It is expected to be a busy 12 months for the region's top technology entrepreneurs as investors line up record amounts of capital to propel their companies to valuations of US$1 billion and above.
According to Beco Capital, a regional venture capital (VC) firm, funds raised in the region last year were six times larger than in 2013 and deal flow was four times bigger in the same period.
"In 2015 entrepreneurs will be tackling all sectors of the economy using technology to make things more efficient," Dany Farha, the chief executive of Beco, told The National.
While the large rise is partly due to 2013 being an unusually quiet investment period as VCs spent much of the time raising money not deploying it, there has also been a tremendous increase in activity on the entrepreneurial front.
"Fresh venture capital funds raised in Mena [Middle East and North Africa] last year totalled $175 million, compared with $29m raised in 2013.
The region is gaining momentum and is on the way to experience its own boom in the technology sector in the next five years, following on India's success story," Mr Farha told the Middle East Investment Conference in Kuwait on Tuesday.
For Beco the Middle East and North Africa is actually a "slimmed down" version with the focus on the GCC, Lebanon, Jordan and Egypt.
iMena Group, which operates online businesses in the region, has a narrower definition, targeting Saudi Arabia and the UAE. It now has plans to enter Egypt and hopes by the end of the year to expand into Morocco, says its founder and managing director Khaldoon Tabaza.
The firms are among investors circling the potential big winners of the region's tech gene pool such as e-retailer souq.com, the jobs site Bayt.com, the online chauffeur service Careem, the online food ordering service Talabat led by chief executive Mohammed Jaffar, the car sales site Sellanycar.com, the classifieds site Dubizzle, the internet estate agent Propertyfinder founded by Michael Lahyani and a handful of others that also have the potential to break the $1bn barrier.
The Maktoob founder Samih Toukan's Souq.com, for example, has some 24 million visitors a month. Talabat operates in Kuwait, Saudi Arabia and this country, working with restaurants such as Burger King, KFC and Pizza Hut. Dubizzle, Bayt, Propertyfinder, Careem, Sellanycar and Souq are among those based in Dubai.
What is most startling, according to Mr Farha, is that half of these firms did not exist six years ago while the rest were very small.
Now combined turnover for the group of firms is $900m, the combined headcount is 2,600 employees - revenues and staff numbers are growing 100 per cent year on year - and they have a total net worth enterprise value of $2bn, according to Beco's calculations.
Propertyfinder is one of Beco's portfolio investments in which it has invested a total of $5m so far including injecting more liquidity into the group in December to help its push into Saudi Arabia.
Sellanycar.com, started in 2013, offers consumers the opportunity to quickly dispose of their used vehicles, a service which iMena believes taps into a fundamental need in the region.
"2015 is shaping up to be another great year for the online industry in the region," says Mr Tabaza. "In my view for the next three to five years you will see growth in the region because of the pent-up demand for online products and services.
"Sectors we are excited about include classifieds, e-commerce market places including automotive like sellanycar.com and restaurants such as reserveout, transport like Easy Taxi and payment/finance services like Telr."
He says that after this period of fast growth the next phase of the industry will see more consolidation as the region's online sector matures.
What is driving growth this year, investors say, is the sheer number of people online, the high smartphone penetration - it is around 80 per cent in the UAE - and the relatively large amount of consumer spending on telecoms.
Sales of smartphones reached 64 million units in the second quarter of last year across the Middle East and Africa, a growth of 27 per cent year-on-year, according to International Data Corporation (IDC).
The demographics and macro picture mirror what has been happening in another fast-growing market - India - says Mr Farha. About $2.1bn of venture capital is currently being invested in India compared with $800m in 2009, Beco says, with the largest global players attracted to the country.
Flipkart, India's biggest online retailer, said in May that it had received $210m of funds from a group of investors led by DST Global, an investment company controlled by the Russian billionaire Yuri Milner, which has also backed Facebook, Twitter and Groupon.
Snapdeal, another Indian online retail firm, last year raised $100m from investors including the US investment firm BlackRock.
The Middle East is set follow India's example, Beco says.
"When four or five of the current technology winners grow into the $1bn tech companies they promise to be, they will attract international VC investors. When this happens, it is going to be a quantum leap for the region," Mr Farha said in Kuwait.
To compare, VC investments per capita in Mena were at $0.56 in 2013, around a third of that of India, at $1.44.
This region offers a deep pool of entrepreneurial tech activity.
Mr Farha says Beco has come across about 600 opportunities since 2012 and almost 60 per cent of the companies it has seen were revenue-generating with more than 20 per cent close to break-even.
Beco's own portfolio companies achieved a net internal revenue return of 35 per cent over the past two years, it says. However, the VC model presents its own challenges. It does little at the start-up phase, preferring to deploy at levels above $750,000.
With bank lending to small and medium enterprises (SMEs) in this country at a low 4 per cent and a nascent accelerator and incubator scene this presents a wide funding gap in the private sector for any potential entrepreneurs. "For seed capital, there are incubators, accelerators, seed funds and investors that will write smaller cheques but, for the most part, the capital is being provided by angel investors, super-angel investors [highly prolific and/or very sophisticated, well connected individuals], friends and family - and entrepreneurs' own savings," says Mr Farha. "Which is good. When you have skin in the game you work that much harder to succeed. We like that. In the US its really no different."
Another problem with the VC model, says iMena's Mr Tabaza, is that it can sometimes lead to friction between founder entrepreneurs and the venture capitalists. Both Beco and iMena advocate an invest, guide and operate model to mitigate some of this.
Regardless of the investment model applied significant challenges remain for the overall sector including the cost of expanding into neighbouring countries in the region and regulations required to enter the biggest markets Saudi and Egypt, says Mr Tabaza.
The biggest potential cloud on the horizon is for online retailing. While the overall market will continue to grow, competition from international players will erode regional companies' competitive advantage.
"Online retailers will face a challenging period. The market for e-retail will grow," says Mr Tabaza. "Online retail is growing into a global business model rather than a regional model. Increasing competition from international players who are setting up regional fulfilment centres will erode the regional player's current delivery advantage."
India again illustrates the point. Amazon's entry into India in 2013 shook up the sector, triggering increased competitiveness, according to research by Technopak, an Indian consultancy.
International players have also started to stalk the Arabian Gulf region. Last year Pay Pal said it would launch an Arabic-language mobile payment app.
On Wednesday, Germany's Rocket Internet said it had agreed to buy Talabat and the UAE's 24h.ae. It paid about ?150 million (Dh624.6m) for Talabat but did not disclose the deal size for 24h.ae.
"The Middle East is one of the most attractive markets with significant growth potential and highly attractive ebitda [earnings before interest, tax, depreciation and amortisation] margins," Rocket's chief executive Oliver Samwer said on Wednesday. "The online food takeaway sector is currently undergoing tremendous change.
"We believe in the long-term growth potential of this space and are excited to take advantage of opportunities to build out our global leadership."
Rocket is trying to create one of the world's biggest delivery networks - called Global Online Takeaway Group - and has previously invested hundreds of millions of euros to increase its stakes in the grocery services HelloFresh and Delivery Hero.
The presence of global players in the region does indicate a healthy outlook for the technology space, however it is no guarantee of anything other than fiercer levels of competition.
When in 2009 Yahoo acquired Maktoob for $164m it seemed a watershed for the Middle East's fledgling internet sector. Yet last month Yahoo said it had cut half its staff in Dubai as part of its global restructuring efforts.
In the face of increasing competition from Google and Facebook as well as Twitter, which have all taken a greater interest on the region, the local website, which did reach about a million unique visitors a day, could not drum up the advertising revenue it and its parent needed.
malrawi@thenational.ae
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