<strong>Venture</strong> <strong>Capital</strong> <strong>in</strong> <strong>the</strong> <strong>Middle</strong> <strong>East</strong> <strong>and</strong> <strong>North</strong> <strong>Africa</strong> Report4macro overviewRaymond Soueid, Booz & CompanyThe need to provide sufficient employment for burgeon<strong>in</strong>g young populations makes it clear that <strong>the</strong> countries of<strong>the</strong> MENA region must develop a more organic, bottom-up approach to provid<strong>in</strong>g jobs <strong>and</strong> driv<strong>in</strong>g economic growth,with a significant role for small <strong>and</strong> medium-sized enterprises (SMEs).That will require a significant <strong>in</strong>crease <strong>in</strong> entrepreneurship, <strong>and</strong> higher value <strong>and</strong> impact entrepreneurship. Thisentrepreneurship cannot be limited to <strong>the</strong> historical forms of self-employment <strong>in</strong> <strong>the</strong> region, characterized by smallshops <strong>and</strong> o<strong>the</strong>r relatively unsophisticated bus<strong>in</strong>esses. Ra<strong>the</strong>r, <strong>the</strong> region’s new entrepreneurs will have to develop<strong>in</strong>novative products <strong>and</strong> services with <strong>the</strong> <strong>in</strong>tent to build large bus<strong>in</strong>esses of <strong>the</strong>ir own. VC firms that could supportthis wave of growth may look to a number of regional economic growth drivers, <strong>in</strong>clud<strong>in</strong>g population growth, naturalresource availability, <strong>and</strong> overhaul of major <strong>in</strong>frastructure.There will be several sectors where strong entrepreneurial <strong>in</strong>put will be necessary. Start-up <strong>com</strong>panies that can, forexample, quickly develop human capital solutions for larger <strong>com</strong>panies will have significant market opportunities.O<strong>the</strong>r sectors that will make good use of Start-ups <strong>in</strong>clude tourism, m<strong>in</strong><strong>in</strong>g <strong>and</strong> maritime, healthcare, <strong>and</strong> renewableenergy. While <strong>the</strong> technology sector is relatively underbuilt, <strong>the</strong> region’s focus on <strong>in</strong>formation technology <strong>in</strong>vestmentis open<strong>in</strong>g up many new opportunities for specialty firms – especially firms that can help create regionalanalogues to some of <strong>the</strong> IT VC-backed success stories <strong>in</strong> Europe <strong>and</strong> <strong>North</strong> America.Ano<strong>the</strong>r area of opportunity is <strong>the</strong> ‘miss<strong>in</strong>g middle’— those bus<strong>in</strong>esses with an enterprise value between USD500,000<strong>and</strong> USD8 million. Even where entrepreneurs are able to secure seed <strong>and</strong> early fund<strong>in</strong>g from friends, families <strong>and</strong> angel<strong>in</strong>vestors, <strong>the</strong>re rema<strong>in</strong>s a gap between this stage <strong>and</strong> that where private equity or <strong>com</strong>mercial banks are will<strong>in</strong>gto take a stake. This f<strong>in</strong>anc<strong>in</strong>g gap is especially acute <strong>in</strong> those sectors which have not traditionally enjoyed <strong>in</strong>vestorsupport <strong>in</strong> some parts of <strong>the</strong> <strong>Middle</strong> <strong>East</strong>: sectors such as education, technology, tourism, <strong>and</strong> hospitality.For those venture capitalists that enter <strong>the</strong> region <strong>and</strong> develop a strong enough network to develop potential deals,<strong>the</strong> opportunities will not only be manifold, <strong>the</strong>y will <strong>com</strong>e without <strong>the</strong> <strong>com</strong>petition that greets <strong>the</strong>ir counterparts<strong>in</strong> o<strong>the</strong>r regions of <strong>the</strong> world.Although <strong>the</strong> region represents a significant opportunity for VC firms, <strong>the</strong>re are still issues to be addressed. Fundmanagers recognize that <strong>the</strong>ir chief impediment <strong>in</strong> <strong>the</strong> region is simply a lack of deal flow. Not enough actionableideas are available for review <strong>and</strong> fund<strong>in</strong>g, <strong>and</strong> those ideas are not always backed by management teams with strongcapabilities. Entrepreneurs need strong support at every stage of <strong>the</strong> start-up process, requir<strong>in</strong>g a great deal of time<strong>and</strong> effort from VC firms.This absence is due partly to <strong>the</strong> lack <strong>the</strong> <strong>com</strong>ponents that mark entrepreneurial activity elsewhere: a culturalwill<strong>in</strong>gness to fail, a wide network of potential mentors <strong>and</strong> supporters, a legal <strong>and</strong> regulatory system that makes itpossible to start <strong>and</strong> run bus<strong>in</strong>esses effectively, <strong>and</strong> a mature technology <strong>in</strong>dustry.Even if deal flow picks up, <strong>the</strong> region still needs to address some structural flaws. In certa<strong>in</strong> markets, for example,bankruptcy laws <strong>and</strong> procedures do not make possible <strong>the</strong> orderly dissolution of assets. This creates significant uncerta<strong>in</strong>ty<strong>in</strong> a market where failure is <strong>com</strong>mon. Laws regard<strong>in</strong>g contracts, corporate structures, corporategovernance, legal ownership <strong>and</strong> post-IPO lock-ups <strong>and</strong> exits fur<strong>the</strong>r <strong>com</strong>plicate <strong>the</strong> future of VC activity <strong>in</strong> <strong>the</strong> region.Yet <strong>the</strong>se challenges are more than offset by <strong>the</strong> potential that <strong>the</strong> region offers to VC firms able to get<strong>in</strong>volved <strong>and</strong> guide <strong>the</strong> entrepreneurs <strong>the</strong>y are hop<strong>in</strong>g to fund. If <strong>the</strong> deals beg<strong>in</strong> to percolate <strong>in</strong> enough volume, <strong>the</strong>region will be<strong>com</strong>e one of <strong>the</strong> globe’s great new VC territories.6
<strong>Venture</strong> <strong>Capital</strong> <strong>in</strong> <strong>the</strong> <strong>Middle</strong> <strong>East</strong> <strong>and</strong> <strong>North</strong> <strong>Africa</strong> Report5<strong>the</strong> vc ecosystemVC firms, <strong>in</strong>cubators, <strong>and</strong> o<strong>the</strong>r entities <strong>in</strong> <strong>the</strong> VC Ecosystem(Map shows head office locations only - many of <strong>the</strong> entities below cover a broader or country scope. Map is also forillustrative purposes <strong>and</strong> does not <strong>in</strong>clude all <strong>the</strong> stakeholders <strong>in</strong> <strong>the</strong> regional VC ecosystem)Onl<strong>in</strong>e<strong>Wamda</strong>www.wamda.<strong>com</strong>Bus<strong>in</strong>ess Plan CompetitionsMIT Arab Bus<strong>in</strong>ess Plan Competitionwww.fsvc.orgArab Crunchwww.arabcrunch.<strong>com</strong>Arabia 500 Competitionwww.nortonrose.<strong>com</strong>StartUpArabiawww.startuparabia.<strong>com</strong>Mashro3ak Hakeeka (Arabic Only)www.booz.<strong>com</strong>/meEgypreneurwww.<strong>in</strong>telcapital.<strong>com</strong>Med<strong>Venture</strong>swww.envestors.ae7
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