Starting up in a safe mode

At the recently concluded Gitex Dubai 2006, a successful start-up entrepreneur, an executive running the most popular Arab-language online community, a fund manager, a technology research analyst and the head of informatics of the British University in Dubai came together in a first of its kind dialogue on technology start-up scenarios in the Middle East. The obvious and important question 'where are we today?' was thrown open to the panel.

Five years ago, when the Dubai Internet City was inaugurated, it was hoped that besides attracting the biggies like Hewlett-Packard, Microsoft, Cisco, Oracle and Nokia, the initiative would also spark entrepreneurship that would make the city the region's tech hub. While the big global companies have set up offices in most of the countries of the region, the success stories of start-ups have been few and far between.

Though no firm numbers are available, Todd McGregor, managing director of Forrester Research - Middle East, which provides technology research and consultation, says there are not more than eight to 10 successful start-ups that have come up with innovative service models unique to the region. And that falls far short of the rhetoric revolving around the region's promise.

The very few private equity funds dedicated to technology have acquired stakes in some of these successful start-ups which have grown as a result, but as yet no IPOs have seen the light of the day.

Some of the region's successful start-ups include Dubizzle.com, Ducont, Comguard, TrackIT Solutions - all in Dubai -a nd Maktoob.com and Rubicon, both based in Amman, Jordan.

It's timely to ask why the region has seen very few successes and also why it has not been able to come close to exhibiting the same kind of entrepreneurial spirit as Silicon Valley in the United States?

What is lacking here? Is it funding, research and development in the science and technology departments of universities, protection of intellectual property rights or greater governmental support for early stage start-ups, or failing to cater to the unique needs of the region?

Experts feel it's a combination of all these factors - the missing linkages of all concerned stakeholders - that has contributed to the lacklustre performance.

A critical piece is the availability of funds. Most of the local start-ups were launched with money from family and friends. Very little help came from private investors. There was no venture capital available, domestically or from abroad. Today, the scene has improved marginally with the arrival of a few capital funds dedicated to technology. However, early-stage investment, the so-called seed capital, is still hard to come by.

"It was a challenge with the lack of venture capital out there," said Sim Whatley, co-founder and managing partner of Dubizzle.com, an online forum which caters to the various needs - property, cars, jobs, cultural events - of the expatriate community of the region.

"Here it's not like in the US where companies are willing to put up between $4 million and $40 million. Therefore you have to have a concrete revenue stream immediately, which is difficult. And then if you are looking at a region that has enough people with specific needs, you do not necessarily have advertisers willing to pay for that audience."

Later-stage financing can also be difficult to garner for some.

Track IT Solutions, a start-up that offers RFID (radio frequency identification) technology to Gulf companies, has been growing at a rate of 50 per cent a year in both turnover and profits since it was launched in August 2004.

The Dubai chapter of The Indus Entrepreneurs (TiE), a global network of professionals and investors, gave Somasekhar Vedantam, Track IT's CEO, the opportunity to take his business plan to prospective investors.

With an expected growth of 100 per cent in the coming year, Vedantam says the biggest challenge he now faces is getting funding from the right kind of investors for the next phase of growth. The company plans to scale up its operations to not only provide services but also to manufacture quality products locally.

"Though the appetite of the majority of investors in this region is not oriented towards long-term value creation, lately there are many investors who are looking to invest in qualified ventures," Vedantam added. "The problem is there is no formal platform that brings the two together -that's a huge gap."

Rami Bazzi, fund manager of Injazat Technology Fund which has acquired stakes in Ducont (a mobile messaging start-up in Dubai) and Rubicon, (start-up in the area of animation in Jordan), agrees.

"Private equity funds are a recent phenomenon in the region and are focussed on specific sectors. Most of them cater to the real estate or projects, which have a real estate component. Technology is neither easy to understand nor manage," he says.

"Understanding technology and the drivers of technology means more about managing these companies, growing them and helping them become a more structured entity. And for that you need the right team in place - people who have the expertise and experience to guide a start-up to make it successful."

He, however, believes that the bitter recent experience at the region's stock markets is starting to bring about a change in investment philosophy.

"That this short-term investment to get quick returns is not sustainable and there is another asset class that is more long term and based on fundamentals that can achieve stable returns one is looking for."

Forrester Research's McGregor sees a role for the local governments in providing monetary incentives for early-stage investments. "Like in many Western countries, they could provide grants to the start-ups that would offset some of the initial set-up costs."

Just giving a 100 per cent ownership office space is not enough, says Vedantam. "Do I get a concession in importing equipment? No. Today, if I want to set up a factory here it's a very expensive proposition. Land should be offered at concessional rates," he adds.

Maktoob.com (maktoob means "message" in Arabic), considered an Arab equivalent of Yahoo and one of the apparently profitable start-ups in the region Dubai's Abraaj Capital acquired a 40 per cent stake in 2005 - saw there was a demand for broad Arabic content (email, chat forum, media, e-commerce) that has been growing over the past few years.

Broadband connection is expensive and internet penetration is still low in the region, restricting the growth of on-line users. But today Maktoob with the right content has around four million users.

"We have people from provincial areas going online," said Ahmad Nassef, vice-president, Maktoob Group. "There is a problem with funding obviously, but it's also a matter of providing good quality content and good quality services and tools that people deserve in this region in Arabic. That's the real challenge."

It's the US, particularly Silicon Valley and Boston, that has seen the most successful tech start-ups and attracted the majority of venture capital in the field. The ingredients of success include a strong cultural bias towards research and advancement of technology through universities and institutions, with strong financial back-up and the ability to get products into the mass market.

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Sadly, experts say all three of these ingredients are lacking here. This, however, does not mean that there have been no failures in the US. In fact, there have been - perhaps- hundreds of instances where venture capitalists have lost money investing in start-ups.

"I think one of the challenges here is to basically create awareness of the value of research and development to society in general and the economy," says Habib Talhami, head of informatics at the British University in Dubai.

"Is it simply that we lack the research, that we lack the people who would be able to translate the research into reality? No. It's the mentality that still exists in society that we can make money the quick way through real estate, finance etc," says Talhami.

"The region has not had a tradition of innovation. And it's very hard to get that work that's being done in some of the universities here to transfer over to the commercial sector. Yes, venture capital is a big factor, but so is credibility in terms of what we [as researchers] can deliver."

The linkage between investors and educational institutions is important, Bazzi of Injazat Capital says. "Research and development - it's where innovation comes from and the government has to do a lot here. A lot of money has to come from the government in terms of national programmes, training, etc."

However, observers feel that the government could do more to encourage the entrepreneurial climate. They point to the lack of openness in the UAE, in terms of labour laws, especially having the right to hire and fire. The current labour law only allows an expatriate worker to work for the sponsor only. Changing employers may expose the worker to a six-month work ban, which restricts labour mobility.

Additionally, the protection of intellectual property rights, an important aspect in technology, needs to be firmly secured. Though steps have been taken to enforce laws to eliminate copyright violations and piracies, it still has a long way to go before achieving international standards.

With such impediments not going to be resolved overnight, it may be a while before countries of this region achieve entrepreneurship goals.

"It's a cultural thing: right from the incubation of an idea to getting the product in the market. It takes time. Though we have been slow, I think we are now heading in the right direction," Injazat's Bazzi says.