When Yahoo acquired Arabic Internet portal Maktoob.com in 2009 for $165 million, expectations ran high among the Arab world’s tech entrepreneurs that the regional startup scene would be inundated with cash-rich suitors. Instead, the exit market seemed to dry up in the midst of the Arab uprisings.
But this past March, Souq.com, promoted as the Arab world’s Amazon.com, received $75 million in funding from South African media firm Naspers, putting the Middle Eastern online retailer’s valuation at half-a-billion dollars. The investment is the latest in a string of venture capital (VC) deals finding their way to support the developing e-commerce market in the Arab world. Other online Arab retailers that have won funding include fashion retailer Namshi.com, discount retailer MarkaVIP.com, travel site Triperna.com and coupon retailer Cobone.com. In 2013, MIH, a subsidiary of Naspers, had acquired a majority stake in Dubizzle.com, considered the biggest classified advertising site in the UAE.
American entrepreneur and venture investor Christopher Schroeder describes the activity as inevitable, because investors are finally beginning to see the value — and returns — in the Middle East technology market. He is the author of Startup Rising: The Entrepreneurial Revolution Remaking the Middle East, a book on the region’s entrepreneurship movement that was published last year.
Schroeder, who has recently returned from a trip to Iran where he “saw an intriguing and nascent startup community,” says he has been exploring the strengths and limitations of the rising entrepreneurial ecosystems of the region. He has looked closely at some of the thousands of young entrepreneurs. “They are all not only innovating, but also [trying] to solve some of their long-ignored social and infrastructural challenges,” he notes.
Schroeder is the former CEO of Washingtonpost. Newsweek Interactive and the successful seller of two Internet portals — LegiSlate.com and Health Central.com. His book is based on articles he had written in 2011. An Arabic version will be out soon, as will other translations and an audio edition.
“I wanted to better understand how increasing and ubiquitous access to technology is changing societies in the Middle East and elsewhere,” says Schroeder, a veteran angel investor and advisor to U.S. venture capital funds and many consumer-facing, social media startups. “I wanted to understand also the surprising power of women in startups here and the role of religion among these entrepreneurs. And I wanted to learn more about why many global technology juggernauts are doubling down in the region during this time of uncertainty.”
Untapped Investment Potential
Schroeder’s research also provided insight into the still-untapped investment potential in the Middle East’s growing online market. “Right now, the e-commerce market in the Middle East, broadly defined, is somewhere between a billion and a billion-and-a-half dollars,” he says. “Not including commodities or oil, the entire movement of goods and products is $450 billion. How hard is it going to be to go from $1 billion to $10 billion in three years? Looking at those kinds of factors, knowing full well that terrible scenarios are also quite possible, compared to other emerging growth markets, there’s a lot that can happen here.”
Reflecting on the recent market activity, Schroeder notes that the Yahoo acquisition fired up the potential of would-be tech entrepreneurs in the region. “I think Maktoob showed a new generation that this can happen here, and we need to be thinking about this in different ways,” he says. “The A-ha moment came with the realization that what has been happening in startups, technology and entrepreneurship is happening everywhere. If it is happening in Latin America, Eastern Europe, South East Asia and Africa, then why not in the Middle East?”
There are local efforts taking root to spur tech innovation. This year, Fadi Ghandour, the founder of regional courier service Aramex and one of the region’s best-known entrepreneurs and angel investors, launched a new venture capital fund for Middle East tech startups with the International Finance Corporation. The fund, which starts with $75 million, has company in Emerge Ventures, which two Dubai-based entrepreneurs launched to invest in tech advertising, mobile, payments and logistics. Another is Middle East Venture Partners (MEVP), a Middle East-focused VC firm that invests in the early and growth stages of companies. According to MEVP managing director, Walid Mansour, they have invested in one accelerator, are building another one now, and have funded 21 companies in the technology space. MEVP is very bullish about the next 12 months, says Mansour, and may invest in as many as eight more companies.
Other tech accelerator funding initiatives include Afkar in Dubai and JuiceLabs in Cairo. Egypt’s biggest city is home also to one of the more novel efforts to push tech entrepreneurship — Ahmed El-Alfi, chairman of Sawari Ventures, has leased the old American University campus by Tahrir Square in Cairo and transformed it into the GrEEK Campus, the country’s first tech park and the region’s largest shared workspace.
The technology-fueled Arab uprisings catalyzed forces working in parallel, Schroeder suggests. The unrest that spread through the region swept away longstanding regimes in Tunisia, Egypt, Libya and Yemen. “The same desires to have a political voice, a societal voice and a cultural voice were the motivation to have an economic voice,” he says.
Few speak of the uprisings now with the same sense of possibility; Egypt’s revolutionary fervor has reverted to popular support for a military ruler; Libya has yet to recover from its violent jettisoning of the Qaddafi regime, and Syria remains mired in a bloody civil war. Schroeder chalks up some sentiment in the region to high expectations of the Arab uprisings not being met. But there is a tangible progression as a result, he says, that is measured in digital access; there are now roughly 90 million Internet users in the Middle East, about 40% of the region’s population, according to Internet World Stats.
A Different World
“An entire generation is being raised knowing the bankruptcy of the regimes on top, and knowing much better how the rest of the world is interacting and doing things powerfully because they’ve got access to technology,” Schroeder says. “All of a sudden people realize the world can be a different way. You can make an argument of how easy it is to get there, how painful it is to get there, but all of a sudden an entire millstone has been lifted off a generation in terms of the way they think about what can be done. That makes me very hopeful.”
In some ways, Schroeder says, the uprisings colored people’s perceptions of the region; but other emerging markets carry their own unique risks and challenges. “There’s a macro way to look at success in the Middle East. Emerging growth markets are not for the faint of heart. China has huge market caps and amazing talent. But try to find a lot of Silicon Valley VCs who are thrilled, and there aren’t many. If you got into Tencent or Alibaba you are doing okay, but they are the exceptions.
“If you went to the hardcore investors, they would tell you the rule of law is terrible. There’s no transparency. If I had to seek restitution in a court, I think my odds are better in Cairo than in China. There’s the incredible complexity of India. I know of unbelievably successful entrepreneurs in Sao Paulo, who will not take their family to a movie without armed guards. We live in worlds where unbelievable potential, and hard — even terrible — scenarios co-exist. In this reality, I look at the Middle East in a new light.”
Even the top-down hierarchies in many countries in the region are at least asking questions about how to engage in entrepreneurship, he says, though the infrastructure, education and rule of law issues are daunting. What is so remarkable, he adds, is that despite these circumstances, young people are building enterprises.
“Would you have believed me if I told you two years ago that the last Startup Weekend that had 250 to 300 entrepreneurs was in Gaza? Absolutely no chance. So what they did was they brought in Oasis 500 from Amman to do some of the courses. They couldn’t believe the caliber of the entrepreneurs, in the midst of Gaza. So these young entrepreneurs, whether they are refugees from Syria on the border of Lebanon or in Dubai, they keep building.”
The Trickle-down Effect
More importantly, Schroeder says, the spread of technology is penetrating into the lower economic end of Arab society. “A lot of times, people want to think about the use of technology in the frame of big high-tech startups,” he notes. “What’s being missed here is that when you have ubiquitous access to basic technology, such as basic dumb phones with over 100% penetration in most countries, the most non-tech businesses become tech enabled.”
An example he observed in Egypt was artisans using simple phones to sell their handicrafts in other parts of Cairo. “Several women I met are taking their crafts and putting them on platforms, like the Etsys of the Middle East. You have these amazing platforms people have been building to outsource work. So people can have access to this thing in powerful ways.”
The civil violence in the region has had an undeniable impact on investor confidence and the ability of companies to get funding, Schroeder says, but he adds the market was seeing investor activity on a small scale. “You look over the two years of the Arab uprisings — the tragedy that is Syria, the complexity that is Egypt — it is at one level no surprise that we are not having the traditional exit, after exit, after exit,” he said. “If you look under the covers, it is interesting to keep an eye on the smaller companies and the investment dollars that are moving in, the fact that A-round funds are now being raised…. [There is] a lot more activity than the obvious one exit would have.”
Some success stories are not well known outside the region, Schroeder suggests, partly because of the focus the world puts on the region’s unrest. “The Economist said that over 25% of all tech startups in the Middle East [were launched] by women. Nobody here understands the ramifications of that. I can’t find anybody who knows that one of the largest tech-related IPOs in 2013 was Asiacell in Iraq.”
One or two more well publicized, prominent exits would help the market psychologically, he adds. The knock-on effect of local success stories and homegrown companies attracting substantial investor support cannot be underestimated, partly because many entrepreneurs would prefer to remain in their native countries, he notes.
“The biggest thing I’ve seen is that more and more people want to live at home. There are a thousand reasons why people want to come to Western universities and Silicon Valley, and that’s going to continue. But in studies I’ve seen, for the first time in 30 years, more people returned to India than those leaving India. This generation is the most mobile in history — there are people with catcher’s mitts looking for talent around the world. But if we have [regional successes] then we will have more, then even more; it will become a flywheel of success.”
Republished with permission from Knowledge@Wharton (http://knowledge.wharton.upenn.edu), the online research and business analysis journal of the Wharton School of the University of Pennsylvania.