Most Arab investments in venture funding have so far gone to Silicon Valley
Several events in the first six months of this year have spurred business commentators in the Middle East to declare a new dawn for the region’s venture capital sector. The headline-grabbing catalyst was the $580 million sale of Souq.com to American e-commerce giant Amazon.com, but there have been many more examples, such as Careem’s $500 million funding round in January, Emaar Malls’ acquisition of a majority stake in Namshi, or Noon.com’s buy-out of JadoPado.
But these are all examples of a longer-running trend. In June, the MENA Private Equity Association revealed that although the total amount of investments made by the region’s private equity and venture capital firms dropped by 24 percent to just over $1.13 billion last year, it was the venture end of the market that proved most active.
The number of venture deals completed in the Middle East last year increased by 43 percent to 175.
Walid Hanna, the CEO and co-founder of Middle East Venture Partners, the firm in which Emaar chairman Mohammad Alabbar bought a significant stake in May, said in a telephone interview with Zawya that the pipeline of opportunities being presented to his firm “is getting richer and richer”.
“We started MEVP back in 2010 and I can assure you that the number and quality was way, way smaller and lousier. We’ve seen an incredible increase in both quantity and quality of deal flow across the Middle East,” he said.
Earlier this week, Hanna’s company, which has offices in Dubai and Beirut, made its first investment since Alabbar bought his stake, acquiring equity in travel company Wego.
“We have a very good idea of what has been happening over the past seven years,” he said. “It’s definitely an asset class every investment firm should be looking at.”
He said that his firm saw 1,000 potential investment opportunities last year, which were mainly MENA-based but also included some deals in India. He expects this number to increase steadily year-by-year.
Amir Farha, the co-founder and managing partner of Dubai-based Beco Capital is even more bullish.
“In our first year, we saw close to 140 opportunities. That was in 2012. Last year, we saw just under 1,000, and this year, we think we’re going to see to see just over 2,000,” he said. “We’re on track to do that. Focal points
Hanna cites Cairo and Amman as two of four major centres in the Middle East as source markets for investment-worthy start-ups, but said that “increasingly they are coming from two cities - Dubai and Beirut”.
In both cases, he said that the venture scene is flourishing because of the availability of capital.
“In Dubai, there’s a concentration of venture capital firms, and there’s the stability of the UAE that comes into play, the infrastructure, the ease of doing business. When you combine all of this together, Dubai became the capital of the venture capital space across Mena,” he said.
Beirut, too, has benefited from greater availability of funding as a result of ‘Circular 331’ – a directive issued by Lebanon’s Central Bank in 2013 aimed at channelling about $400 million into local start-ups via local banks.
“This availability of money allowed the banks [to] invest directly in technology companies, or they invest in funds like ours so that we can invest. Since the beginning of 2014, more than 100 start-ups benefited from this programme,” Hanna explained.
Farha also acknowledges Dubai’s regulatory structure, with its free zones and its relatively easier labour visa rules as contributory factors.
“I think it’s a hotbed of talent. It’s very diverse in terms of population, culture.
“And they market the city well. Government initiatives like the Dubai Future Foundation have put Dubai on the map on a global level. They [the government] are driving Dubai as a location for start-ups and I think that’s really benefiting anyone in the ecosystem – including ourselves.” All eyes on Saudi Arabia
Farha said that Saudi Arabia remains “the holy grail” when it comes to investing in start-ups, as it is the region’s biggest economy. And although the government is attempting to encourage private sector growth, the barriers to entry for new entrants means that “if someone can build something reasonably sizeable, it’s very hard for someone [else] to come in and compete”.
“So if you do find an exciting opportunity in Saudi, you have your own regulatory advantages from the outset,” he said, adding that there were still lots of areas of opportunity for new ventures and lots of talented professionals who can set them up.
“There are highly intelligent Saudis who realise that, if they want to be successful, they have to go into the private sector,” he said.
Hanna is not so sure, though. Although he says there is genuine innovation coming from firms emerging from incubators, such as the one at King Abdullah University of Science and Technology (Kaust) in Riyadh and a specialist energy incubator run by Saudi Aramco, there hasn’t been the number or the quality of start-ups to justify serious investment in the market yet.
“The numbers are extremely low. In a small country like Lebanon or Jordan, you will see ten times the number of start-ups that what you would see in Saudi, although the population in Saudi is ten times that of Lebanon.”
He acknowledged that “things have started to move” in the kingdom, with the government creating new incubators and parallel VC funds.
“Riyadh could be one of those [entrepreneurial] cities, but it is going to take some time.”
In terms of venture funding for start-ups, Richard Clarke, a partner and head of deal advisory for KPMG in the Lower Gulf, said that the market is still “reasonably immature”.
“Venture tends to be a loose collection of individuals, for the most part. Whether there’s a corporatisation of them or not, it tends to be led largely by individuals and supported by a corporate platform.”
For instance, some of the best-known venture funds in the region have been started by entrepreneurs that have had success with other businesses such as Beco Capital (Bayt.com co-founder Dany Farha) and Wamda Capital (Aramex founder Fadi Ghandour). Silicon Valley
Moreover, many Middle East investors interested in the higher risk, higher return world of venture financing have, until recently, placed their money into funds that raise in the region but invest in Silicon Valley.
“I don’t think it’s a negative for Dubai that pools of capital flow out and look for opportunities in Silicon Valley,” said Clarke, pointing out that the more mature venture community on the U.S. West Coast has fund managers with a more established track record and more efficient ways of deploying capital.
However, he added that this doesn’t need to be done at the expense of local investments. The problem, he says, is that neither local banks nor private equity funds have much appetite for venture funding.
“I think venture obviously is a gap in the market. Private equity struggles to come down below $15 million, but most venture doesn’t go as high as $10 million or $15 million. That’s quite a lot of money for individuals, rather than corporates.”
This is a space into which Hanna’s Middle East Venture Partners hopes to move. At the launch of the MENA Private Equity Association report in July, he said that MEVP was creating a new fund and would look to triple its assets under management, which currently stand at about $120 million.
Yet so far, there has been little interest in the region from Silicon Valley funds, with the $11 million raised by Fetchr led by New Enterprise Associates in 2015 being one of only a few exceptions.
Hanna says it is “too soon” for the major venture capital firms like Accel Partners and Sequioa Capital to build the necessary local infrastructure, they need to make effective local investments, pointing out that many VCs have preferred to target bigger, single market territories such as China and India instead.
“It’s the right time for Arab investors to invest in Arab companies and then hope that the foreigners will acquire some of our portfolio [at a later stage],” he said.
Clarke agreed, stating that the only way such funds will think about moving into the region will be when the volume of major, international deals increases.
“If there are five or six more businesses that are developed here that get international exposure, it will encourage people to come and recognise that there is a community here which has that entrepreneurial spirit and is good at building new business.”
Farha is optimistic about this, stating that successful start-ups in the region like Maktoub in Jordan, Propertyfinder, Souq.com and others have all had experienced employees that left the business to start their own ventures.
In the case of Careem, it recently invested in a technology platform known as Swvl building bus transport networks that was co-founded by a former employee in Egypt.
“It’s testament to the idea that if you scale these companies, you create new ones. Every Careem should create 100 new companies,” said Farha. “As we grow, those success stories will happen. And obviously, we have new people coming forward who are sick of working in the corporate world, have a great idea and want to pursue it.”
© Zawya 2017