Middle East Tech Start-Ups Lure Large VC Funds

The Middle East and North African entrepreneurship scene has been abuzz of late with a rising number of start-ups, especially in the tech industry.

High smartphone penetration rates and a growing e-commerce sector have made MENA a hotbed for tech start-ups, bringing a surge of investors in their wake eager to tap into the promising new business potential.

“We look back in the last five years and those have been characterised by small funds offering around $10 to $15 million,” said Omar Christidis, founder and CEO of digital hub Arabnet.

“Today, all of those funds are raising larger amounts- about $30 to $60 million, which is almost four times as much the money than was previously raised. They are interested in doing bigger deals and I think that is really going to transform the landscape,” he added.

“We are going to see faster scaling of companies. It also means we are going to see competition between venture capitalists to fund the best start-ups while the best start-ups are going to get better terms.”

Those adding to MENA’s venture capital scene include a number of funds launched by local investors. Among them, Fadi Ghandour, the founder of logistics firm Aramex, announced a VC fund in partnership with the International Financial Corporation (IFC). The fund will be a part of Ghandour’s firm Wamda Capital and offer tech start- ups around $1 to $3 million in financing. It is expected to close with around $75 million in total.

Ghandour’s VC fund joins another such initiative from two local entrepreneurs.

In December, Dubai-based investors Paul Kenny and Arya Bolurfurshan launched Emerge Ventures, which is looking to invest $25,000 to $1 million in companies working in advertising, mobile, payments or logistics.

Although the total size of the fund is unknown, the firm has already bought stake in three companies and aims to invest the rest of the capital by the end of this year.

According to the Middle East Private Equity Association report, VC investment in the region is on the rise, especially
in the ICT sector. From 2010 to 2012, venture capital investors completed around 119 transactions, compared to 56 from 2007 to 2009.

Around 47 per cent of total deals completed by VCs since 2010 were in IT and software companies, the report found. This marks a large jump from 2007 to 2009 where just 32 per cent of VC investments were in the ICT sector. Out of 74 deals completed in IT and software firms since 2006 around 56 were closed after 2010.

WELL TIMED GROWTH

The rise of VC in the region has coincided with the sprouting of other forms of entrepreneurial support.

The Middle East, and especially the UAE, has seen a growth in start-up accelerators and incubators for technology firms, aiming to provide the know-how and initial stage capital. These look to fill the much-needed early stage funding gap before the venture capital firms can step in.

Many like Emerge Ventures also provide guidance and expertise to firms that they fund in exchange for equity.

“From 2008 to today, the amount of seed investment has tripled while the amount of entrepreneurial support activity has quadrupled,” said Habib Haddad, founding CEO and general partner at Wamda.

“Five years ago it was quite lonely to be an entrepreneur. Today when you talk about a entrepreneurship…there is huge momentum.”

Some of the prominent programmes include SeedStartUp, part of the US accelerator TechStars and Turn8, run by i360 and supported by conglomerate DP World.

Afkar.me, a recently launched incubator aims at building digital start- ups in the region while In5, which is a part of Dubai Internet City provides early stage support for start-ups.

In line with the growth in the number of tech start-ups in the region, Free Zone manager Dubai Silicon Oasis Authority (DSOA) announced plans earlier this year to set up the Dubai Technology Entrepreneurship Centre (DTEC).

The centre, which will be launched in 2015 within Dubai Silicon Oasis, is touted to be the largest entrepreneurship hub in the MENA region. This comes in addition to DSOA’s current incubation centre called Silicon Oasis Founders that offers consultancy and mentoring services to entrepreneurs.

Despite a number of such initiatives, industry experts still believe that accelerators and incubators have room for growth, as there is still a gap in early stage funding.

“Historically, I would say there was a gap in venture capital. But today we are about to reach a point where the gap is not going to be in the venture capital stage but at the early stage,” said Christidis.

“There is a lot of money chasing a few really solid or early stage companies, which means there is room for more accelerators. The region’s accelerators have already picked up on this. Oasis 500 has funded a deal with Dubai SME and then we have Flat6labs that have already extended into Jeddah and now Abu Dhabi,” he added.

“Now Levant and Egypt accelerators have also expanded into GCC markets. Because that is where the clients are, that is where the money is and that is where the markets are.”

As funding for start-ups increases, experts say that the MENA will get to see serious entrepreneurs and not just raw early stage ideas.

“People in their 30s who have ten years of experience and have resources are going out to sort a problem they have noticed and I think they have a higher chance of succeeding,” said Christidis.

Haddad too argues that as such mature entrepreneurs come to the fore, venture capital investors will rise in proportion.

“In the last few years we have been seeing entrepreneurs with almost 10 years of experience because there is money to be made or a smart engineer who just graduated would opt for a business instead of working in a firm or a person who has worked in a company like Amazon for 10 years would want to start a similar company,” he said.

“We are looking at really big companies right now in the region and we will have them once we start seeing proper exits.”