Just Capital: Seed Funding in Jordan

 Just Capital

This article first appeared in the Summer 2010 issue of The Explorer, Aramex's thought-leadership magazine that investigates issues critical to businesses, communities and the planet.

 

By Bilal Hijjawi

Over the last 20 years, hundreds of billions of dollars from Arab sources poured into domestic and global investments. Barely a fraction of those funds, however, has been allocated to seeding business start-ups, and what little private equity that was invested in growth stage companies went to opportunities that already had proven revenue streams – namely mid-stage or late-stage ventures. The bulk of investment financed real estate, infrastructure and big industry projects, many of which are today under-performing assets as a result of the global economic downturn. According to Accelerator Technologies Holdings (ATH), a venture capital firm, there is a subsequent “canyon of death” in growth-stage financing for Arab tech companies. Dr Usama Fayyad, a former Yahoo executive, adds, “there is no source for seed capital yet” and calls this stage in the entrepreneurship ecosystem a “desert”.

Dubai International Capital did try to cross that desert in 2009 when it launched ABAN, one of the first Arab funds to seed start-ups. But it was a casualty of the Emirates’ real estate misfortunes and no other funds have emerged to fill its void. A few have tried to invest in start-ups, says Fayyad, but often “quickly migrate to investing in later stage ventures”. He sees the very low-risk appetite among Middle Eastern investors behind the lack of interest in early stage ventures. Most investors will accept the lower but more secure returns of late growth stage ventures.

The significance of this investment landscape for Middle Eastern start-ups is considerable. Historically, venture capital is the principal reason the great entrepreneurs of the world have been able to turn their innovations into sweeping commercial successes. The colossal market presence of Microsoft, Google, Apple, Amazon, Ebay, Yahoo and thousands of other brands owe their very existence to venture capital funding. In fact, at more than $700 billion in combined market capitalization, Microsoft, Google, Apple, Amazon, Yahoo and Ebay represent more than half the GDP of the oil-producing Arabian Gulf nations. Their combined total revenues for 2009 are estimated at about $170 billion.

In Jordan, a country with no oil or energy resources to rely on, the environment is especially ripe for seed-stage funding. Emile Cubeisy of IV Holdings, an investment subsidiary of ATH in Amman, believes the future belongs to daring venture capitalists that invest in start-ups. The ability to say “yes” to new enterprises will, he believes, separate the men from the boys in the next phase of venture capitalism. Regional investors who once were solely focused on large private equity deals will eventually realise the “much higher potential” returns on investment in start-ups and early stage ventures.

Changing lanes

It’s a funding revolution that, sadly, might come too late for some of Jordan’s entrepreneurs. “It’s sad, really sad, to see how many great new ideas by Arab entrepreneurs wilt and die from the lack of funding,” says Bahjat Homsi, the creator of a website focused on startups and SMEs. “I wasted a lot of time and money on trying to secure funding from investors who were excited about the project, but not serious about putting up the capital… this was draining my energy.”

Homsi spent three years trying to pursue his dream venture, and was in the final stage of negotiations with ABAN when the financial crisis cut the funding supply. It persuaded him to change his business completely. “I actually developed a totally new idea,” he says. “I decided there was a way to monetise my previous frustration and created Sindibad Connect, which seeks to solve some of the problems I faced by linking diehard entrepreneurs to serious investors.” Through a partnership with Zawya.com, a successful business that is also the result of solid entrepreneurship, Homsi’s Sindibad Connect is finally ready for take-off.

Emile Cubeisy calls such tenacity and perseverance towards realising ideas “the most important internal factor” in entrepreneurship. While Cubeisy admits that similar conviction isn’t as strong as it should be among young Jordanian entrepreneurs, he sees this changing gradually over time. For instance, when IV Holdings was launched in April 2008, it received only three venture proposals a month, while today “it’s a deal a day”. “Jordan,” he says, “has entered a tipping point in entrepreneurship.” 

Cubeisy also sees entrepreneurs’ willingness to shift lanes midstream and adapting to that change as another key internal factor that leads to success. “Entrepreneurs have to be honest with themselves,” he says. “They need to be able to fully assess the business concept in a commercially viable way. This requires perspective, exposure, tossing ideas around and being receptive to feedback and then adjusting to it.

“Many entrepreneurs would launch their ideas and start to move down the road less travelled but then return back to the road most travelled when facing early adversity to their ideas – they go back to seeking security in a normal job.”

Change in entrepreneurial culture is also impacted by external factors, which are equally important. Aside from the great difficulties entrepreneurs face when looking for start-up capital, “validation” is an important step towards building a stronger conviction among entrepreneurs. In Jordan, business plan competitions are being proposed and launched, creating an awareness in the investor community that there’s a flow of entrepreneurial ideas and energy. Cubeisy also wants to see the media playing a big role in validating the efforts of entrepreneurs and the organisations that nurture and support them.

Is cash always king?

Funding, though the main locomotive of entrepreneurship, doesn’t necessarily mean that a mountain of capital is needed to make a difference. After all, Maktoob, which was later sold to Yahoo for over $150 million, was set up on a shoestring budget. In ATH’s AcceleratorTech fund, a country such as Jordan is described as an ideal low-cost base for launching new ventures. The overview cites Jordan as a “low cash-burn innovation environment” that offers technology-savvy and cutting edge solutions that are universal in their value proposition.

As one of the judges at the Queen Rania Entrepreneurship Competition, Dr Usama Fayyad expressed surprise at seeing so many good ideas and business plans generated by young Jordanians. “If these same ideas and business plans were pitched in Silicon Valley, they’d surely be able to raise funding.” He adds that he now is confident that Jordan has a tech-savvy core community keen on developing ideas in cyberspace and new technology. “There’s also enough motivation to work hard at ideas; what’s missing is the ability to find start-up capital.” 

In Jordan, the desire for an active SME base goes all the way to the top. King Abudllah II has championed the cause of Jordanian entrepreneurs and the potential of the private sector; a recent initiative from the King centres on kick-starting the efforts of germinating a more nurturing and practical ecosystem for entrepreneurship.

After a meeting with King Abdullah, a group of progressive entrepreneurs set up Oasis 500, a programme to train future entrepreneurs and seed their ideas. “The King wants to capitalise on the next generation,” says Fayyad, who heads the programme. “We met and brainstormed and came out with a decision that we need to create a culture change and we want to do that by setting examples, not through slogans.”

If everything goes as planned, Fayyad hopes Oasis-500 will eventually fund 500 new start-ups. Through it, he adds, entrepreneurs would be given the challenge of moving from boot camp to market.

Cubeisy also sees positives in the cohesion of society in the Middle East, especially places like Jordan, with little in the way of sectarian or cultural divides. “Every Jordanian is clear about the vision of the country and wants a role to play,” he says. Cubeisy is encouraged by projects such as the New Think Theatre, which is championed by Maher Kaddoura and managed by a group of young ambitious Jordanians. Kaddourra is also behind the Start Alliance, a Rotary-like foundation for promoting the emergence of a culture of entrepreneurship. It’s all part of creating a “can do” climate – all helped, of course, by the much-heralded successes of Hussam Khouri and Samih Toukan, the founders of Maktoob.

“There’s a realisation that a gap in the entrepreneurship ecosystem exists,” says Cubeisy. “But the solution is not in ideas or programmes, but in a will to turn ideas into successes.”

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