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Chasing the unicorn

While the Middle East seems primed for startups that grow to be valued at more than $1bn, it still has only one unicorn. Why?

The digital market is estimated to add $95 billion in annual GDP by 2020. Yet the ecosystem remains emergent.

Once a rare sighting, global unicorns now number close to 200 — and the tech industry is driving the boom. Smartphones and cloud computing have enabled a raft of privately held young companies to eclipse a valuation of $1 billion and infiltrate even the most tech-averse industries.

Uber changed the way we book taxis. Airbnb capitalised on the sharing economy. Spotify transformed the music world. And Deliveroo rejigged the food-delivery businesses.

Though not at Silicon Valley level — coming up with the next category, the new frontier, the thing you’ll need tomorrow — the rapidly evolving Middle East startup ecosystem, of more than 3,000 firms, has its moments.

The digital market is estimated to add $95 billion in annual GDP by 2020. Yet the ecosystem remains emergent.

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In 2016, pace-setting Careem, which one-upped Uber in the race for regional ride-hailing dominance, became a unicorn, and the acquisitions of online retailer Souq by Amazon — the largest technology M&A deal in the region — and Talabat, Carriage and Yemeksepeti by Berlin-based Delivery Hero proved that the region can produce big exits.

Many found success by localising new ideas from the US and Europe, while music-streaming platform Anghami, GPS-driven delivery startup Fetchr and Bridg, a mobile payment platform using Bluetooth, have shown the right combination of innovation and entrepreneurship. 

Meanwhile, earlier this year entrepreneur Donna Benton sold 85 per cent of The Entertainer, the lifestyle discount service she launched in Dubai in 2001, to Bahrain’s GHF Financial Group for a reported nine-figure sum. The group now plans to invest $150 million in the company, according to Arabian Business. Last year, The Entertainer posted an annual turnover of more than Dh130 million. 

On its face, there are factors and forces driving the region’s startup culture.

Many cities, especially Dubai, have large pool of foreign talent — an asset for innovation. As seen in Silicon Valley, where more than half the founders of billion-dollar-plus tech startups are immigrants — including Tesla, Google and Facebook — innovation is more likely to occur when people with different backgrounds use different perspectives to solve the same problem.

“Startups can have a real impact on the economy, and in the past few years the Middle East has proven itself to be an attractive option for aspiring startups.”

~ Mudassir Sheikha

Today, oil-rich governments across the region are diversifying economies, trying to foster local entrepreneurs building the next billion-dollar company, and thus create jobs.

Over the past year more than $3 billion has been raised for technology investments in the region, according to Bloomberg.

Yet somehow the Middle East isn’t just producing industry-altering, globally scalable businesses having a shot at billion-dollar valuation. Despite not being profitable yet, Careem is the only unicorn in the region — valued at about $1 billion in 2016.

The taxi company says it has 20 million registered users and operates in more than 90 cities. Reuters reports that the company is in early talks to raise as much as $500 million in new funds, while plans are afoot to expand its registered drivers to one million this year. 

So: why aren’t there more unicorns?

Undoubtedly, there is room for massive growth — the region has the GDP, population and connected users, with mobile broadband subscriptions expected to see the biggest growth between now and 2022. Furthermore, the digital market is estimated to add $95 billion in annual GDP by 2020. Yet the ecosystem remains emergent, as opposed to well-rounded and robust.

“Startups can have a real impact on the economy, and in the past few years the Middle East has proven itself to be an attractive option for aspiring startups,” Mudassir Sheikha, CEO and cofounder of Careem, tells Debonair. “However, it’s hard to build a large tech business in the region.”

For one, there’s a shortage of talent and expertise. “Unlike other parts of the world, the Middle East doesn’t yet have a deep pool of tech talent,” adds Sheikha. “This has made it challenging to build tech services that can compete with global tech platforms.”

Then, despite its wealth and government efforts, the region still lacks enough accessible early-stage financing for most young tech companies looking for funding of around $25 million to $50 million. However, prompted by the success of Careem and Souq, big local players such as Majid Al Futtaim Holdings, Saudi Telecom Co and Saudi Arabia’s Public Investment Fund have recently started pumping money into homegrown startups, but there still remains a shortage of investment.

“For one Careem to emerge, hundreds of high-potential, early-stage tech firms need to be born and seed funded,” says Muhammed Mekki, founding partner of tech hub AstroLabs. “With relatively few angel investors and funds willing to take a risk on ventures at the early stage, securing a first investor is one of the biggest challenges facing entrepreneurs in the Middle East.”

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Expanding and working across the Middle East countries generally isn’t as easy as in, say, the European Union. The region really isn’t a single market; it’s many markets. To reach the full Middle Eastern market, entrepreneurs have to tackle various customs regulations and consumer preferences and norms across nearly two dozen countries. 

Launching a startup is only half the battle. The size of the underlying market can be just as important, since not a single country in the Middle East has a large-enough market to propel a business to the next level, explains Mekki. “Once startups reach substantial penetration in their home markets and are looking to scale up across borders, the reality of the extremely fragmented and disparate markets that comprise the Middle East make international growth extremely difficult.”

Furthermore, scaling to every country with different laws, requires separate investments and local integrations, adds Sheikha, making it a “difficult and rigid” process. “Political differences and conflicts are the additional challenges that startups have to overcome to succeed.”

Simply put, finding another unicorn like Careem won’t be easy, as many elements of the startup ecosystem need further development. Apart from access to funding, harmonising legislation, strong regulatory framework and inter-country collaboration for startups to scale up across borders, developing technical skills is a key component. “We should be able to reverse the brain drain of our tech talent, bring them back to the region by setting up world-class tech education centres,” says Sheikha.

“The Middle East should look at different ways of being more startup friendly, such as reducing the cost of starting businesses, making bankruptcy laws more entrepreneur-friendly and celebrating failure.” 

Until then, regional unicorns will remain mythical creatures. 

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