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]

On why the biggest tech companies are built in Silicon Valley

On Friday, ContentDJ founder Jerry Tian published a blog post addressing the issue of “Why Canada Has No Big Tech Companies” – Nortel is dead and RIM is quite obviously dying, he points out. Tian, who was himself responding to an interview with Boris Wertz, founder of Vancouver’s Version One Ventures, offers a thought provoking theory and one that applies to a large degree to all up-and-coming startup ecosystems.

The founder questions the commitment and willingness of Canadian investors and entrepreneurs to devote the ten years or more that it may take to build an independent multi-billion dollar company with staying power, rather than flipping that company for an eight, nine, or even ten figure exit – typically to Silicon Valley acquirers – and exporting that future innovation and wealth building. It’s a charge that could be applied equally well to New York, Los Angeles, Chicago, Austin, Boulder, and dozens of would be international startup hubs.

“’Silicon Valley is not a place but a state of mind,” Tian writes, quoting KPCB General Partner John Doerr. “Some of these insights are collaboration, competition, openness to innovation, failures and experimentation. Probably the most important one is the long term commitment behind technology companies.”

Of course, Tian and Doerr are spot on. What emerging startup hubs often miss when trying to “become the next Silicon Valley” – a flawed mission in and of itself – is that the grandaddy startup ecosystem is more than its physical infrastructure of entrepreneurs, engineers, designers, investors, service providers, universities, and the like. Equally important are the systematic irrationality and a feedback loop around the willingness to turn down the quick buck and go for the massive once-in-a-generation success story.

This isn’t the case with every company, founder, or investor, but it exists in enough density in the San Francisco Bay Area, and based on results to a lesser extent in Seattle, that these are the only two areas areas in the country that have led to multiple ten billion dollar plus technology and internet companies – the true giants that transcend their local ecosystems and seep into the lives of average consumers.

It is these companies, with their ability to attract talent, make acquisitions, invest in long-term R&D, and create systemic wealth that make ecosystems. And with very rare exception, getting to this scale requires a decade or longer commitment and a willingness on the part of founders and investors to turn down near and mid-term paydays. Similarly, it requires a vision and an ambition  to build something that will be around forever.

Tian writes:

So, why is nobody talking about these acquisitions? I think it’s simply because investors are getting filthy rich off these deals.

And that’s exactly what not to do if you want to create the next Silicon Valley. You cannot sell the hen that lays the golden eggs for a few quick buck [sic]. Technology companies take 10 years to really manifest the value. To really build a billion dollar company, it takes tremendous multi-decade commitment. And that’s the biggest missing piece in Canada.

Like or hate Zynga founder and former CEO Mark Pincus, one has to respect him for saying that he wants to build a “digital skyscraper,” a company that would be around for 100 years. Pincus went further to say that he views serial entrepreneurship as failure and that he wants to run Zynga for the rest of his career. Ironically, he recently replaced himself as CEO, personally recruiting Don Mattrick for the role. But Pincus made the ego-busting move in an effort to return Zynga to its former glory and to get it back on that century-long track.

In his somewhat controversial on-the-ground reporting on the Chicago ecosystem last summer, Trevor Gilbert delved into “the Midwest Mentality” and the impact it has on the types of companies that are built there. Gilbert called Chicagoans “pragmatic.” Lightbank partner Paul Lee offered an example of this pragmatism, saying that Chicago startups typically focus on generating revenue from day one, rather than building a massive, but unprofitable user base, a la Facebook and Twitter pre-monetization. Profit is all well and good, and should be the ultimate goal of any business that wants to be around for the long term, but focus on it too intently early on and it can be impossible to invest in growth. It takes a special kind of vision and fortitude to look past the short term and make the big bets required to create massive companies.

This is not to pick on Chicago. A similar phenomenon seems to exist in LA where companies race out to a low nine-figure valuation and then either stall out in that vicinity or sell for sub-one billion dollars to a larger out of town acquirer. Call it the curse of the big-little deal – maybe everyone here just wants to see their name in lights. In a market that is desperate for success stories and validation, these medium-sized exits are hailed as “wins” – and they are, given the difficulty of building a hundred-million dollar company – but they often rob the ecosystem of potential multi-generational tentpole companies. This is a mentality that appears to have changed in recent years, but that change has not yet bore fruit in the form of LA’s answer to Google, Amazon, or Facebook.

New York has seen its own version of this phenomenon, with the ecosystem’s biggest success stories, DoubleClick and Tumblr, being exits to Google and Yahoo respectively. Local darling MakerBot followed suit, selling for $600 million in June. New York does have Fab, Gilt, and Foursquare all shooting for the moon but these companies and the ecosystem as a whole still must prove that they can sustain this ambition and parlay it into a giant company.

As Tian points out, part of the blame for these exits falls on investors. It’s not that investors aren’t interested in massive outcomes – they most certainly are. But not all non-Silicon Valley investors are equipped for the financial and time commitment it takes to create them. These investors, many of which operate out of first- or second-generation funds, often have smaller pools of capital to invest out of.

Write a $2 million check at a $10 million valuation out of a $100 million fund, and a 50x return looks pretty good, returning 98 percent of your fund. Make that same investment out of a $1 billion fund and the impact on fund economics is decidedly less interesting. This is one of the few arguments in favor of mega-VC funds. But it also benefits firms that are on their fourth, fifth or sixth fund and have less to gain reputation-wise with solid base hits.

Returning to Tian’s piece, he closes by writing, “If you are wondering why Canada doesn’t have the [sic] billion dollar company, it cannot be more obvious than this. Too many people are in it trying to get rich quickly off entrepreneurs. Not enough people have the gut [sic] and commitment to create or help create something truly meaningful.”

Tian paints with a broad brush, yes, which ignores many of the subtle nuances and external factors that contribute toward building massive technology companies. But there’s little arguing that people in Silicon Valley think differently. Armed by decades of case studies and social proof, the ecosystem has developed a healthy disregard for rationality.

Mark Zuckerberg famously did just that when Yahoo came calling. He was just 20 years old and Facebook, at less than two years old, was unprofitable with just $30 million in revenue. Yet Zuckerberg and Facebook’s board, which included Peter Thiel and Jim Breyer, turned down Yahoo’s $1 billion offer. When the elder advisors tried to convince the young founder that his 25 percent of that offer would be a big number he said, “I don’t know what I could do with the money. I’d just start another social networking site. I kind of like the one I already have.”

Israeli social mapping company Waze just made the opposite decision, selling to Google for slightly more than that mythical $1 billion. Sarah Lacy cautioned Israel-bulls to “reconsider too much high-fiving over Waze.” While legendary local angel investor Yossi Vardi likes to compare Israeli startups to tomato seeds which need more experienced farmers to grow properly, Lacy believes that the country has the potential to build and sustain globally dominant Web companies without selling, offering MyHeritage as an example.

None of this is to say Silicon Valley is immune from this syndrome. There are thousands of entrepreneurs in the Bay Area who would rather flip their company than do the long, hard work of building something sustainable. But the sheer density of the ecosystem means that a dozen or so each year choose the road less traveled. Also, given the scale of the Valley ecosystem, building a big company is the only way to move the needle and attract talent and capital. Everyone in line at Philz coffee is working on the next “billion dollar business.”

Finally, Silicon Valley is a magnet for those entrepreneurs around the globe who want to build great technology companies, and the ecosystem surely benefits from this imported talent. This was actually Wertz’s central point in the original interview and is one that Tian touches on briefly. It’s a difficult problem to solve, given the power of knowing someone (or several someones) who has summited the mountain before and who can show you that it can be done. In each of these other markets, someone will have to be the first.

In many cases, it is highly irrational to turn down a nine- or ten-figure acquisition offer. There are real benefits to gaining access to the financial and personnel resources of a larger acquirer, ones that can often make or break the success of a still fledgling company. But, if there’s anything in Silicon Valley that Canada, LA, New York, and other startup ecosystems should aspire to it’s this willingness to roll the dice. Sometimes the shooter rolls a “7.”

Source : Pandodaily, by Michael Carney

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London’s tech startup scene is hot — just don’t compare it to Silicon Valley

London’s tech scene has been growing for years — is it finally on the cusp of breaking out and delivering billion-dollar startups?

 

Down a flight of stairs, past a photo of British mod icon Paul Weller, and into the basement of Google’s campus in the ultra hip area of East London, sit Britain’s home-grown budding Kevin Systroms and David Karps (well, at least wannabes). On a weekday afternoon, almost every seat, desk, couch and stool in the free co-working café in Google’s basement is filled with young web and mobile entrepreneurs, hunched over their laptops, building decks, and chatting excitedly about their next big idea.

Google London Campus, image courtesy of Google.

Every major city it seems these days has its techie hubs, but London’s tech scene has been steadily growing over the past several years. That growth is being driven by a combination of increased government support, attention from international internet giants, a handful of early startup successes, a growing venture capital ecosystem, an adjacent London financial sector that’s starting to take notice of tech, and an early adopter city that’s not unlike the one in San Francisco, which enables the Valley’s startups to access some of the world’s most engaged beta testers.
It’s way too easy to make the comparison between Silicon Valley of a few years back and the East London of today. Many of the London entrepreneurs I’ve met with since I moved to the Shoreditch area of London for the summer to grow GigaOM’s coverage of the London tech scene warn me away from that simplistic “the Valley of Europe” discussion. Please don’t write one of those X is the new Silicon Valley stories, one founder practically pleaded with me. Needless to say, X could be anywhere these days, from New York, to Sao Paulo to Berlin, to New Delhi.

The growth of London tech

But something’s clearly been brewing for a couple years now. To Simon Thethi, the founder of the news site that launched in January of this year to cover London tech, Tech City News, it was clear even back in 2010 that London was starting to develop into a buzzing tech hub. But now it’s really got an energy that makes it stand out, says Thethi, while we sit and drink coffee on the rooftop terrace of one of London’s many membership clubs that the tech community seem to often use as meeting space.

The Shoreditch Grind espresso bar in East London

“Tech City” is a name for London’s tech scene that’s emerged – like most city trends do — both organically and through a little inorganic help. The U.K. government is investing 50 million pounds ($70 million) into building out Tech City and attracting tech companies to the region from Microsoft to Amazon to Qualcomm. According to London Partners, a group that promotes Tech City, there’s 3,000 tech companies in the condensed area of East London, which they say makes it Europe’s fastest-growing tech cluster. London and Berlin have a healthy rivalry going on over which city’s tech sector is bigger and growing more rapidly.

Internet giants, too, are investing in London. In addition to Google’s London campus, which opened a year ago, the giant search engine has its British headquarters in the Victoria and Holborn districts, and is building out a billion-pound campus in Kings Cross. Facebook has one of its largest offices in London, boasting 29 open positions. Jobs are one of the key reasons that the British government is aggressively promoting the tech sector, in the wake of Europe’s recession.
But London’s got its own unique slant to the startup wave. Given that London boasts a huge financial industry, a thriving media sector and some of the world’s largest advertising and design firms, it’s natural that London startups would gravitate to these areas. It’s more New York than Silicon Valley (oops, I did it again). At an event thrown earlier this week by the BBC’s commercial division, BBC World, the media company announced its next class of six digital media startups that would join its accelerator program, BBC Labs.

An emerging sector

Still, London’s tech scene is decidedly still emerging. The biggest homegrown startups, like game company Mind Candy, on-demand ride startup Hailo, social chat platform Badoo, and music recognition company Shazam, aren’t blockbuster global brands yet and more importantly haven’t created a wave of millionaire VPs like Valley internet firms Facebook, Google and PayPal. The creation of wealth through these Valley web exits delivered (and are delivering) the next wave of founders (see the PayPal mafia).
London has yet to kick off that wave. And it is still waiting for its first billion-dollar tech company. Mind Candy has been eyeing an IPO, which could be “Tech City’s” first flotation. But the worst thing that could happen for the East London tech crowd is if a homegrown company like Mind Candy went public in New York and even moved operations there. The message would be: Once a startup gets big enough it outgrows London.

The official Silicon Roundabout, a name that was originally coined as a joke.

There are also a couple of cultural disconnects that seem to be holding back some of the growth of London’s startup scene. One of those is what entrepreneurs describe as a lack of aggressiveness in scaling companies for the big exit – selling at the first offer instead of building startups into billion-dollar businesses. Several entrepreneurs I’ve spoken with this week say this is a key hurdle that is holding back London web startups from reaching that billion-dollar threshold.
Another is the omnipresent — and very natural — fear of failure, which is prevalent in most early startup scenes, but has somehow been shaken out of the pivot-loving, failure-embracing crazy founders of the Valley. Fear of failure can harm a startup ecosystem because entrepreneurs and investors are less willing to take big risks, which leads to less disruptive ideas.
As more successes emerge from London’s tech hub, many of these hurdles will likely be cleared. But for now, Tech City has a whole lot of potential that’s still waiting for some big payoffs.
We think the city has enough tech potential that we’re holding our second annual Structure:Europe conference in London in September, and we’re looking for cloud-enabled and cloud-focused startups to join our Startup Zone.

Source : GigaOm