Will 2017 mark the peak of technology hysteria in the Middle East? Everywhere you turn there are start-up conferences, accelerators, competitions and interviews with equity-rich and cash-poor founders selling promises.
Don’t get me wrong, the unbridled enthusiasm toward innovation is refreshing. People are attempting to improve their communities, countries and our planet. But therein lies the problem.
Are they really?
Across the Middle East and North Africa region (Mena) there are a handful of challenges being addressed by great start-up teams that are experiencing genuine traction. But there’s also a lot of froth. Wannabe entrepreneurs (let’s call them WEs) all over our region are in dire need of a bucket of icy water over their heads.
For a start, the mythical value of “X for the region” needs to be stamped out. WEs need to understand that in most cases a “local” version of an “internationally popular” application is not an edge. We’re seeing this already in the ride-hailing space where competition is fierce.
In just five short years since each of the key players started, the battle is now focused on market share and global dominance.
But the worst “X for the region” perpetrators are likely those in the travel and hotel booking space. Either Booking.com, TripAdvisor or Priceline will end up in a small oligopoly. If the world is happy with two kinds of cola, then we’ll probably make do with a similar number of travel booking sites.
Once the user interface and experience has matured, the only thing they each compete on is price and personal preference. This is true of most tech companies in the “aggregation” camp. Creating an Arabic language version of your interface is not a sustainable competitive advantage.
If you still wish to build or invest in a business of that kind, then at least pick something that is a pain to operate, grows fast and cheaply and can be quickly sold to a bigger player looking to enter the region. Even then you might not be hugely rewarded.
According to various sources, Souq.com took in $425 million (Dh1.5 billion) of investor money before Amazon’s $650 million acquisition, implying the difference of $225 million was the actual economic value created over its 12-year life. A crude calculation gives us a 53 per cent return on invested capital over 12 years, equating to a 3.6 per cent return per year; not exactly something to write home about.
Please stop fund-raising. You heard me. Too many WEs are basing their business plans on perpetually raising new capital for their ventures with no clear path to profitability.
WEs neglect to remember that in most cases your initial capital should allow you to build a basic product that gets you rapid user adoption in the worst case, and above break even in the best. Thereafter, fund-raising is almost always done to magnify your already significant growth rate.
You should always be on a trajectory to profitability. People under-appreciate what the prospect of not needing money does to a start-up’s valuation.
Worse still, there are dozens of WEs out there with business models that just do not work. The simple math is as follows.
If your customer acquisition costs more than the lifetime value of those customers, you don’t have a business.
If your business relies on perpetually cheap Google Adwords to attract customers, you don’t have a business.
Furthermore, every day that passes, your business must be deepening the moat that protects it from competitors that all too often have deeper pockets. Your edge has to be more than “access to capital”. Capital will not always be there, just read some economic history. Your edge must be something that’s hard or ideally impossible for others to replicate.
When start-ups outsource their software development, this implies their edge must be somewhere else.
If you are serving consumers then you need to focus on solving habitual problems. You need repeat users, you need to become a seamless part of their lives.
If you are serving other businesses, then don’t underestimate the competition from similar start-ups in the US, UK or Timbuktu. Xero is an online accounting platform originally from New Zealand but has users in more than 180 countries.
Users of your service don’t really care where you are. This should also force Mena start-ups to build products for a global audience. Your opportunity is global, but so is your competition.
I propose an alternative framework for WEs to develop their ideas. How about building businesses that can only scale well in our region? Or businesses that address large, local problems.
Our demographics, blisteringly hot weather and our chronic water scarcity are all potential crises that offer huge rewards if solved. We have thousands — if not millions — of university science and engineering graduates emerging every year across the Mena yet we produce insignificant amounts of intellectual property.
The number of patents filed per capita in our region is one of the lowest on the planet, marginally ahead of sub-Saharan Africa.
Real results can only be measured over time. By 2020 we should have a good feel whether this nascent technology revolution sweeping the Mena has indeed been transformational. Or whether its trail was dominated by broken promises and shattered dreams.
— The writer is a Kuwaiti investor and investment management consultant based in Dubai. His Twitter is @alialsalim
