(Corrects website address in 16th paragraph of story first published yesterday.)
Habib Haddad says when he needed money three years ago to fund Yamli, an online Arabic transliteration service, he had to sell his furniture. His deal with Yahoo! Inc. (YHOO:US) this week is a sign investors are more willing to put money into Middle East startups.
“I had $100 left in my account and my credit cards were maxed out” after initial investments from two Google Inc. executives ran out, Haddad, 31, said in an interview in Dubai May 28. That day, Haddad, who also runs a fund investing in startups, announced an agreement making Yahoo the latest company to use the technology he developed with fellow Lebanese entrepreneur Imad Jureidini.
Deals like this may encourage a growing breed of early- stage investors and venture capital funds in the Middle East to boost investments to lure global companies, say investors such as Con O’Donnell, a Cairo-based entrepreneur. O’Donnell sold his stake in the digital media company he co-founded to Vodafone Egypt (VODE), a unit of Vodafone Group Plc. (VOD)
Funds run by entrepreneurs such as Haddad are investing in Egypt, Lebanon, Jordan and Bahrain, extending a lifeline to struggling startups and defying an economic slowdown in countries hit by political unrest. Bank lending to small businesses in the region is the lowest in the world, according to a World Bank study. Policy makers across the Middle East say the growth of small companies is critical to lower the world’s highest youth unemployment rate.
“Activity is picking up,” Tarek Assaad, managing partner at Ideavelopers, a unit of Cairo-based EFG-Hermes Holding SAE, the biggest publicly traded Arab investment bank, said in a telephone interview. “More money is going into venture capital funds and these funds are investing more.”
Haddad’s fund, Wamda, is backed by Dubai-based Abraaj Capital, the biggest private equity fund in the Middle East. Wamda has invested in seven companies since the end of 2011, he said. Tenmou, a Bahrain-based fund that counts the government’s Bahrain Development Board among its partners, is in the “final stage of making five more investments” after concluding agreements with four startups since July last year, Chief Executive Officer Hasan Haider said by phone May 28.
Ideavelopers focuses exclusively on technology companies, Assaad said, taking advantage of a “phenomenal growth” in Internet traffic in Egypt after last year’s uprising. Activists used social networks such as Facebook and Twitter to mobilize anti-regime protesters.
Facebook Inc (FB:US), which raised $16 billion this month in the biggest initial share sale for a technology company in history, today started a sales office in Dubai to serve the Middle East and North Africa. The social-networking company has 45 million users in the region, Joanna Shields, the company’s vice president and managing director of Europe, Middle East and Africa, told a news conference in Dubai.
Six months after the January 2011 uprising, Ideavelopers invested in Nefsak, an Egyptian version of Amazon.com Inc. (AMZN:US), offering more than 22,000 products online ranging from books to clothes and electronics. Like Haddad, Nefsak’s 39 year-old founder Sherif Nassar had a rough time seeking funds when he started the company in 2008. Banks “told me I need to be operational for three years” to qualify for a loan, he said. “I had to sell personal stuff.”
Nefsak expanded from three people sharing a borrowed office with one telephone to a staff of 30, and Nassar forecast on May 28 the business will grow “by double-digit factor every month on average for the next four years.”
This compares with Egypt’s economy, which grew at the slowest rate in at least a decade, causing almost one million people to lose their jobs, official data show. In Tunisia, where a street vendor set himself ablaze and kicked off a wave of uprisings that spread to countries such Egypt, Libya, Yemen and Bahrain, the economy contracted 1.8 percent. Unemployment surged to more than 18 percent.
Lowering unemployment requires private businesses to invest in entrepreneurs, Haddad said in Dubai. Yahoo’s purchase of Yamli’s technology license, which enables users to convert words typed in Latin characters into their Arabic equivalent, is the company’s latest investment in the Middle East after buying the Arabic-language portal Maktoob Inc. in 2009.
Still in Infancy
Still, venture capital remains in its infancy in the region. Such investments in the U.S., the world’s largest economy, reached $29.1 billion in 2011, the highest in three years, according to data posted on the website of the Arlington, Virginia-based National Venture Capital Association.
Middle East stock markets are struggling to recover to pre- financial crisis levels, making it harder for venture capitalist to cash in on their investments by selling shares to the public along the lines of Facebook Inc. and Google Inc. (GOOG:US) Google’s IPO raised $1.9 billion in 2004.
While Dubai’s benchmark stock index gained 9 percent this year, it’s still 75 percent below the level it reached at the end of 2007, according to data on Bloomberg. Egypt’s EGX 30 Index (EGX30) is 34 percent below the pre-uprising level.
The potential for entrepreneurship in the region is also being “oversold,” said O’Donnell, who has invested in books.com.eg, a website that sells mainly Arabic books.
Not Just Technology
“People are being told ‘be an entrepreneur and you will be the next Mark Zuckerberg’,” O’Donnell, 46, said by phone May 28, referring to Facebook’s co-founder. “The reality is that they should be told ’one or two of you will be lucky if they made it to the next round of funding’.”
Still, O’Donnell notes a growing interest of investors in startup companies. As he offered advice to 12 teams of entrepreneurs in Egypt in the last eight months, he found himself thinking of them as “really lucky. People are mentoring you for free, putting you in touch with investors. None of this was there when I started,” he said.
While most funds lean toward technology companies, some, like Bahrain’s Tenmou, don’t share the bias. Among the fund’s investments is a company that set up the first weight-loss center in the island-kingdom, said Haider, Tenmou’s 27-year-old chief executive. Wamda is investing in restaurants run by a Lebanese couple in Tunisia and a parenting website run by three Egyptian women, Haddad said.
The fund also invested in a company started by two Lebanese in Byblos, a coastal resort town north of Beirut. Woopra, which now has an office in Silicon Valley, offers real-time analysis of Internet traffic, competing with researcher Omniture Inc.
“We invested in them because we think they have a huge international potential,” Haddad said. For the time being, he says he’s not worried about exit opportunities.
“We focus on making the companies we invest in very solid, to make revenue and sustain themselves, and if you follow that mentality you will not be that itched to exit.”
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