FORBES MIDDLE EAST

INVESTING
TECHNOLOGY
V
enture capital is not an
asset class: we hear that
a lot from the critics. Its
what people say when
they want to warn investors that ven-
ture investing is a slow, risky process
where only a few people win. Two
years ago, a hotly-debated report by
the US-based non-profit organization,
the Kauffman Foundation, claimed
that the model was broken. Too many
Limited Partners (LP), stated the re-
port, invest too much capital in un-
derperforming Venture Capital (VC)
funds and on misaligned terms. To
Kauffman and others, the outlook on
venture investing is bleak, but despite
the gloomy predictions, hopeful inves-
tors with dollar signs in their eyes are
jumping into the venture capital game
with increasing propensity.
And its not just the bankers and
tech demigods that are running VC
funds anymore. NBA players, teenage
pop stars, and trust fund babies are all
trying their hand at this once-again
sexy opportunity to win big (or not).
With more money pouring into venture
investment than ever before ($33 bil-
lion in the US market so far this year),
we have to wonder if we are in the same
kind of bubble that sent Silicon Valley
scrambling in 2001.
Venture capital brings together
three main players: the limited partner
(rich investor Joe), the general partner
(venture fund with boring name), and
the startup (Stanford drop-out). The
way it works is that the first two guys
try to make a quick buck while the
third one puts in all the hard work. In
todays market, all three may be caught
in a tech bubble on the brink of burst-
ing. Lets take a look at whether or not
this is true and how it affects us in the
Middle East.
The New Landscape
The numbers surrounding venture capi-
tal and tech startups are reaching levels
last seen during the late 90s and early
2000s. Venture capital and angel invest-
ing database, CB Insights, reports that
in Q1 2014, VC funding totaled almost
$10 billion [globally]...This was the most
since Q2 2001 during the now infamous
dot com boom. Although mildly alarm-
ing for investors, this is great news for
entrepreneurs, who will now find it eas-
ier than ever to secure seed stage financ-
ing for their startup.
Anyone in the MENA region with an
inkling of entrepreneurial interest should
give it a shot, especially as Arab culture
becomes increasingly comfortable with
early, smart failures. There is little down-
side risk and potentially big payouts for
those willing to take the plunge.
All You Need to Know About
the Middle Eastern Tech Bubble
The world may be heading for a double bubble for tech investing, but with
venture capital in its infancy across the region, its just the beginning for the
Middle East and North Africa.
By Robert Carroll
Anyone in the MENA
region with an inkling
of entrepreneurial
interest should give
it a shot, especially
as Arab culture
becomes increasingly
comfortable with early,
smart failures
62 FORBES MIDDLE EAST OCTOBER 2014
Some venture capitalists like the
loud-mouthed, LA-based fund man-
ager Mark Suster do not believe we are
in a bubble. He argues that although
current levels of funding look frothy,
startups are operating in a completely
different landscape than they were 14
years ago. For example, there are 50
times more internet users than in 2001,
most of whom have credit cards on file
and are very comfortable with making
online purchases.
Further, smartphones have allowed
much of the world population to be
connected to the internet 24/7. In the
Middle East, several countries have
reached a 200% smartphone penetra-
tion rate due to consumers carrying
two or more phones. We never would
have imagined this kind of connectivity
in 2001.
Avoiding The Valuation Trap
Regardless of positive developments,
investors should be cautious. A big con-
cern of bubble prophets is that valua-
tions of late stage companies are unjus-
tifiably high, with more consumer tech
companies valued at over $1 billion
today than actual $1 billion consumer
tech exits in the last 10 years, accord-
ing to CB Insights. This seems to be a
problem faced by US-based companies,
but not yet for companies based in the
MENA region.
What is happening in the US is that
once investors see a clear winner (like
ridesharing service, Uber), everyone
wants to join the party. More cash gets
injected, valuations skyrocket, and all
of a sudden a small startup turns into
a privately-owned behemoth. Uber may
or may not be worth its $17 billion val-
uation, but only time will tell.
In the Middle East, its more difficult
for us to know a good deal when we see
one. Given our short history of startup
investing, we dont yet know what will
work in our region. As a venture inves-
tor at Oasis500 in Amman, Jordan, my
concern is that the scarcity of good deals
in the MENA region will cause investors
to bandwagon like they do in the US,
but on mediocre companies.
Investing Early and Heavily
We dont have the luxury of hindsight,
so it would be wise to be more conserva-
tive. Our best strategy moving forward
is to keep investments at Seed or Series
A levels as long as possible, until we see
an obviously successful startup, as mea-
sured in terms of user base and revenue
growth. I think smart investors in the
MENA region will invest heavily at an
early stage, nurture their portfolios, and
stand up with the top performers in sub-
sequent rounds of funding to maintain
pro rata shares. Dumb investors will in-
vest at a later stage, jump on bandwagons
and drive up valuations on popular but
unproven startups.
We saw this work well with MarkaVIP.
com, a flash sale e-commerce site based in
Amman. Founder Ahmed Alkhatib kept
it a lean, small startup until he could cap-
ture a large customer segment and gener-
ate lots of revenue. Then he brought in the
big gun investors.
Are we in a global bubble for tech
investing? Maybe. Are we in a bubble
in the Middle East? I doubt it. Venture
capital is still a very new asset class in our
region and has yet to draw the attention
of most investors away from traditional
investing. That will certainly change as
venture investing becomes more and
more popular, and if we move forward
with caution, I think we have a bright fu-
ture ahead of us.
W
E
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T
E

S
C
R
E
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N

S
H
O
T
S
In the Middle East, its
more difcult for us to
know a good deal when
we see one. Given our
short history of startup
investing, we dont yet
know what will work in
our region
OCTOBER 2014 FORBES MIDDLE EAST 63