Arab Incubators Help Web Ventures Hatch

Just over a decade after the Arab world’s first wave of internet companies began to sweep across the Middle East, entrepreneurs and investors say the infrastructure to support start-up companies in the region has never been better.

In the early days of the regional internet business in the late 1990s and early 2000s, entrepreneurs had few places to turn when seeking early-stage investment and support needed to start businesses.

A few succeeded, such as Jordan’s Maktoob, which was bought by Yahoo for $164m in 2009. But for the majority, the climate for internet start-ups was simply too harsh.

“We had far fewer entrepreneurs a decade ago, but they were tough as nails because the really great ones were the only ones who could do it and survive,” says Hany Sonbaty, a venture capitalist with Egypt’s Sawari Ventures , who in a previous role managing a technology fund at EFG-Hermes, the investment bank, was the first outside investor in Maktoob.

Things have changed. A handful of well-funded investment and support schemes for Arab start-ups – often known as incubators – have been launched in recent years, fulfilling a crucial role in the creation of internet companies.

“Right now, I’ve never been so optimistic,” Mr Sonbaty says. “Things are coming together.”

Making the biggest waves among the incubators is the Amman-based Oasis 500, which upon its launch last year set itself the target of funding 500 new companies within five years. In return for an early stage investment of about $32,000, which comes alongside mentorship, training and access to a network of experienced “angel” investors, Oasis 500 takes a 20 per cent stake in a start-up.

Egypt’s Flat6Labs, funded by Mr Sonbaty’s Sawari Ventures , takes a similar approach, accepting teams of entrepreneurs into a three-month boot camp based in its Cairo offices. It invests $10,000-$12,000 in each team in return for a 10-15 per cent stake, as well as an option to acquire a further portion when the company “graduates” from its incubation programme.

Hanan Abdel Meguid, the chief executive of OTVentures, the internet subsidiary of regional mobile operator Orascom Telecom, is one of several experienced industry leaders working as mentors to the businesses being built at Flat6. In every quarterly intake of businesses she has worked with, she thinks at least one will become a leading company in its own right, or be acquired at a healthy valuation.

“Some will be big, but all of them will have an impact. What is being done there is beneficial for the whole industry, they’re really shaping these guys,” says Mrs Abdel Meguid. “I’ve seen the before and the after, and I’m in awe.”

But with dozens of start-ups emerging from the growing number of incubators, industry veterans worry that such companies will struggle to find the larger investments – typically in the millions of dollars – needed for growth. Banks prefer lending to government-backed businesses or established companies connected to the region’s well-known business families, and venture capital funds – the typical source for this investment stage – remain thin on the ground.

“That will be the next problem,” says Samih Toukan, chief executive of the Jabbar group of internet companies and a co-founder of Maktoob. “A lot of good companies are coming out of these programmes, but they will find it hard to get to the next level.”

Mr Sonbaty of Sawari Ventures agrees. “We are in the middle of a process that takes a couple of decades, and it takes a lot of pieces to align. In a lot of ways one of the last mountains to conquer is venture capital, which is one of the few asset classes where you pay to invest in excessive risk. It takes a certain mindset.”

A bright spot for the industry is electronic commerce, which is growing quickly in the region. Euromonitor, the research house, expects the total regional ecommerce market to double in size to $2bn by 2016.

JadoPado, the Dubai-based online electronics retailer, is seeing even faster growth. Within 10 months of its launch the site exceeded $1m in turnover, and Omar Kassim, its founder, says he expects sales to triple this year. Characteristics of the United Arab Emirates as a market – small, wealthy, with a heavily consumerist culture – make it ideal for online retailers, Mr Kassim says.

“This is a country where you have drive-through ATMs, it’s an instant-gratification culture,” he says. “Our customers are thinking ‘if it can come to me, why should I go to the mall?'”

But with even global giants such as Amazon.com operating on thin margins, Mr Kassim thinks the Middle East’s ecommerce upstarts will take time to start making money: “There are some people in the region who are pushing nice numbers in terms of revenue, but I’ve not come across anyone yet who is highly profitable.” He expects JadoPado to break even within 18 months.

Amman-based Marka VIP, an online fashion retailer, is one of the region’s fastest-growing web businesses and recently raised $10m in investment from European and US venture funds. The site, which launched in late 2010, has attracted 2m users and is adding 10,000 members every day, says Ahmed Alkhatib, its founder.

With spending on the site growing at rates of 25-50 per cent each month, “the Gulf is a no-brainer for ecommerce, it’s a low hanging fruit,” says Mr Alkhatib. “Right now, the fish are jumping into the boat, and there’s no sign of it slowing down.”

Zawya