Thoughts About Venture Capital Model In Arabia

Thoughts About Venture Capital Model In Arabia

My dear friend, and ex-colleague at N2V, @mrarrabi has published some thoughts on Wamda titled: “Is Venture Capital the right investment model for startups in the Arab world?”. Here is my feedback, hoping to start a constructive conversation about this with some others as well.

Arrabi was wondering if the international VC/Startups model would work in Arabia or not, and that we should focus more on copying successful business models locally to reduce the risk.

For me, I think the VC model in USA is currently in crises, lower returns, lots of inefficiencies, and less innovation. VCs invest in disruptive technologies and they couldn’t disrupt their own industry. So we have to find our own ways to attract capital to our startups.

At the same time, inspired by Steve Blank, I always differentiate between Startups and SMEs. Startups are companies who are looking for a new business model, while SMEs are companies who execute an existing and proven business model.

In that sense, I think that clones or copycats are not really startups, they are SMEs, working on optimizing or customizing proven models to fit a local environment,

which is still good, but I have two questions here:

One: Would this approach attract big capital from around the world to invest in Arab Startups?!

The answer would be yes in a big market that is actually one country! Russia or Brazil for example, and soon I guess Turkey. But not the highly fragmented market of Arabia! Theoretically, Saudi and Egypt have a big chance because of the size of their markets, but legal structure is always a big challenge in Saudi, and low purchasing power is another big challenge in Egypt.

If local logistics and local payment are not needed, then why be a local company anyway, this can be a global company from day one, however, competition will be huge as Arab users are becoming global users too using feedly, dropbox, instagram, whatsapp, pocket, flipboard, foursquare, twitter, facebook, g+, etc… So startups must be really good to compete on such a level, which I believe is doable, Woopra from Beirut, MXD, Dakwak and Glanse from Amman and many others did that.

To be more realistic, I think we better off focusing on “Global Startups That Are Locally Inspired!”.

Enwani from Jeddah is a good example for this, they are creating a new innovative address system that will enhance the overall e-commerce and logistics experience everywhere not only in Arabia. But the idea was reached after struggling with the lack of reliable address systems in Arabia. Now they have 10s of thousands of users in Saudi, and expanding.

Two: Would this mean that we are moving towards an innovative replacement to the traditional VC model?

Not yet, exits are still really tough. But why not?!

Why to assume that startups should always be acquired by established companies? Why not to go IPO in a new way?! I know of some super crazy people who are trying to create a new stock exchange for Arab Tech companies with less requirements and easier listing process.

On the other hand, Crowd-Investing is picking up in Arabia with Eureeca in Dubai, a great attempts to find legal workarounds to enable entrepreneurs to raise capital from the crowd.

Think about Crowd-Pre-Selling too as a great way to bootstrap and scale even before launching your product! A good example is Presella in Beirut.

My point is that we need to innovate more instead of only imitate. Not easy, I know, it’s easier said than done, but fortunately, some crazy people are trying :-)