Could the Middle East be home to the new Silicon Valley?
July 25, 2017 | 4:13 PM
by Mohammed Mahfoodh Al Ardhi
The UAE, Qatar and Bahrain boast over 100 per cent smartphone penetration and more than 70 per cent social media adoption – higher even than the United States. - File photo
 
Sharelines

If future prosperity were forecast according to current levels of investment, the world’s richest nations could be left wanting. Emerging markets, on the other hand, particularly those that have suffered from the decline in oil prices, have addressed economic challenges with increased investment in new industries, innovation and a great deal of confidence.

In the Middle East, it is the technology sector that has been attracting growing levels of public investment as well as the attention of global private equity investors. Global equity investors have been active in the GCC region for several years.

With robust legal frameworks, supportive demographics, thriving companies and world-class infrastructure, countries such as the UAE and Bahrain have garnered notable interest. However, the region’s e-commerce and digital markets are underpenetrated at two percent, compared to the global markets that boast a 15 per cent penetration.

These regional markets present an excellent opportunity for growth.

According to a report by the international management consulting firm McKinsey, digital consumer adoption in the GCC region is high.

The UAE, Qatar and Bahrain boast over 100 per cent smartphone penetration and more than 70 per cent social media adoption – higher even than the United States.

Some governments in the region have begun implementing core digitisation initiatives, and other countries have big ambitions. With evidence that high levels of digitisation lead to higher GDP, the rewards are great for investors and governments alike.

We can already see interest in the region from major international brands. Earlier this year, Amazon made its first move into the Middle East with one of its largest acquisitions in recent years – the purchase of Souq.com, the e-marketplace that serves 50 million people across the region. This is a clear indication that e-commerce has great potential on the regional scale, especially given the rise of the online retail sector.

The luxury market, currently worth around $200 million, is expected to reach $1.5 billion in the next few years, and we are already seeing bright young entrepreneurs taking the sector online with shopping portals such as The Luxury Closet and So Chic in the UAE, and Kuwait-based Boutiqaat. While our region has long played host to technology companies, it is only in the past few years that breakthrough startups have begun to secure significant investments from global players.

For instance, in 2016, online retailer Wadi.com raised $67 million in series A funding – the highest among tech startups in the Middle East – only 10 months after its launch. Similarly, Careem, the local version of the popular ridesharing app Uber, has also attracted a series of investments since its inception in 2013, contributing to its growth and popularity.

The success of these companies is driven by an increasingly discerning consumer marketplace with a growing appetite for technologies and services that already exist in developed economies.

For startups, there is an ever-expanding range of incubators and accelerators to choose from, including AstroLabs Dubai. The innovative coworking space for digital technology companies has leveraged its collaboration with Google to help emerging entrepreneurs optimize their capabilities and learn from the experiences of the world’s technology leaders from places like Silicon Valley.

Other entities in the region supporting tech startups in the GCC region include Saudi Arabia’s Badir Program for Technology Incubators, Oman’s Information Technology Authority (ITA), as well as the UAE’s Turn8. Another platform that has achieved great success in the Middle East is WOMENA, an angel investment network that promotes technology investment among women in the region.

Businesses that emerge from these platforms, such as creative app developers and virtual reality companies, represent the latest generation of innovators to witness rapid growth across the region. Kuwait’s Bookr, the popular for salon and spa bookings, and Bahrain’s Fish.me, the unique fish marketplace app founded by ex-fishermen and logistics professionals, are prime examples of this new wave.

An increasing preference for online shopping in a consumer market with ever-growing purchasing power explains why several successful startups in the region are in the online and app-based retail space. Analysts at the 2016 Gartner Symposium projected that the spend on information technology in the Middle East would reach $212.9 billion by end-2016 – a 3.7 per cent increase over 2015, a trend largely fueled by digital businesses and an inter-connected world. Experts concur that the growing focus on technology, supported by the mushrooming of state-backed incubators, represents a strategic shift towards non-oil, consumer-driven markets. Government strategies that seek to move beyond a dependence on natural resources towards shaping a diversified economy are the driving force for the large-scale injection of public money in the technology sector.

Investing in key industry sectors and national infrastructure is crucial for a region that comprises primarily oil-dependent nations keen to boost job creation and secure long-term sustainable economic growth.

For private equity firms, such as Investcorp with its over 15 years of experience in funding technology companies, digital technology presents a fast-growing and intriguing investment landscape. The sector has the backing of national governments – major stakeholders and investors in facilitating the required infrastructure for technology startups to succeed.

The enthusiasm of governments to inject billions of dollars of public funds into the burgeoning startup ecosystem is a powerful signal that the technology sector represents a serious long-term commitment with a relatively low risk profile, supported by the growing purchasing power of the world’s most connected population.

Therefore, private equity has all the leeway it needs to move in and support companies across the region in an investment-friendly, low-tax climate – a very different environment to the austerity of the world’s developed markets.

If we play our cards right over the coming years and channel financial as well as intellectual capital into the promising digital business, we can transform the Middle East region into a major technology hub capable of competing with the biggest names on a global scale.

- The author is the Executive Chairman of Investcorp and an International Advisor to the Brookings Instituition.

All the views and opinions expressed in the article are solely those of the author and do not reflect those of Times of Oman.


STAY UPDATED
Subscribe to our newsletter and be the first to know all the latest news