Is the Middle East the next new market for tech startups?
[This is an excerpt from the forthcoming book, "Startup Rising" by Christopher M. Schroeder. Copyright © 2013 by the author and reprinted by permission of Palgrave Macmillan, a division of Macmillan Publishers Ltd.]
The West tends to look at the world through the prism of its own successes, and believes that it has a monopoly on innovative ideas and entrepreneurship. Nothing amuses the entrepreneurs I meet around the world more than when some US politician who refers to entrepreneurship as a “leading American export,” as if other, thousands-of-years-old entrepreneurial cultures have only recently discovered it.
And one of the most common questions I hear from American entrepreneurs, investors, and policy makers as they consider looking at new growth markets is, what will be the “next Silicon Valley” of a certain region or country?
“Interesting businesses are and will be created outside of the Valley, in the States and around the world,” Ben Horowitz, the former CEO of the tech juggernaut Opsware and co-founder of one of the most successful venture capital funds in the world, readily concedes.
“But think of the movie business. Great films are made in many locations, but there is a reason that the vast majority of successful films -- certainly in aggregate dollars -- come from Hollywood. That’s where talent wants to be. There is Bollywood in India but it pales in comparison. In fact, how many technology startups outside of Silicon Valley or the US have built multi-billion dollar businesses?”
When I pushed venture capital investors who have opened up offices in emerging markets about why they do so, two consistent themes arise. First, they look for large market opportunities -- one may lose money in a place like China, but for all its challenges, it’s too big to ignore. Second, emerging markets offer outstanding engineering and call-center talent, invariably much cheaper than in the United States.
As for opportunities for regional or even global innovation from the emerging worlds?
“It happens all the time, especially for services aimed at local or even regional needs, which explains Alibaba, Tencent, and Baidu in China,” notes Mike Moritz, chairman of the legendary Sequoia Capital -- a pioneering venture capital firm responsible for backing the likes of Apple, Google, Cisco, PayPal and LinkedIn which are among the other most successful technology companies in the world.
“But Silicon Valley has always been a magnet for immigrants. It’s the place where raw technical abilities will always be embraced by successful companies and worldly leaders.”
But what happens when the vast majority of talented people don’t want to move -- when they not only want to stay home, but are driven by almost patriotic passion to make change where they come from?
The real question going forward won’t be whether Silicon Valley is the only game in town or where the next one will crop up. Rather, it will be how rapid and inexpensive access to its innovations in software and devices will create new, multiple “hubs” of innovation in every corner of the globe.
This will also challenge the West’s definition of “innovation” as only the next shiny, new thing. The word has different ramifications in emerging markets that are gaining access to software and devices for the first time. These markets create innovative solutions for their own challenges and opportunities. From their unique experiences and circumstances, in fact, their solutions may one day be adopted globally.
What if information technology could make geographic proximity and network effects of talent less important? We know this is already happening in our day-to-day lives. Skype, group chat, social networks, collaborative software, and other, ever-advancing video connections are already mainstream and improving daily. They have had clear impact on the social and political dialogue in every country where they are embraced. They create hubs of action in many walks of life unimagined even five years ago, and tweaked by individuals to better attune them to local and regional cultural needs and norms. These experiences may not yet be as ideal as face-to-face proximity, but for a new generation raised on them, and by breaking down barriers of distance, might they be plenty good enough?
There is precedent for how local need-solving becomes globally competitive innovation in the hardware business. Certainly no one in the early 1980s would have expected Japan or Korea to become a dominant player in mobile devices and consumer gaming. Who would have imagined that Finland, a country known mostly for wood products, would create Nokia -- a company that first used mobile communication to facilitate connections between forestry and milling locations hard to reach with traditional telephony?
Look at mobile. Basic cell-phone penetration in Egypt, a land of 80 million people with annual per capita GDP under $6,500, is over 115 percent. The penetration numbers hold true throughout the Middle East. Yet currently only 8 to 12 percent of these users have access to smartphones. Can we fathom what kind of innovation may come from countries -- those that never even knew landlines -- that attain mobile smartphone computing access of 50 percent and more of their citizens? Mobile experts told me we could see sub-$50 smartphones within three years to help drive this adoption.
Moritz concedes, upon further reflection:
I’ve found in my travels that if you put great entrepreneurs from any corner of the world in the same room with each other, they are quite similar even if their mother tongues, religions, and colors are different. They look at the world, problems, and opportunities the same way. Their minds, their energies, and their desires to succeed are a lingua franca. They talk to each other as if they’ve known each other their whole lives.Is any of this, however, truly possible and scalable in the Middle East?
In the face of brutal oppression in some nations and political uncertainty throughout the region, it’s hardly an idle question. Added to political instability, the gap between the mega-wealthy and the desperately poor throughout the region remains shocking; education and literacy offer profound challenges. Corruption, high unemployment, heavy reliance on government largesse, archaic and often indecipherable rules of law, and cultural resistance to investing beyond fixed assets are all daily realities.
For all the enthusiasm that came with the Arab uprisings, Arabs are still debating vehemently the kinds of societies and governments they will create, what role religion and women will play, and how business practices will be proscribed. One need only spend a few days in Amman or Cairo, going through metal detectors in every restaurant, hotel, and tourist destination, to sense how the political and social realities can keep risk capital -- and, indeed, business itself -- sidelined.
But while we must take these concerns seriously, they can also mask the three-fold hurricane-force wind these entrepreneurs have at their backs.
First, technology offers an irreversible level of transparency, connectivity, and inexpensive access to capital and markets unprecedented only five years ago. A new generation in the Middle East, as elsewhere, has never known a world before information technology, and they have a keen understanding of how others like them live and create opportunity for themselves.
Second, this generation benefits from regional and global capital now more comfortable with political risk. Twenty years of experience in other emerging markets, all but dismissed as economic engines less than a generation ago, has laid important groundwork. Nearly all of these countries were, and remain, equally marred by political uncertainty, opaque governments, corruption, and weak infrastructures.
Third, changing market dynamics, growth, and opportunity in the Middle East were in motion well before the uprisings. The Arab world alone has over 350 million people, nearly twice the size of Brazil -- a GDP larger than Russia and India, and per capita GDP nearly twice China’s. Disposable income has grown 50 percent over the past three years, to over $1 trillion in 2012. It’s a young market, with over 100 million people under the age of 15, who love their connectivity, mobile phones and rapid adoption of smart devices.
And this new generation is hungry. If there was one universal sentiment that connected every young entrepreneur I met it was this: Their revolution was not merely about overthrowing longstanding dictatorships, but challenging a generational premise and complacency of their parents that things could not change. “Why should we accept mediocre jobs in lumbering large companies or the government -- assuming we can even find those?” one Jordanian founder told me. “In fact, I don’t understand why my parents accepted it! We can be better!”
These entrepreneurs come from every walk of Arab life. They are women and men, devoutly religious and culturally Islamic, college educated and self-taught, young and old and from literally every country in the region. They are above all realistic about the odds against them, yet unfazed by the political and infrastructural barriers.
They view the recent political change as an unprecedented opportunity and, in some cases, confirmation of their efforts over many years. They are unleashing social and economic forces that will create the foundations of a new Middle East. These forces will build and evolve over years, but will be accompanied with a speed and transparency through technology that will hold any leadership, and themselves, to instant accountability.
These entrepreneurs are not naïve. They expect setbacks. But they believe they are on the right side of history.
So to me, the most interesting question of all is why wouldn’t the Middle East be ripe to unleash a new era of tech-based entrepreneurship and innovation of the sort that has driven growth and job creation around the world?
[Image courtesy Shahrokh Dabiri]