The evolution of tech startups in MENA [Opinion]

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The growth of an ecosystem
Watching an ecosystem grow. (Image via Miami Herald)

In much of the world, being a technology startup is a very ‘cool’ pursuit.

The storied successes of Bill Gates and Steve Jobs are legend, and more recently Mark Zuckerberg, Jan Koum, Kevin Systrom, and Travis Kalanick come to mind. Terrific stories, of how companies like Facebook, WhatsApp, Instagram, and Uber became the companies we know today, abound.

So, how have technology startups evolved in the the Middle East and North Africa?

This part of the world is steeped in a trading culture, a natural petri dish for entrepreneurs. In a world being eaten by software, it helps to define what a startup is in the emerging market context, versus the developed markets of the US and Europe, and the supporting ecosystem required for technology startups to flourish.

Technology startups in MENA generally gravitate towards service-based ideas, niche applications for content localization, automated food ordering and delivery.

These can be good businesses that create an ‘income substitution’ opportunity for the entrepreneur, diminish dependence on government employment, and shines a light for other aspiring entrepreneurs. All these startups tend to focus on the immediate domestic market within their county and don’t easily scale beyond the region.

Scalable growth whether regional or global, requires the entrepreneur to have access to a rich pool of technical talent, a liberal statutory climate that supports business formation and intellectual property protection, access to mentors and angel investors, and ultimately access to venture capital and corporate partners.

In the immediate term, government sponsored financing programs that provide full service coworking facilities, public service messaging to encourage entrepreneurial risk taking, and skills development (incubator/accelerator) programs will establish a baseline of services and training to support the early stage entrepreneur.

Let’s examine a few of the key areas needed to support and sustain a startup ecosystem.

1. Cultural adjustments

Risk - Technology startups are high risk ventures.

Risk tends to be perceived very differently in the MENA region, where the nobility in trying hard, failing fast, and learning from the experience is not highly valued.

Familial pressure to secure a ‘proper job’ in finance, oil, or government is ever present. Failure is shameful to the individual, the immediate family, and impacts how the person is perceived in the public eye.

Adjusting this behavior is critical to support a sustainable ecosystem.

Local successes Every community needs their local success.

Someone who embodies the entrepreneurial spirit and can be the community anchor to show what smart risk taking, hard work, and innovation can yield.

Companies such as Maktoob, Talabat, and Yemeksepeti represent what is possible for locally founded startups that are later acquired for impactful returns.

Equity ownership Giving up equity can be a tender and cautious topic in MENA.

Loans from family, and trusted friends are common, but may not scale to meet the financing requirements of a fast growing company. Equity sold to an external investor is not a common practice, nor is the calculation of equity value for a young startup with an insufficient history of positive cash flows.

Imparting this knowledge is needed in order to tap alternative sources of capital.

Closed communication – Sharing an idea can be an unnerving proposition for fear that someone will steal it.

In technology, secretive approaches are inefficient and do not make for high collaboration. Highly collaborative environments lead to the greatest and fastest forms of innovation, and besides, rarely can a pilfered idea bring with it the passion, and determination of the originating entrepreneur.

2. How to support the entrepreneurial ecosystem

Statutory Bureaucracy is an impediment to all startups.

Examples include the lengthy period to incorporate a legal entity, cost to capitalize a business, insufficient intellectual property protection, to name a few. They need to be dramatically simplified and made more effective.

Innovation inevitably has some ideas that are too early, or not sufficiently developed that will fail. Bankruptcy and insolvency regulations must improve to allow the quick and painless shuttering of non-performing companies.

Technical talent Brain power fuels the technology startup and includes expertise in UX/UI (front-end) design, back-end development, software architecture, and quality assurance. This is in addition to customer service, product management, marketing, and sales. These skills need to be developed locally, or imported to support the growth and health of the ecosystem.

Access to capital For the technology entrepreneur, angel investors and venture capital are the rocket fuel for growth.

Attracting professional investment will demand that the entrepreneur execute at scale in a large enough market to generate the kind of returns usually associated with equity investments.

In the interim, government programs to jumpstart the investment process will be critical. In time, other professional investors will enter the market to participate.

The emerging ecosystem in MENA and the Levant holds significant potential

Solid traction depends on what steps governments will take to encourage that potential. Cutting red tape, STEM education, incubators, accelerators, and seed capital are all required first steps. It’s all the entrepreneur needs to flourish and create a vibrant ecosystem.

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