The first billion dollar valuation is a case of when, not if, for tech startups in the Middle East.
A small band of Middle Eastern technology startups are racing to become the region’s first ‘unicorn’—a Silicon Valley term given to companies that have broken through the $1 billion valuation mark.
Research into the intricacies of San Francisco’s tech cradle reveals that just 0.07% of venture-backed tech companies will go on to achieve a $1 billion valuation. However, Dany Farha, Chief Executive of Dubai-based VC firm BECO Capital, is adamant that the realization of a billion-dollar valuation in the Middle East is not just inevitable but possibly already amongst us. Online retailer souq.com, speculates the CEO, may already be a member of that rarefied unicorn club.
“The rumor mill suggests that souq.com, who are the Amazon of the Middle East, are already there—but I can’t confirm that,” says the chief exec from his Dubai office. “Given the sheer size of that company, and the sheer size of the markets and consumers that they are able to cover, they are most likely to crack [the billion dollar valuation] first.”
Other potential $1 billion startups on Farha’s Middle East hot list include Property Finder (property portal); Bayt.com (jobs and recruitment); Talabaat (online food delivery), Dubizzle (online classifieds); MarkaVIP (online shopping); Careem (ride-hailing app) and sellanycar.com (automotive sales platform).
BECO Capital has been meticulous and painstaking in its gathering and tracking of data on the regional tech ecosystem since the investment firm opened its doors in 2012. Farha pores over those historical figures and, without any doubt in his voice, declares: “We are experiencing a tech boom in the Middle East, and it started last year.”
He points out that around half of the region’s top 10 tech startups, which harbor realistic unicorn ambitions, did not even exist five years ago. “Today,” Farha says, “this group of 10 or so leading companies employs 3,000 workers, are probably worth collectively $3 billion and are growing on average around 100% year-on-year.”
It is not just the deal flow of prospective startups that seek funding from BECO that is on the up. The quality of founders, ideas, pitch decks, business plans, and financial modeling has also increased significantly over the last 24 months, reckons Farha. “2015 has started in such a way that if deal flow continues with the numbers we are seeing right now then it will equal 2012, 2013 and 2014 put together. The growth is exponential.”
BECO Capital’s CEO theorizes that the tech ecosystem across the Gulf, Egypt, Lebanon and Morocco is destined to become the next economic block to benefit from global investors in search of new growth markets, value investments and lucrative exits. India’s tech sector, which in 2014 soaked up around 80% of the world’s emerging market venture capital dollars according to BECO data, is right now a hotbed of investment, and Farha sees parallels between the Middle East and its large eastern neighbor.
There are tipping points in markets which tech investors are ever vigilant of, he explains. These primary drivers are the number of people in a region getting connected and online, the penetration of smart phones across that population and the rise and potential for ecommerce across that user base. “We believe MENA is about 3-5 years behind India,’ says Farha, who highlights the nature of earlier tech boom cycles in North America, Europe, China and South East Asia. “India will have its moment and, as it matures, those investment dollars will look for the next emerging market.”
There are around 100 million people online in the Gulf, Egypt, Lebanon and Morocco, and the GCC (namely the UAE, Saudi and Qatar) has some of the world’s leading smart phone penetration rates per capita. Add a burgeoning e-commerce market, currently valued around $15 billion, according to a 2014 Payfort report, inside of one of the world’s most affluent economic blocks and the Middle East tech sector looks ready for lift off. “There is significant value to be unlocked in this region,” states Farha.
In February, Germany’s Rocket International acquired Kuwaiti online food delivery service Talabaat for $170 million, which made it the Middle East’s biggest tech deal since Yahoo! purchased Maktoob for $165 million in 2009. In hindsight, the Maktoob acquisition, though indeed a landmark moment, had heralded something of a false dawn in Arab tech circles.
Rather than sparking a tech gold rush, the ecosystem instead continued to develop steadily. Incubators, accelerators and co-working spaces popped up and bloomed across the region, while online businesses grew in terms of traffic and promise but without the headline exits. In between the Maktoob and Talabaat deals, there were few meaningful acquisitions of the kind to enshrine themselves in tech folklore that is told and retold by ambitious entrepreneurs in shisha cafes across the region.
Nevertheless, Farha believes Rocket International’s move for Talabaat is yet another strong indicator that the region’s tech sector is set to enter a period of exciting growth over the next decade. He reveals that many local startups that have a relationship with BECO are often in discussion with international VC funds, and they are also being tapped and targeted by larger foreign tech companies that want to see them scale to a size which would open the door for a potential acquisition.
There is a common misperception, says Farha, that tech startups don’t generate revenue—that they just build traffic and a user base which has the potential be monetized. “Quite the contrary,” shrugs the chief executive, “about 60% of the opportunities that BECO has seen over the last four years have been revenue generating, and about 20% were close to break-even or profitable—which is really quite something.”
Hot tech trends, as far as BECO investment dollars are concerned, are ideas and technologies that create online marketplaces. “Look at classifieds and a property like Craig’s List,” says Farha. “You see all those horizontals and categories, and it runs into the hundreds. We think there is so much room for entrepreneurs to build great marketplaces.”
The entertainment sector is also undergoing aggressive activity and growth at the moment, indicates the CEO, as too is the number of people knocking on BECO’s door armed with business plans that solve problems around enterprise services and food and beverage. “There are a lot of people out there in this region who are waking up and deciding to join the ranks of tech entrepreneurs. The snowball effect is very important,” he says.
So what can all these would-be Mark Zuckerburgs learn from studies that examine the DNA of Silicon Valley’s unicorns? Well, aside from the magnitude of the challenge—a 2013 study by California-based seed fund Cowboy Ventures indicates only one in every 1,538 venture-backed startups will achieve a billion dollar valuation—the average age of a successful unicorn founder is 34. He or she is also typically one of three co-founders—one of whom will have had lots of startup and tech experience. And it’s worth noting that consumer-oriented startups (Facebook, Google etc.) are more likely than enterprise ventures (Workday, Box) to join the unicorn club. Enterprise businesses, however, will typically deliver more value per dollar invested.
“There is a clear path to creating billion dollar technology companies,” says Farha. “This part of the world is no different, and there’s a group here who are well on their way.”