Majd Zghyer is the strategy officer at uMake, an entrepreneurship support organisation (ESO) based in Ramallah, Palestine.
So far this year, startups across the Middle East and North Africa (Mena) have raised over a $1 billion in investment, a record-breaking amount for the regional ecosystem. Most of the investment in the region however, is concentrated in the three biggest hubs – the UAE, Saudi Arabia and Egypt. Out of the 249 startups that raised investment in the first half of this year, just one of them was Palestinian (Kenz).
The funding gap becomes more insurmountable when compared with the mere $150 million that Palestine-based startups have raised – not over the span of a calendar year but to date – based on data published by the International Conference on Entrepreneurship in Palestine (ICEP).
There is no doubt that Palestine is facing existential challenges due to long years of restrictions imposed by the Israeli occupation - the big elephant in the room. I should also be clear that the aim of the comparison here is not to deny facts and context but rather to put things in perspective so we can acknowledge the current state of startup funding in Palestine and explore ways to address gaps and unlock opportunities.
A fragmented donor-funded ecosystem
Palestine’s long history of struggle against occupation and injustice has directly affected its development trajectory and created a long list of obstacles that continue to impede unlocking the true potential of its talented people. An overview of the recent available macroeconomic data published by the World Bank (WB) can reveal some of the features that characterise the Palestinian economy. Frankly, given its structural deficiencies, the Palestinian economy is still largely dependent on donor funding from foreign governments and international institutions. According to official data published by the World Bank, Palestine received $2.2 billion in net Official Development Assistance (ODA) in 2019. Not surprisingly, this figure represented more than 13 per cent of the Palestinian gross domestic product (GDP) - which was estimated at $16 billion for the same year. On the other hand, Palestine attracted $122 million as total foreign direct investment (FDI) throughout 2019 which represented a meagre 0.7 per cent of Palestinian GDP. This very low level of FDI inflows indicates that Palestine is not seen as an attractive investment destination by traditional pools of capital, let alone by VC funds and tech startup investors.
More importantly, the enormous gap between FDI and ODA should give us a clear indication of how much Palestine is experiencing “donor-dependency” while also suffering when it comes to attracting private investments. It is worth noting that while I don’t doubt the good intentions of international donors nor the effectiveness of foreign aid, I strongly believe that addressing many of Palestine’s developmental challenges requires a new approach. Yes, donor funding has enabled Palestinians to build an institutional foundation for their long-awaited future state and helped address social and economic challenges here and there. For example, in May 2021 the WB approved a new US$30 million Development Policy Grant (DPG) to support the digital foundations of the Palestinian economy, strengthen recovery and resilience post Covid-19, and improve governance and transparency in the public sector. Yet, when it comes to building an innovation-based economy and a robust startup ecosystem, a completely different approach is urgently needed. With youth unemployment rates still exceeding 40 per cent, it’s time to move beyond the conventional narrative of philanthropy and endorse a transformative approach that rewards hard work, talent, innovation and impact.
In its recent ‘Palestinian Startup Ecosystem Summary Document’ that was prepared by Startup Genome, the Palestinian Ministry of National Economy’s Innovative Private Sector Development (IPSD) Project concludes that the Palestinian ecosystem is going through its ‘Early Activation Phase’. Specifically, with fewer than 300 tech startups, limited early-stage funding and no success stories yet (in terms of high valuations and exit deals), the Palestinian startup ecosystem is still fragmented with limited connections to regional and international markets. In order to help address existing gaps, IPSD recommends building a ‘collaborative approach’ that emphasises knowledge exchange among local stakeholders as well as improving access to regional and international market opportunities. Importantly, the document sends a message of hope by confirming that despite the challenges, the Palestinian ecosystem has a growth potential and that by taking the right actions, it can advance through the next phases of an ecosystem lifecycle. The most important factor in building a robust startup ecosystem is ‘multi-stakeholder cooperation’. Unlocking untapped opportunities requires greater collaboration among the three main players within the ecosystem - government, the private sector and the entrepreneurial community.
The way forward
On a governmental level, so much work needs to be done with regards to regulation, spending on research and development (R&D) and the establishment of government-backed investment funds. First of all, the government should play a role as an enabler and facilitator of economic growth by creating the regulatory framework that makes it easier to launch new businesses and provides incentives for risk-taking innovation. Secondly, the government can help plant the initial seeds in the ecosystem by catalysing R&D and supporting innovators at universities and research institutes to commercialise their innovations. Palestinian policymakers should give much greater attention to R&D and devise well-structured initiatives to improve it – there should be no excuses when we know that Israel spends around 5 per cent of its GDP on R&D and this has definitely had a significant impact on its booming startups that recently raised US$10.5 billion in the first half of 2021. Lastly, the government can activate new opportunities by establishing government-backed investment funds that can be managed by the private sector and aim to invest in VC funds or directly into startups at the earliest stages. These types of funds are very critical to de-risk investments and help create a local VC industry that attracts the attention of investors from Palestine and internationally. An inspiring lesson can be drawn from the success of the Innovative Startups and SMEs Fund (ISSF) in Jordan which changed the entrepreneurial game in the Kingdom and encouraged hundreds of amazing Jordanian companies. The Palestinian national institutions such as the Higher Council for Innovation & Excellence (HCIE), the Ministry of Entrepreneurship and Empowerment and the Palestine Investment Fund (PIF) are perfectly positioned to lead the way in addressing gaps in this necessary field.
Furthermore, the private sector as the ultimate ‘engine of economic growth’ must play a bigger role in building the startup ecosystem. Strictly speaking, local Entrepreneurship Support Organisations (ESOs) - such as accelerators, incubators and innovation hubs - can play a significant role by providing the infrastructure and tools that would enable early-stage founders to embark on a rewarding entrepreneurial journey. The role of local ESOs becomes more pivotal when the ecosystem is still in the Early Activation Phase. Therefore, ESOs themselves should be supported, their capacities must be enhanced and their financial independence must be ensured so they can make a meaningful difference to their direct beneficiaries: the entrepreneurs and early-stage startups. In addition to local ESOs, the presence of funding options is critical for startups that seek to grow and expand their offerings. Unfortunately, there’s currently only one active institutional VC fund in Palestine, Ibtikar fund, which invests in Palestinian startups at the Seed and pre-Series A stages. Indeed, VC funding is probably the most important factor in the startup game and the Palestinian ecosystem is in dire need for new emerging funds (and angel investing networks) with greater focus on the pre-Seed and Seed stages. Another arena where the private sector can play an essential role is through increased cooperation between big corporates and startups. This kind of cooperation can be beneficial for both sides through knowledge exchange, technological diffusion and impactful synergies. Corporates like Bank of Palestine and PalTel Group have led the way in this field not only by supporting local initiatives, but also by creating their own innovation hubs.
The final piece in the puzzle – the entrepreneurial community – lies at the heart of any thriving startup ecosystem. Despite their important roles, both the government and the private sector are considered the ‘enablers’ of change in the ecosystem. It is the entrepreneurs who are the real ‘builders’ and ‘drivers’ of the ecosystem through their innovative ideas and disruptive business models that aim to positively change our economy and society. However, entrepreneurs have a responsibility to keep updating their skills and commit time and effort before they can enjoy the rewards of success. In recent years, there has been a number of excellent incubation and accelerator programmes that have enabled Palestinian entrepreneurs to acquire the skills and confidence needed for success in their entrepreneurial journey. Among these programmes is the Founder Institute (FI) accelerator programme which targets startups at the pre-Seed stage and based on the programme’s direct links with Silicon Valley, it provides its graduates with excellent mentorship, training and upskilling opportunities. Importantly, over the past three years, the programme has enabled Palestinian entrepreneurs to launch 18 promising startups with completed company registration, minimum viable product (MVP) and limited traction in terms of customers/users and revenue. Yet, the impact of the programme is constrained by limited early-stage funding and few connections to regional and international markets. It is hoped that the recently launched “IGNITE Investment Readiness Advisory Services’’ programme can address these two gaps by enabling aspiring entrepreneurs to get their ‘businesses ready for investment’ and ultimately enhance the investment deal flow in Palestine.
The moment will come
Despite being in its ‘Early Activation Phase’, the Palestinian startup ecosystem has genuine growth potential. However, the right pieces of the puzzle must come together in order to establish a transformative approach capable of addressing existing gaps, especially the challenges related to early-stage funding and access to regional and international markets. Additionally, a ‘triple helix’ model of cooperation - between the Palestinian government, the private sector and the entrepreneurial community - is the ultimate pre-condition for unlocking the true potential of the Palestinian ecosystem. Equally important is the urgent need to move beyond the unproductive mentality of ‘donor-dependency’ and utilise all available resources to create a different reality that rewards hard-work, talent, innovation and impact.
I cannot finish this article without giving a round of applause to all Palestinian entrepreneurs who have demonstrated their resilience and managed to succeed despite the challenges. Startups like Mashvisor, Receet, Tawazon, WeDeliver, RedCrow, Fanera, Gamiphy, Inggez, Flowless and Kenz - to name a few - give us a valuable lesson in startup growth and success. It is the need to build products/services tailored for solutions to problems in regional and international markets from the get-go. In other words, what all these inspiring startups have in common is the direct route to scalability. This strategy helps turn the curse of a small fragmented local market into a blessing by taking advantage of the growth potential in other markets and regions thus attracting the attention of customers, partners and investors. There is no doubt that the next generation of Palestinian entrepreneurs can follow the same strategy and provide the region and the world with impactful solutions to complex problems in exciting fields such as fintech, agritech, edtech, medtech and many others. With the right incentive structure and transformative opportunities, I am optimistic that we will soon start hearing about investors knocking on Palestine’s door and declaring their willingness to invest.