A shortage of deals is holding back venture capital companies in the Middle East even though the sector is awash with cash, one of the industry's most successful leaders believes.
Deal drought slows venture capital
AMMAN // A shortage of deals is holding back venture capital companies in the Middle East even though the sector is awash with cash, one of the industry's most successful leaders believes. Two years ago, Khaldoon Tabaza said that one of the biggest challenges for entrepreneurs and the people who fund them was a shortage of investors willing to put their money into venture-capital funds. But with more than US$500 million (Dh1.83 billion) committed to a host of regional funds over the past year, a shortage of cash is no longer a concern.
Mr Tabaza, who founded the Jordanian fund Riyada Ventures before selling it to Dubai's Abraaj Capital last year, said yesterday the test of the industry now was to build companies that could return real profits to their investors. "I don't think the region today can take more venture-capital money and more SME [small and medium-sized enterprises] money. I don't think it is needed and I think today we have pretty good supply, if it all comes through," he said. "Now, what we need to do is produce real success stories." When Riyada was acquired by Abraaj, the UAE private-equity group committed $200m to a new fund targeting small businesses across the region. Mr Tabaza now heads the fund, known as Riyada Enterprise Development Company (Redco).
The commitment was one of a string of multimillion-dollar investments made into regional venture funds over the past year. Foursan, another Jordanian venture capital firm, launched a $100m fund last December, saying it would grow to $200m by the end of this year. A number of smaller funds targeting early-stage investments have also been announced. "The biggest problem that we are facing now is not money, it is that not many start-ups are investment-ready," Mr Tabaza said. "You need to size up your market, hire your team, prepare your numbers; I understand why that wasn't happening in the past, people weren't thinking about it because the supply of funds wasn't there.
"The supply of money only came in the last 12 months, so there is still a process that needs to take place here, the quality of the deals available needs to catch up to the money." Successful "exit" deals, such as the acquisition of Jordan's Maktoob Web portal by Yahoo for more than $160m and the sale of Dubai's Sphere Networks to a Taiwanese network equipment manufacturer, have created optimism among technology entrepreneurs.
But the reality is that examples of a successful exit by investors - through an acquisition, further rounds of investment or a stock market float - remain few and far between, Mr Tabaza said. It is now success stories, not cash, that is in short supply. "Awareness of venture-capital models needs to increase, among entrepreneurs, their investors, their family and friends, service providers and lawyers, the governments; they all need to better understand how this industry works," he said.
"Investors themselves need to do this, but the ecosystem in general - service providers, [non-governmental organisations] - we all need to take it to the next level. "We've spent years complaining that we need funding and we need support, but now is the time to focus on execution, getting the deals done." @Email:firstname.lastname@example.org