VOL. XLIV

No. 25

18 June 2001

In the wake of the recent slump in global tech stocks, the current global climate for the venture capital industry is far from bullish, but Dubai Ideas Oasis (DIO) is still fully committed to "energizing the venture capital industry in the region," according to the company’s CEO, Avi Bhojani. Speaking to MEES on 5 June at the company’s headquarters in Dubai Internet City, Mr Bhojani explained that the DIO, a government initiative, is essentially trying "to create an ecosystem that is going to help foster start-ups." The DIO, he said, aims to create a start-up community dedicated to helping entrepreneurs turn their ideas into profitable business. While the project’s mandate includes facilitating access to venture capital, it also combines a range of enabling services including business incubation, business development, marketing and advertising services, financial consultancy and a technical infrastructure.

The DIO, Mr Bhojani explained, is seeking to support ventures with strong growth prospects and compelling business models that can add value to the region’s "new economy," and has so far invested in five such initiatives including an online auction platform and a technology provider for small-scale enterprises. Its most recent investment is in Middle East/North Africa Financial Network Inc (MENAFN), a start-up regional provider of online financial services, which, according to Mr Bhojani, has a strong product offering and a dynamic management.

MENAFN offers products and services in the online financial services market – currently in its infancy in the region, according to the company, but likely to grow fast – including investment services, a financial marketplace and a set of financial solutions targeting institutions. The company is already working on its second round of venture capital funding, which will allow it to expand its operations and activities over the next 18 months. MENAFN’s other core investors, in the first round, include General Atlantic Partners, Capital Z Partners and several regional high net-worth investors.

Mr Bhojani believes that more MENAFNs will emerge both from the region and internationally – DIO has been in contact with potential clients in South Africa and India – creating growing demand for DIO’s services. He also believes that the interest of the regional banking sector in funding such ventures will increase as they grow their portfolio services and move more heavily into investment banking and private equity. However, the challenge, he says, is "getting the quality of deal flow – you need the right businesses. It is also the most risky end of the game, which traditionally banks here are not used to. They have been used to lending against some collateral, whether in the form of a salary, an asset or some form of guarantee. Start-ups, by the nature of the beast, don’t have those collaterals, so not only do you need appetite for risk but you also need a management team that can help that."

While venture capitalists are less risk averse and much more able to provide long-term business support, their presence is limited in the Middle East. "There are a few venture capitalists in the Middle East," says Mr Bhojani. "What we are noticing is that there are a number of financial institutions and a number of families who want to get into this game." He argues that DIO is aiming to encourage the process partly through DIO’s own private equity fund. "We have made a few investments through this," says Mr Bhojani, "which provides proof of feasibility that can encourage other players to join." Mr Bhojani thinks that Islamic funds may be particularly interested. "There is an interesting paradigm which is want we want to try and build – the convergence between venture capital and Islamic finance. Islamic finance, when you get down to the fundamentals, essentially goes to getting a return on the money invested by taking a stake in the business – that is what venture capital is. So if we can build that convergence, and even take 5% of the liquidity locked into Islamic financial instruments, the amount of equity that’s going to be available for early stage business is going to be huge." Mr Bhojani thinks that such funds could lead to a spur of early-stage business activities. "We are trying to build an ecosystem and create a deal-flow and promote local financiers to think in terms of venture capital and early stage investment business."

Mr Bhojani admits that encouraging either conventional or Islamic institutions to participate in start-up ventures is "harder than what we had thought," but believes that this is due to the fact that venture capital in the region is a nascent industry and that exit strategies are limited. "There is a fundamental challenge which is an exit. A capital investor, however strategic, wants to exit an investment – private equity funds need to return the investments of the limited partners. In the absence of an exit it is difficult to attract private equity funds." The two main forms of exit, said Mr Bhojani, an IPO or some kind of M&A activity, are limited in the region, partly due to the underdeveloped nature of the primary market (although public flotation could take place in an international market) and partly due to the cultural challenge of M&A. "In the Arab world, there is a family-owned mentality. You would much rather let your business die than lose control." Mr Bhojani says that the DIO is trying to assist in facilitating developments in both of these areas. "We may be able to do a couple of proofs of concepts where there is a merger or an acquisition. That cultural barrier has to be broken."

The DIO is to seek the participation of local banks more actively in the coming months and has already had discussions in this respect with both UAE and regional banks. The DIO will also boost its financing capacity and is seeking to raise its existing $8mn private equity fund by another $15-18mn. It has also established an $8mn incubator fund and is set to manage the recently established $50mn venture fund launched by the Gulf Finance House. "Part of our task," says Mr Bhojani, "is to make sure that when entrepreneurs come into the community, venture capital is available. We already have a small fund and soon there may be other corporate venture funds available so entrepreneurs will have an option. There will be a marketplace."

Copyright © 2001 Middle East Economic Survey