The Middle East and North Africa is one of the most difficult parts of the world to grow a business, but it’s even harder to scale into the 22 countries that make up the region.
New entrepreneurs enter an environment of political instability, antiquated bureaucracies and weak physical and digital infrastructure, and have to acclimate to a new culture with each step into another country.
It’s a much taller task than for startups in the United States, or even Europe.
As their businesses grow, so do their challenges, as they try to navigate uncertain markets, learning hard lessons along the way, and at the same time pave the way for other companies to claim a stake in a tough terrain.
Getting to scale
“Getting to scale is the most difficult part. Scaling above that is a different challenge…. One to a hundred is easy. A hundred to a thousand is difficult,” said Ahmed Alkhatib, founder and CEO of the six-year-old luxury discount ecommerce site MarkaVIP.
He acknowledges they scaled too quickly initially because he was eager to build the company’s momentum in the first few years as one of the earliest major online retailers.
In a couple of years they went from small startup to a corporation of hundreds of employees, its size attracting the attention of overseas competitors and leading to the creation of an in-house logistics firm, replacing Aramex for the majority of deliveries.
“One mistake we made is that we grew way too fast for our own good, and did it at a cost of spending a lot of money and not being profitable. That’s driven mostly by competition. If you have no competition, you can scale slowly. If you have a lot of competitors, it can eat away at profits,” he said.
Laying the groundwork
A year later, in 2011, online retailer Namshi entered the market, adding competition to the still-nascent sector that would in just five years see hundreds of others competing.
“All eyes are on us. If a new company is setting up, they can invest in learning from someone who has done it before, and they can bring in talent from someone who has done it in the region,” said Dubai-based Namshi cofounder and managing director Hosam Arab.
“When we started, we were one of only five to ten ecommerce companies. You’re learning a lot for the first time, probably with a lot of people that haven’t done it in this part of the world, and you can afford to make mistakes because it’s not as competitive. Now it’s more cut throat, and we have to do a lot to be seen.”
He recalls at the time he was getting off the ground, he saw a lot of other companies “burning through cash” from their investments by “spending money on the wrong things”. If there was a secret sauce for his company, he says it would be efficiency and building a lean organization.
“For us, it has been keeping our costs down and focusing on high-impact improvements. People were focusing on smaller incremental improvements, and they’re all nice to have, but they’re not the kinds of things that move the needle. Fast delivery and quality products are the things that have given us the edge over the past as other companies have come up.”
Yet for all of its success, Arab says that, at least for now, he has chosen to stay within the GCC due to the thick bureaucracies in much of the rest of the region.
Getting to scale
The four-year-old ride-sharing service Careem has taken the less cautious road, opting to enter some of the most difficult markets as it continues its expansion throughout the region. When it launched in Egypt last year, Careem – along with its international rival Uber – faced protests from taxi drivers, ultimately winning their bid to operate in the country.
But its rapid expansion – 10,000 new customers a month in Egypt alone – has meant some inevitable bumps and improvisations along the way, such as finding ways to maintain meticulous personal customer service as the company grew faster than they’d ever expected, in ways they didn’t foresee.
One of Careem’s innovations was to incorporate 42,000 regular taxi drivers into the service in Egypt.
“When you start, it’s hard to imagine how you’ll function later,” said Hadeer Shalaby, general manager of Careem in Cairo. “In school, they teach you how to grow a business, but they don’t teach you how to control it when it grows very fast.”
She believes the company laid a strong foundation by creating a company culture and customer engagement catered to individual countries from day one.
“One of the challenges was understanding different realities and different cultures. Dubai was different than Riyadh. You need to do things differently for different realities.”
Finding the right support
For the Beirut-based venture capital firm Middle East Venture Partners (MEVP), the different markets are a challenge that they must prepare for every time they take on a new startup investment.
“The process takes time. It takes on average six months to close a deal, so the companies need to be careful of their cash flow,” said Mohamed Sabouneh, an associate at MEVP.
He said in some cases the companies they invested in ran out of cash before the deal closed, and MEVP stepped in to cover their basic expenses while the company got on its feet.
Unique challenges at all stages
Anyone who thinks expanding to the West will go more smoothly than growing within the region will likely be faced with a new set of unpleasant surprises – closer scrutiny of Arab companies due to money laundering legislation, and in many cases tighter legal regulations.
The international book sales service Bookwitty, one of the most successful startups to come out of Lebanon with $30 million in investment, still struggles with its global expansion as a Lebanon-based company.
“It’s really hard to open an account internationally,” said Bookwitty’s head of media partnerships Nasri Atallah, referring to the extra layers of scrutiny Lebanese firms face with western countries’ crackdown on money laundering. “If we didn’t have that, we’d have twice that growth that we do now.”
But the region’s tough terrain isn’t all bad news for entrepreneurs. In some cases, it allows a regional company to grow for several years until it makes good on an exit with a foreign competitor. It was recently reported that the Seattle-based retailer Amazon is in talks to buy the Dubai-based Souq.com. In other cases, the company continues to grow on its own without facing much competition.
“When you’ve scaled large enough, then you’ve captured the attention of huge retailers. Amazon went to India because of Flipkart. There will be big competition or they will attack us,” said Alkhatib from MarkaVIP. “[That’s] a good thing because these guys can’t easily replicate what we do – legally and logistically. That’s why these retailers exist, because of bureaucracy.”
While the MENA region is no longer a virgin market, its unique challenges still require skill sets, information and flexibility to operate in diverse marketplaces. That’s where specific regional knowledge is important, for both entrepreneurs and investors.
Feature image via Global Weekly Watch.