo­cals of the po­ten­tial they were sit­ting on.

The Souq.com deal and Ca­reem’s bil­lion dol­lar val­u­a­tion have been a “light­ning bolt to the ecosys­tem” that made in­vestors re­al­ize now is the time to start putting money in, said Christo­pher Schroeder, a U.S.based ven­ture in­vestor and au­thor of “Startup Ris­ing: The En­tre­pre­neur­ial Revo­lu­tion Re­mak­ing the Mid­dle East.”

“The re­gion is 350 mil­lion peo­ple and in two years smart­phone pen­e­tra­tion will be al­most 70 per­cent,” he said.

The growth may also be fed by nascent, if still clan­des­tine, ties be­tween Is­rael and the Gulf states.

“Is­rael and the Arab coun­tries, in par­tic­u­lar the Gulf coun­tries, are on the verge of a new era of co­op­er­a­tion, in par­tic­u­lar with re­spect to tech­nol­ogy, agri­cul­ture and wa­ter in­no­va­tion,” said Erel Mar­galit, an Is­raeli La­bor Party law­maker and for­mer ven­ture cap­i­tal­ist who plans to meet with peo­ple in­volved with star­tups in Dubai, Abu Dhabi, Cairo, and Morocco this month in the U.S.

“We are talk­ing about cre­at­ing hub to hub co­op­er­a­tion on themes like health care, In­ter­net of Things and agrotech. Should this be suc­cess­ful, Startup Na­tion will meet Startup Ris­ing in the Arab world for in­vest­ments and tech­nol­ogy co­op­er­a­tion.”

Find­ing an­other uni­corn like Ca­reem will not be easy. Most tech­nol­ogy com­pa­nies are young and look­ing for fund­ing of around $25 mil­lion to $50 mil­lion. Low credit card pen­e­tra­tion and a short­age of tal­ented coders and man­agers are hin­der­ing po­ten­tial.

Mar­ket de­vel­op­ment has also been slow be­cause of the lack of spe­cial­ized in­vest­ment firms with proven track-records, a short­age of busi­ness founders and tech­ni­cal tal­ent, and exit op­por­tu­ni­ties have been slow to ma­te­ri­al­ize, said Khal­doon Tabaza, founder and man­ag­ing di­rec­tor at iMENA Group, which in­vests in Mid­dle East on­line clas­si­fieds and mar­ket­places firms.

He ex­pects this to change in the near fu­ture.

And like ev­ery­where, startup fund­ing is a risky busi­ness. Even the re­gion’s high­est-pro­file deal of­fers a cau­tion­ary tale. Souq.com had been val­ued at about $1 bil­lion in a fund­ing round that closed in 2016, peo­ple fa­mil­iar with the deal told Bloomberg. But when Ama­zon.com ac­quired the com­pany a year later it paid $580 mil­lion.

In the short-term, more cap­i­tal will drive up val­u­a­tions and that could scare off some in­vestors, es­pe­cially if peo­ple start los­ing money.

As Tarab­zouni put it: “Make no mis­take, there will be fail­ures. There will be de­val­u­a­tions. There will be in­vestors who will get burned. There will be lots of les­sons learned. On the flip side, there will also be tremen­dous growth and value from the win­ning bets. That’s the na­ture of ven­ture cap­i­tal.”

Ama­zon.com Inc. ac­quired Souq.com, a Dubai-based eCom­merce plat­form, for $580 mil­lion, shock­ing lo­cals.

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