The Curse of “Imitate then Innovate” In MENA VCs Mindset

The Curse of “Imitate then Innovate” In MENA VCs Mindset

Lets get back to the basics, what’s the job of a VC? It’s basically getting high returns to LPs, right? I mean VCs are paid to manage LPs money by investing it startups, helping them grow, then exiting through IPOs or acquisitions.

Because it’s hard to get a tech company listed in any of the regional stock markets, we, VCs, gave up on that, and focused only on acquisitions. This is honestly a big problem, because if we all as VCs can’t get any company listed, then I think we’re doing something wrong! We can’t always blame the regulators for this. I mean we’ve been investing in startups for more than 10–15 years now! Not a single regional tech IPO!

But anyway, let’s talk about exits via acquisitions, because I also believe we’re doing it wrong! Over the past 15 years of investing, MENA VCs collectively had around 10 exits! We’re always frustrated about not having enough exits. And because we’re always good, we must find someone to blame, and this case, it’s the founders. We blame them for not creating exit-able startups. But I believe we as VCs, are a big part of the problem, how?

In the US, a lot of the successfully funded and acquired startups are started by ex-Cisco, ex-Intel, ex-Paypal, ex-Google, ex-MicroSoft. Why? Among a bunch of other valid reasons, there is a very important one that we usually underestimate, which is what I call: “Corporate Needs”.

People who work at those companies get insights from uses/clients/partners on current trends, then because they are entrepreneurial enough, they predict the future trends that the corporate is not seeing, or discover a gap or problem or a need that the corporation is not willing to waste time and resourced to fill or solve because they think is not worth it. -So they quit, create innovative technologies to catch that wave for the new trend (that they only can see), or to solve that problem (that they only can see). Their motives might be to create a legacy, or change the world, or challenge the status quo, etc…

On the other hand, you see those US VCs who are also entrepreneurial enough to see and invest in the visions of those futuristic founders. But their motives will usually be getting high returns in the future because they see this as either a successful IPO, or a future “corporate need”, i.e., a potential acquisition.

US VCs also care about having relations with corporates as much as with entrepreneurs to learn more about what would be their future tech needs or current market gaps they need to fill. i.e., potential acquisition areas.

For us in MENA, we as VCs don’t have that luxury of having ex-Google, ex-Intel, etc… So we have three main options: One, invest in regional startups (targeting the regional markets). Two, invest in global startups that are locally born (started in MENA but targeting the global market). Three, invest in international startups (outside MENA).

Most of MENA VCs (if not all), chose the first option. But instead of looking at the local or regional “corporate needs”, we encouraged founders to start clones of successful startups in the US, under the “imitate then innovate” tagline, then we keep hoping that when the cloned startups expand to emerging markets, they will acquire their local clones.

In other words, we invest in clones to be acquired by startups (who have limited capital), while in the US, VCs invest in innovating/disrupting startups to be acquired by corporates (with big money).

That worked for us for a while, and might still work for few years to come, but as the innovation in online customer acquisition evolves, it will soon threaten this dream in Consumer web as well as in Enterprise web. For example, Uber, Airbnb, Amazon, and many others are serving consumers in MENA, and on the other hand you see MailChimp, AppAnnie, DropBox and many others are also serving business clients in MENA.

The “Imitate then Innovate” thesis resulted in few big acquisitions, yes, I agree, but I think if we have not solely focused on this strategy, we might have seen much much more local/regional exits. If we have innovated and encouraged founders to innovate over the last 10 years (and still get inspiration from international successful startups), we would have had a much evolved VC and Startup ecosystem.

For many years, I listened to VCs in several events repeat the same message over and over again, “Imitate then Innovate”, until I stopped seeing true innovative startups anymore in MENA. We better find a new investment thesis before the model of “acquiring local copies” vanishes for good!

If we can’t “innovate” new technologies now, then instead of “imitating” we can at least “learn” from successful US companies the big abstract simple lessons. For example: we can think about new ways to apply technology to traditional industries to disrupt them just like what Uber did to the transportation industry, and what Airbnb did to the hospitality industry. I am not saying we should start Uber of MENA or Airbnb of MENA, I am saying we can adopt the same way of thinking, but find our own hot local traditional market that needs tech disruption the most and focus on it, with local/regional conglomerates in mind as potential acquirers (not international startups!).

I believe we should start looking at local/regional corporates in all industries and dig deeper to discover their future tech needs or current gaps, and then encourage founders to solve those problems by applying technology to non-tech industries.

If we do that, I guess we will be better in managing our LPs money, help in creating more successful entrepreneurs, and making good money for ourselves as well. Everybody wins.