Middle East Startups: More than Good Intentions Reply

Thalia Beaty reports on programs to strengthen entrepreneurs in a region undergoing economic as well as political transformation.

Beaty_Doing Business visual

By Thalia Beaty

NEW YORK – Ala’ Alsallal stood at the front of a conference room in Rockefeller Plaza in New York largely hidden behind the wooden podium. His voice, however, boomed as he talked about his company, Jamalon, the largest online retailer of books in Arabic or English in the Middle East, and pounded through revenue projections, customer retention rates, and his competition.

In the financial capital of the United States, entrepreneurs deliver hundreds of pitches every day. This evening, though, the entrepreneurs, who had traveled from Jordan, Egypt, and Dubai, were not asking the panel of venture capitalists for investment, but instead for advice about their business models and about explaining their market niche to American investors.

Two New York-based venture capital firms, Silicon Badia and Chadbourne & Parke LLP, along with Jordanian accelerator Oasis 500 and Partners for New Beginnings (PNB), a U.S. government funded project of the Aspen Institute hosted the event in the fall. This eclectic mix of actors reflects the broad interest in and hope for what entrepreneurship can do in the Middle East. Founded in 2010, PNB is a public-private partnership meant to stimulate economic development in the Middle East, and is one of the major policy initiatives to have come out of President Barack Obama’s 2009 speech in Cairo.

Entrepreneurship is not an American export, though. Innovation by Middle Eastern entrepreneurs is one of the persistent bright spots in the region, and U.S. government interest in fostering entrepreneurship, through PNB, for example, is recognition of an already vibrant and talented movement.

In the face of entrenched authoritarian regimes and popular anger at unequal and insufficient state-led economic development, a class of people has dedicated themselves to using technology and global networks to develop solutions for both local and global needs. A new book by Chris Schreoder, “Startup Rising,” recognizes this trend. He argues that American venture capitalists and Silicon Valley need to see the Middle East not just as a potential new market or an outsourcing destination, but also as a source for serious innovation.

But even as Schreoder pushes American investors to consider Middle Eastern startups and PNB shuttles groups of entrepreneurs back and forth across the Atlantic, major obstacles remain. The region’s domestic business environments are little understood and, as a result, many of the startups, which target Middle Eastern markets, have trouble demonstrating the value of their ideas.

When Alsallal finished his pitch back at Rockefeller Plaza, panelist Paul Cianciolo, vice president of FirstMark Capital, asked him about his unit economics and margin structure. Cianciolo said that while discounting books would attract customers to Jamalon initially, it would be difficult to end the discount. As a result, he said, the company’s profit margin would never really grow.

Alsallal said that, in response, he works with Arab publishers, none of whom sell online, to create electronic catalogues of their books that no one else has. In addition, Jamalon accepts cash on delivery, which counts for 80 percent of its transactions, and benefits from an arrangement with Aramex, the region’s largest delivery company. He said he is confident in his market share.

What was lost in this short exchange is the fact that most publishers in the Arab world do not distribute their books outside of the city, much less the country, in which they are printed. This is significant because it means that Jamalon essentially faces no competition from physical bookstores. When inevitably other online venders enter the market, Jamalon’s electronic catalogues will become another stand-alone product that could have a second life.

If this were a real pitch competition, the question would be whether Alsallal had piqued investors’ interests enough to have the opportunity to continue the conversation. But even if given that opportunity, entrepreneurs from the Middle East face significant challenges capturing the interest of U.S. investors. Namek Zu’bi, founder of Silicon Badia, an accelerator and one of the venture capital funds that sponsored the pitch session, said in an interview, “It is really difficult to convince a VC to put his or her dollar in a startup in the Middle East.”

In part, this is because entrepreneurs in the region do their work largely without the supporting structures that most American investors take for granted, such as market research, a competitive venture capital network, and transparent legal regulations. At the pitch session, another panelist asked entrepreneur Riham Mahafzah, founder of Gallery AlSharq, a company that sources non-violent photographs of the Middle East to advertisers, how big her market actually was. She said she does not know, but that she is working with a market research firm to get some data. This kind of uncertainty is not a variable that American investors often have to consider.

Given these challenges, Zu’bi said that what most startups in the region need from the United States is advice. More than investment dollars or big name advisors, Zu’bi said that entrepreneurs need to speak with mentors who have actually worked in similar businesses that have already succeeded. Eventually, to compete for investment, they also need to meet investors many times to build trust.

“When they look you up on LinkedIn, they need to see that you have 20 connections in common,” said Zu’bi.

While there are many obstacles for Middle Eastern startups to win American venture capital, it is possible. 500 Startups recently accepted DakWak, a website translation service based in Jordan, into its highly competitive accelerator program in California. Zu’bi’s venture capital firm and accelerator, Silicon Badia, is also an investor and mentor to DakWak, and it has seen other entrepreneurs and startups make the jump from the Middle East to Silicon Valley.

Entrepreneurship in the Middle East may have great potential from the perspectives of investors and of policymakers, but getting the right people to the right table under the right circumstances is challenging.

“There has to be interest on both sides,” Zu’bi said. “But, yes, the only way do to do this is person-to-person connections.”

Ease of Doing Business Rankings, 2013: Out of 189 countries, the Arab states fall in a range from the top quarter to the very bottom as measured by 10 indicators including “Registering Property,” “Getting Credit,” and “Enforcing Contracts.”

Economy

Ease of Doing Business Rank

United Arab Emirates

23

Saudi Arabia

26

Bahrain

46

Oman

47

Qatar

48

Tunisia

51

Morocco

87

Kuwait

104

Lebanon

111

Jordan

119

Egypt

128

Yemen

133

West Bank/Gaza

138

Iraq

151

Algeria

153

Syria

165

Libya

187

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