Elie Khoury

When Silicon Valley-based Yahoo acquired Maktoob.com last August for a reported $85 million, it barely made a ripple in U.S. technology circles. But the acquisition of the leading Arabic online community had a seismic effect on the Middle East, a region that’s just getting to grips with what Silicon Valley and the like have been doing for years. Samih Toukan and Hussam Khoury, Maktoob’s co-founders, became overnight stars, not to mention inspiration for budding entrepreneurs across the region. Among the many kudos, the King of Jordan awarded them the King Abdullah Medal of Honor and subsequently decided to set up funds to back hundreds of new businesses over the next few years.

While extraordinary for the Middle East, Maktoob’s story would be familiar to anyone following Silicon Valley. The founders began their careers as consultants in the early 1990s, eventually gravitating toward web services before launching Maktoob.com at the end of the decade. But finding local sources of capital to help the company grow was tougher than what their Silicon Valley counterparts have to go through.

Because there were no regional venture capital firms at the time, Maktoob’s founders scrambled to make ends meet until they were able to turn to a U.S.-based hedge fund called Tiger Global for financing. As for other funding sources, they didn’t even entertain the thought of an initial public offering since that was simply something Middle Eastern technology startups didn’t consider. But ever since the deal with Yahoo was struck, the bar for what an Arabic startup can achieve has been dramatically raised. “For a country like Jordan, this was a big deal,” Toukan says. “In fact, it was unheard of in the whole Arab world.”

‘A Problem and An Opportunity’

No one will mistake the Middle East for Silicon Valley any time soon. But the buzz around startups is unmistakable. There is a nascent technology press emerging to cover the Arabic tech scene and networks of entrepreneurs are growing. After years of looking to the United States for financing, a handful of Arabic venture capital firms and angel investors have been established. At the same time, various other public- and private-sector initiatives have been launched to boost the regional entrepreneurial economy.

There’s little time to lose. The region’s economic growth could soon be increasingly dependent on its budding tech entrepreneurs for generating new jobs and investment. Economists estimate that the region needs to create 90 million new jobs in the next 10 years to keep its burgeoning younger generation out of unemployment. It’s a tall order — the oil-driven economy only created 60 million jobs in the last 50 years. The region’s oil and gas sector “doesn’t generate jobs, and it isn’t spread around enough to support everyone,” says Peter Cappelli, professor of management and director of the Center for Human Resources at Wharton. “Populations are growing faster than the oil money. Having lots of unemployed people sitting around is bad for society, even if the countries could afford to support them.”

Habib Haddad, the Lebanese born co-founder of Yamli.com, an Arabic language search engine based in Cambridge, Massachusetts, adds that with 70% of the region’s population is under the age of 35, “the population is super young.” According to Washington, D.C.-based Population Reference Bureau, the current “youth bulge” is “unprecedented” in the region’s history.

At the same time, the younger generation represents a huge potential market of technology consumers, notes Haddad. There are 22 million mobile phones in use in the region and it’s one of the fastest-growing markets in the world in terms of Internet usage. “The next billion Internet users will come from the Middle East,” and most of those will be from the younger generation, he predicts. “That makes the region’s youth a problem and an opportunity.”

Clearing the Cultural Hurdles

For the moment, though, the odds are still stacked against someone who wants to start a company in the Middle East. Consider the difficulties Elie Khoury, 24, faced in launching his company, Woopra. Khoury studied hardware engineering at Lebanese American University before switching to software. Along the way, he had a classic entrepreneurial moment: He wanted to track who was visiting the websites he was building. When he couldn’t find a tool he liked, he decided to build his own, and reckoned others would want it too. But after deciding to start a company, Khoury faced the hurdle that trips up many Middle Eastern entrepreneurs: culture. For one thing, starting a company does not carry the prestige that getting a job with a well-known, large company does. For another, there is little support, and lots of skepticism. “My friends said, ‘This can’t happen from Lebanon,’” Khoury says. “My parents were supportive, but of course they didn’t believe it would succeed.”

According to Cappelli of Wharton, the cultural hurdle is part of the legacy of the oil economy, which helped turn state-run organizations into the region’s primary, and often most secure, employers. “Governments especially in the oil states have always been big employers offering high-status jobs, and they pull in many of the best employees,” Cappelli notes. Job-seekers “go there first and to the private sector only as a last resort.”

But that wasn’t for Khoury. Having read Silicon Valley blogs like TechCrunch for years, he had reckoned that venture capital and angel funding were easy to come by. But the Middle East attracts so little venture capital that no major VC indices track it. According to the Zawya Private Equity Monitor, Arab private equity funds raised US$5 billion in 2008, of which only US$72 million was allocated to venture capital funds. In its most recent annual Venture Capital Attractiveness Index, consultancy Ernst & Young ranked the Middle East fifth out of eight regions, ahead of Eastern Europe, Africa and Latin America. According to Renaissance Capital, the Middle East has accounted for only 3% of the world’s 197 initial public offerings so far in 2010.

Finding out how difficult it is to raise startup capital in the Middle East was an eye-opener for Khoury, whose team took on freelance projects to pay the bills. But there was an upside, he contends. “When you do things on your own and you use your own resources, you can be more efficient,” he says. “I looked on that as an advantage. And life here is not expensive.” But eventually he needed more money for additional servers and employees. He renewed the search for investors, this time outside the Middle East, and managed to raise US$500,000 from a group of American investors.

While Khoury lives in Beirut, Woopra’s headquarters are now in Dallas, Texas, near most of its investors. The new location provides additional advantages over being back home, like access to faster broadband connections. Despite the obstacles, Khoury views his story and Woopra’s as a sign of progress. “It’s easier these days to connect with people in other regions,” he notes. “That wasn’t really there a few years ago.”

The Mirage of Funding

The case of Usama Fayyad provides a sense of how tech ventures seem to be accelerating in the Middle East. Tunisian-born Fayyad now lives in Seattle, after resigning as chief data officer of Yahoo in 2008, and starting his own consulting firm. Fayyad is also an active angel investor, traveling to the Middle East at least once a month, finding more and more Silicon Valley-style startups to invest in. But his involvement in the region took on a new dimension when King Abdullah asked him to chair the new fund created after Maktoob’s acquisition.

The goal of the fund — which is called The Oasis 500 — is to provide 500 companies with capital in the next five years. So far, it has US$6 million on hand and the goal is to raise US$35 million. “There’s a real desert when it comes to funding,” Fayyad says, referring to the fund’s name. “[Entrepreneurs] get a great idea, gather money from family and then they enter the desert, where no one will give them money.”

That fund represents just a slice of the new venture capital flowing into the region. Earlier this year, the European venture capital arm of U.S. chip maker Intel said it plans to double its investment in the Middle East as well as Eastern Europe and Africa, shifting its focus from Western Europe. Meanwhile, Middle East Venture Partners, in Beirut, just announced it closed its first US$10 million venture fund to focus on the greater Lebanon region. And after President Barack Obama’s landmark address to the Muslim world in Cairo in June, the U.S. State Department announced a Global Entrepreneurship Program, which will start with a focus on “Muslim-majority countries” before expanding around the world.

Among those tapped to help with the U.S. effort is Silicon Valley-based TechWadi, an organization founded four years ago to link up Arabs working in the tech economy. Ossama Hassanein, co-founder of TechWadi and a senior managing director of Newbury Ventures in Silicon Valley, says mentoring was one of the key services his organization can help provide. While money, talent and infrastructure are vital, he says, entrepreneurs in the Middle East need people, who can advise them on the complexities of starting a business. Such advisers are widely available in tech hothouses like Silicon Valley, but few exist in the Middle East. To that end, Hassanein’s organization announced the TechWadi 100, a plan to identify 100 Arabic mentors in the U.S., who will work with startups in the Middle East. “The diaspora can play a very important role,” Hassanein says. “They are looking to us and asking: Can you help us get started? And of course, we can.”

While high-level efforts show promise for the future, Mo Al Adham says he is already seeing plenty of activity on the ground when he traveled from San Francisco to Beirut for the launch of TechWadi 100. A Jordanian citizen raised in Kuwait, Al Adham is founder of TwitVid, a software application that enables video sharing on Twitter. During his trip to the Middle East, he was amazed by the plethora of networking events among entrepreneurs. “I was invited to Dubai Tech Nights, where all the geeks get together,” he says. “I’m finding a similar startup mentality as in the U.S. And these guys, they work 15 hours a day. They have the dark circles under their eyes.”

Better Together

One key to success, say local experts, will be the region’s ability to work as a bloc. “For this to be a sizable market for global players, you have to look at it as one market,” says Maktoob co-founder Toukan. “When you look at it like that, it’s 350 million people.” But it is risky to manage Middle Eastern investments as if they’re based in one homogenous economy. Countries vary widely in terms of Internet infrastructure, access to quality education, cultural attitudes toward starting companies, and the strength of their economies, not to mention the openness of governments to the Internet. “I’m a big believer that the government should stay as much as they can out of the picture,” says Haddad of Yamli.com. “At the same time, they need to put the right framework in place to make business easy.”

A number of tech experts also want to see universities playing a role in changing the traditional mindset that shuns working for anyone but the state or large, established companies. By including courses on entrepreneurship and innovation, they can provide practical help entrepreneurs in the region long for, while also lowering the cultural resistance to people starting their own companies. “The problem here is that [universities] teach people to become employees, which is not enough in my opinion,” Woopra’s Elie Khoury says. “For a country to be successful in entrepreneurship, it has to work on the education system.”

Such structural changes will take years to implement so for now, fledgling tech entrepreneurs are taking the initiative and building support networks on their own. Al Adham started TwitVid in San Francisco to be near the heart of the venture capital world and the Bay Area’s social media community. But after raising his first round of venture capital in Silicon Valley, he turned to the Middle East, where some acquaintances connected him to Maktoob’s co-founders. They invested an undisclosed sum, as did Fadi Ali Ghandour, the iconic founder of Aramex, a logistics company that was the region’s first listing on NASDAQ. Meanwhile, Toukan has launched his next venture called Jabbar, a network of Arabic e-commerce and advertising sites. While everyone still wants to talk about Maktoob with him, he wants to move on to take advantage of one of the fastest-growing pools of Internet users.

Can these entrepreneurs and investors plant the seeds for a Middle Eastern Silicon Valley? It’s too soon to say, but there is plenty of optimism. “When we first started, there was lot of doubt. People did not know what we were getting into,” Toukan says. “Before, there wasn’t example for others to follow. Now, it’s easier. Anyone who wants to start a company can refer to Maktoob.”

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