Attack Of The Clones There is likely no one particular breed of fund manager that has had a tougher winnowing process than the venture capital fund manager investing in the Middle East.
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Imagine the setting if you will: a corporate board room in the prestigious offices of the National Oil Reserves Investment Authority (NORIA), overlooking the azure waters of the Gulf. In this very room replays a time-honored operetta. Money managers of all stripes and from all four corners of our earth come to sell their wares: the fundraising pitch. They manage private equity funds, hedge funds, venture capital funds, commodity funds, stock and bond funds and options trading.
At the other side of the table, the stewards of the capital, NORIA's managers, cast their mindful and jaundiced looks on the well-appointed, tailor-suited money managers and process all that is said through their skeptical minds, in their quest to deploy this capital in a shrewd way, or at the very least, in a way that preserves their careers…
Sweet nothings are always mentioned by the money managers: "Our expected IRR's are north of 25% annually", "We look at our investors as partners and not just a source of money", "We manage the downside risk in a very methodical and proprietary way", and "We look at 100 investments or trades before we do one".
The managers of NORIA respond in kind, "We are currently expanding our allocations into your asset class", "Our investment committee review is swift and transparent, and you can expect clear communications as we go through our decision process".
One occasion, capital changes hands, and these fund managers set off to ply their trade and make investments that range from studied prudence to (Russian) roulette. In most cases, the fund managers get put through the grind, sending further documents, case studies, references, more presentations and meetings, teleconferences, visits at their offices and the illusory "investment committee meeting" only to have NORIA demure, sometimes politely, mostly cryptically. "We like the team and the space and would very much like to make the allocation to your fund. We do, however, believe continued attrition amongst managers in this sub-sector of the asset class creates a maturation risk that is outside our strict investment parameters. We would like to certainly remain in touch and perhaps such consolidation would be complete in time of your next fund, when we would be in a position to reconsider." So… no money for you.
Contrary to popular belief, many fund managers do have it tough when they raise money, and usually it is a process that takes several years of active and dedicated work before even successful and established managers are able to close on another fund.
The process that new fund managers face, as well as fund managers investing in a new space is an order of magnitude more difficult. There is likely no one particular breed of fund manager that has had a tougher winnowing process than the venture capital fund manager investing in the Middle East.
Which line manager of NORIA, in their right minds, will want to justify to his superiors such a risky and unlikely investment as this? Technology investment in the Middle East? Who do we think we are? The country whose name we cannot mention? There is no innovation in the Middle East. We have to worry about the Arab Spring. We have to worry about employment for the many. Too risky. Just too… "too".
Despite that, a few managers have cobbled together investment funds for exactly that, technology investment in the Middle East. For completing the first leg of this triathlon these managers deserve profound respect- the medals are given out at the end of the remaining two legs, investment and exits. Every entrepreneur who stands in front of them giving his pitch should realize that the VCs have it just as bad, if not worse, and they will exact their price, on the entrepreneur should he or she deviate.
How did they succeed? Along the way, the fund managers made some promises to NORIA. They needed to sound prudent. Wise. Practiced. Sober. They said, "We will only invest in proven business models." Of course they would say that. Who does not like the sound of that? "Proven." The heads assembled around the conference table all nod in acknowledgement of the collective wisdom. "We will invest in company managers with proven track records." Yes. Bravo. We like the sound of that.
With those sweet words, the NORIA managers signed off on the investment telling themselves "Nobody ever got fired for buying IBM." "Proven" "Track Records" these are our IBM.
As needed as this may have been, this has a pernicious effect on what happens on the ground next. The "proven" business models are the copycats and the clones. For every Amazon, we have a Namshi. For every Gilt Group, we have a MarkaVIP. For every Groupon, we have a Cobone. And so on. To be fair and to be clear, the Namshis and MarkaVIPs of this world are successful in their own right. They provide a valuable service to the market and to the consumers, which is the only reason they encounter financial success. The entrepreneurs, teams and investors labored hard, executed well and delivered. This is neither a critique of those efforts nor of the results.
Cloning is a successful industry in and of itself. One of the main cloners, Rocket Internet has generated billions of dollars in sales, investments and investor value, and are heavily active in the MENA. So successful are they, that the cloners themselves have been cloned in the form of iMena and, soon to be, others. Again, this is only a good thing. Perhaps we don't like to think of it as pure cloning. "Localization" is the buzzword. There are sufficient obstacles, in the form of things as benign as the absence of proper street addresses for simple delivery, to the obvious such as language to the complicated such as lack of cheap and viable online payment systems that deter many international players from fully engaging in the MENA market. So it is left to the cloners. Sorry, the "localizers".
And who are the creative geniuses behind many of these localized startups? The credentialed set: Consultants, bankers, MBAs. Don't get me wrong… Some of my best friends are consultants and bankers with MBAs. They are perhaps most suited for the problem solving requirements of "localization" as it does not require much in the way of real technology know-how, just rigorous process oriented problem solving. In this milieu there is something that works, so this is not an attempt to fix it.
Ask yourself though, which were some of the biggest recent technology successes that you recognize? Google. Facebook. WhatsApp. What are the elements they have in common besides the very hefty price tags? They all had no viable, let alone "proven" business model when the real venture capital started coming in. Their founders did not have "successful track records" in their respective spaces. These were simply long bets that VCs, unconstrained by unnecessary promises, believing in their own judgment and believing in the creative energies of the people they were backing. They took a risk.
Real value creation and real innovation comes from corners you least expect.
We do have some genuinely innovative technology companies. Take for example Friendshippr. It is an app for "social shipping". It provides a systematic answer for the ever-present requests: "Does anyone know someone travelling from Amman to Doha this week that can pick something up for me?" It works. It is scalable. It does not have a "proven business model". This has the potential, executed-well, to create and capture its target space. How about QMega? They have developed novel technology to consolidate several relatively expensive components in solar panels into a low cost simple microcontrolled unit. This also represents a bonafide technical evolution, even a breakthrough that is relevant on a global scale.
These are a rarity. They are not clones. They are exceptions. They exist in an environment where their founders cannot point to something they are copying that is proven. They are perceived as risky. Perhaps foolish. Perhaps too ambitious. We do not yet have a culture and mind set to support and develop such innovation. This is a bona fide critique of the environment and mindset. For the most part, we know it. Many of us do not believe that we have the collective capability to actually get into real technology innovation.
I do not have a ready wholesale solution. In the hope of provoking a debate and conversation, I am articulating publicly an element of the problem.
We all wish to clone Silicon Valley and its success in technology startups. At the core of Silicon Valley is a research university and a culture that respects developing the new, and the risks, successes and failures that comes with it.
That would be a good thing to clone. Perhaps we should start there.